Exploring the Legal Framework and Practical Scenarios
Payment disputes with subcontractors are a common challenge in the construction industry, often triggering delays and tension among project stakeholders. Under the FIDIC standard forms of contract, the responsibility for managing and paying subcontractors typically falls on the Contractor. Yet, certain FIDIC clauses permit the Employer to step in and pay subcontractors directly under defined circumstances.
In this article, we’ll examine these provisions as found in key FIDIC forms, including the FIDIC Yellow Book 1999 and 2017 editions (with 2023 updates), and the FIDIC Conditions of Subcontract for Plant and Design-Build 2019. We’ll also discuss real-world scenarios to illustrate how these clauses operate in practice.
General Principles: Contractor Responsibility
Under most FIDIC contracts, the Contractor is the central figure in managing subcontractors. This includes supervising their work, ensuring compliance with technical specifications, and handling their payments. The Employer usually remains one step removed, dealing primarily with the Contractor rather than the subcontractors. Let’s see how these principles play out across different editions.
FIDIC Yellow Book 1999
General Responsibility of Contractor (Sub-Clause 4.4 [Subcontractors]):
(FIDIC Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Works, First Edition 1999)
“The Contractor shall not subcontract the whole of the Works. The Contractor shall be responsible for the acts or defaults of any Subcontractor, his agents or employees, as if they were the acts or defaults of the Contractor.”
Key Point: This places full responsibility on the Contractor for subcontractor performance and payment, unless the contract states otherwise.
Nominated Subcontractors (Sub-Clause 4.5 [Nominated Subcontractors]):
(FIDIC Yellow Book 1999)
“The Contractor shall not be under any obligation to employ a nominated Subcontractor against whom the Contractor raises reasonable objection by notice to the Engineer as soon as practicable, with supporting particulars.”
Key Point: While the Contractor can object to a nominated subcontractor, having such a party involved may create a pathway for the Employer to have a more direct role in payments if outlined in the Particular Conditions.
No Privity of Contract:
Though not expressly stated, the 1999 edition generally assumes no direct legal relationship (no privity) between the Employer and subcontractors unless the Particular Conditions specify otherwise.
FIDIC Yellow Book 2017
General Responsibility of Contractor (Sub-Clause 4.4 [Subcontractors]):
(FIDIC Conditions of Contract for Plant and Design-Build, Second Edition 2017)
“The Contractor shall be responsible for the work of all Subcontractors, for managing and coordinating all the Subcontractors’ works, and for the acts or defaults of any Subcontractor, any Subcontractor’s agents or employees, as if they were the acts or defaults of the Contractor.”
Key Point: The 2017 edition reaffirms the Contractor’s primary duty for subcontractor management and payment.
Nominated Subcontractors (Sub-Clause 4.5 [Nominated Subcontractors]):
(FIDIC Yellow Book 2017)
“In this Sub-Clause, ‘nominated Subcontractor’ means a Subcontractor whom the Engineer, under Sub-Clause 13.4 [Provisional Sums], instructs the Contractor to employ as a Subcontractor.”
Key Point: Where a Subcontractor is nominated, the payment approach could involve the Employer directly—if the Particular Conditions allow it. This adds a layer of complexity and potential Employer intervention.
Evidence of Payment to Subcontractors (Sub-Clause 4.5.3 [Evidence of Payments]):
(FIDIC Yellow Book 2017)
“Before issuing a Payment Certificate which includes an amount payable to a nominated Subcontractor, the Engineer may request the Contractor to supply reasonable evidence that the nominated Subcontractor has received all amounts due …”
Key Point: If the Contractor cannot prove that it has paid the nominated subcontractor, the Employer may step in and pay that subcontractor directly.
FIDIC Yellow Book 2019 (Conditions of Subcontract for Plant and Design-Build)
No Privity of Contract (Sub-Clause 1.10):
(FIDIC Conditions of Subcontract for Plant and Design-Build, First Edition 2019)
“Nothing stated in the Subcontract shall be construed as creating any privity of contract between the Subcontractor and the Employer.”
Key Point: This explicitly prevents a direct legal relationship between the Employer and the subcontractor unless specifically agreed.
Assignment of Subcontract in Case of Termination (Sub-Clause 4.4):
(FIDIC Conditions of Subcontract for Plant and Design-Build 2019)
“If the Employer terminates the Main Contract under Main Contract Clause 15.2 [Termination by Employer] … then the Contractor shall be entitled to assign the Subcontract to the Employer.”
Key Point: In termination scenarios, the Employer can assume the Subcontract, potentially handling payments directly.
Evidence for Subcontractor Payments (Clause 14.7 [Interim Subcontract Payments]):
(FIDIC Conditions of Subcontract for Plant and Design-Build 2019)
“Where a Subcontractor’s interim statement includes an amount … the amount due … shall be subject to the Subcontractor providing the documents referred to in sub-paragraph (b)(iii) of Main Contract Clause 14.5 [Plant and Materials intended for the Works]…”
Key Point: Contractors must ensure adequate documentation before subcontractors are paid, indirectly giving the Employer leverage if the Contractor fails to comply.
Direct Payment Conditions
Under specific circumstances, Employers may directly pay subcontractors:
- Nominated Subcontractors (FIDIC Yellow Book 1999 and 2017 – Sub-Clause 4.5):
Employers can make direct payments if stipulated in the Particular Conditions. This can help avoid disruptions when nominated subcontractors threaten to halt work due to non-payment by the Contractor. - Employer’s Right to Assign Subcontracts (FIDIC Yellow Book 2019 Conditions of Subcontract – Sub-Clause 4.4):
In cases of Contractor default or termination, the Employer may take over the Subcontract and manage payments directly, ensuring continuity of critical work packages. - Submission of Evidence for Payment (FIDIC Yellow Book 2017 – Sub-Clause 4.5.3; FIDIC Yellow Book 2019 Conditions of Subcontract – Clause 14.7):
The Employer may demand proof of payment to subcontractors. If the Contractor fails to provide it, the Employer can bypass the Contractor and pay the subcontractor directly, keeping the project on schedule and maintaining trust.
Practical Scenarios
- Scenario 1: Delayed Payments to a Nominated HVAC Supplier
Under the 2017 Yellow Book’s Sub-Clause 4.5, if the Contractor fails to pay a nominated HVAC subcontractor, and the Engineer withholds the next Payment Certificate, the Employer could step in and pay the subcontractor directly, preventing a shutdown in critical building services installation. - Scenario 2: Contractor Default in a Data Center Project
With the 2019 Subcontract (Sub-Clause 4.4), if the Contractor defaults, the Employer can assign key technology and electrical subcontracts to itself. This ensures vital components are delivered on time, minimizing project delays and protecting the Employer’s investment. - Scenario 3: Proof of Payment Withheld
Under the 2017 Yellow Book (Sub-Clause 4.5.3), if a finishing subcontractor complains about not receiving funds despite completed works, the Employer can demand payment evidence. Without satisfactory proof, the Employer can directly pay the subcontractor to maintain momentum on site.
Conclusion: Balancing Control and Flexibility
FIDIC contracts place the primary responsibility for subcontractor management and payment on the Contractor. However, they also recognize the need for flexibility. Certain clauses allow the Employer to intervene directly, ensuring that subcontractors are paid and projects remain on track—even if the Contractor is struggling or in default.
By understanding these clauses, project stakeholders can draft contracts and manage relationships in ways that minimize disputes, safeguard project progress, and maintain healthy working relationships. This is not just about legal compliance; it’s about strategic foresight and risk management.
Continue Your Growth with Growth Mindset Co.
At Growth Mindset Co., we provide insights that clarify complex construction and contract issues. If you found this article helpful, share it with your colleagues and visit our YouTube channel for more deep dives and expert discussions. Together, let’s turn complexity into opportunity, and challenges into stepping stones for success.
