Rights and Obligations under Back-to-Back Contracts

The parties’ dispute concerned the extent of the coverage of this alternative design for demolition and hoarding works. The letter of award for the subcontract stated that it was to be a lump sum fixed price contract and back-to-back with the main contract. Brington maintained that Cheerise was responsible for the design as this was a back-to-back contract.

Brington was awarded a contract for the demolition and hoarding works on a site. It subcontracted these works to Cheerise. The value of the main contract was HK$11 million, and comprised the original tender sum of HK$11.485,07 less a cost saving of HK$485,075 based on an alternative design as described in a letter from Davis Langdon & Seah dated 17 August 2007. The subcontract sum for the hoarding and demolition works was in the amount of HK$5,347,700, which took into account a cost saving of HK$120,000 again based on this alternative design. The letter of award stated that:

“Cost saving based on Alternative Design as described in fax CLF/055 dated 21/08/07 (This is confirmed that this cost saving will not be refund in case of your mentioned Alternative Design is not to be approved by Building Department).”

The parties’ dispute concerned the extent of the coverage of this alternative design. The letter of award for the subcontract stated that it was to be a lump sum fixed price contract and back-to-back with the main contract. Brington maintained that Cheerise was responsible for the design as this was a back-to-back contract.

As it was a back-to-back contract if the consultant disallowed a claim made by Cheerise in the name of the main contractor, Cheerise would not be entitled to anything. Cheerise accepted that it was a back-to-back contract, but denied that the design obligation/responsibility had been passed on. Cheerise also argued that Brington had to consider its claim independently. Finally, Cheerise submitted that Brington was not entitled to claim contra charges and the settlement between them had been made on a without prejudice basis.

The parties differed on their interpretation of what was meant by a “back-to-back” contract. The scope of the work and the risks to be assumed by Cheerise was unclear. In order to construe the phrase “back-to-back”, the court turned to some of the “fundamental canons” of the construction of a contract. What the judge termed “this ambiguous phrase” had to be understood and construed in context.

Brington argued that because of the back-to-back provisions, it was not obliged to pay Cheerise any additional sums or grant an extension of time if its claim to the employer were not accepted by the consultant. The judge disagreed.

The back-to-back provision only referred to the principle of variation, addition or omission, and made no reference to grounds for granting extension of time or deduction of liquidated damages. In the absence of express wording incorporating the provisions in the main contract regarding extensions of time and liquidated damages, the judge did not accept that they had been incorporated by reason of the phrase back-to-back.

The only thing that could be said to be common to both contracts because of the back-to-back basis would be the way in which such claims for variations, additions or omissions were to be valued. There was nothing to indicate that the position of the consultant could be mechanically applied to the subcontractor’s claim or binding on the parties under the subcontract.

In addition, Cheerise was only responsible for one part of the main contract works, so that any delay caused by another subcontractor on the site would not, in the context of the main contract, entitle Brington to an extension of time. It would be grossly unfair if Cheerise could not seek compensation. Cheerise would be entitled to be paid for any variations ordered by the main contractor, irrespective of whether or not Brington had been paid under the main contract. The phrase back-to-back could only mean that the rights to make claim and the principle of valuation of variations had to be the same as those in the main contract. It could not possibly be said that this phrase back-to-back would effectively mean “pay when paid” or “pay if paid”.

If back-to-back were intended to mean that the subcontractor’s entitlement would be lost if Brington were not entitled to compensation under the main contract, clear words had to be used, because such an argument curtailed the subcontractor’s the rights of the subcontract to claim payment under the subcontract- not something to be lightly implied. It certainly could not be implied for the usual reasons such as giving subcontract business efficacy nor by operation of law.

Brington sought contra-charges against the subcontractor. A back-to-back provision must be two-way. If the main contractor’s contentions were correct, it could not claim against Cheerise for contra-charges for the simple reason that the employer did not charge Brington for such charges. That proposition could not be right. Brington should be entitled to claim against Cheerise if it had incurred costs as a result of the subcontractor’s failures or breaches irrespective of the position under the main contract.

As far as the subcontractor’s contractual entitlement was concerned, the judge did not accept that it was determined by the consultant’s decisions. Brington had an obligation to consider the claims made by Cheerise and to assess them accordingly.

In this case, Brington had passed on the subcontractor’s claims in full to the employer whose consultant rejected them. This alone was simply not a defence to the subcontractor’s claims. The consultant’s decision was relevant evidence but not conclusive in the context of the subcontract. Cheerise was still entitled to pursue the claims against Brington if they could be proved and established under the terms of the subcontract and substantiated by evidence. The claims under the subcontract had to be established independently, and neither party could rely on the passing on of the claims to the consultant nor on the decisions of the consultant.

Brington Engineering Ltd. v Cheerise Asia Ltd.; 18 August 2011, Construction and Arbitration Proceedings No. 2 of 2010


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