The Dangers of Subcontracting without Written Approval – When Personal Performance is Required under a Contract
In a recent case, the NSW Court of Appeal considered whether a cleaning services provider which had breached the terms of its contract by using an unauthorised subcontractor, was entitled to the entire contract price for the cleaning services it had provided.
The case highlights the dangers of subcontracting without written approval and affirmed the principle that personal performance under a contract may be required, even where the performance of the contract requires no specific skill.
Background
ANS National Services Pty Ltd (ANS) entered into a contract with Daintree Contractors Pty Ltd (Daintree), whereby ANS was to perform cleaning services for clients of Daintree (such as Woolworths) for a fee.
Clause 4.5 of the Contract contained an express provision prohibiting ANS from subcontracting any aspect of these obligations without Daintree’s prior written consent. Failure to do so was considered to be a ‘fundamental breach of the Contract’.
Approximately 90% of the cleaning services that ANS was obligated to perform was carried out by subcontractors of ANS, without the consent of Daintree.
Decision
It was not in dispute that the cleaning work had been carried out, or that the work had not been performed to a sufficient standard.
However, the parties could not reach agreement that the obligations under the contract had been fulfilled. ANS claimed that that this was a contract to ‘produce a result’ and that result (cleaning for Daintree’s clients) had been achieved. Daintree argued that the obligation of ANS to personally perform the cleaning services had not been fulfilled, and therefore they were not entitled to payment.
The Court agreed with Daintree. The subject matter of the agreement was not cleaning services per se. The subject matter was the performance of the cleaning services by this particular contractor, in a particular manner, and on certain conditions; namely, by the contractor itself.
In support of this conclusion, the Court stated ‘the right to payment under a contract only matures into a debt if the performance to which the payment relates was in fact given’.
ANS was then only entitled to payment for the 10% of the work (which it had personally provided) and not the other 90% performed by subcontractors.
It should be noted that the result may have been different had ANS pleaded in the alternative for a quantum meruit in restitution for the requested services. No such claims were made.
Conclusion
Parties should therefore carefully consider what they are personally required to do under a contract, before employing subcontractors to perform the work on their behalf.
Failure to do so may disentitle the contractor from claiming payment for services that its subcontractors have provided.
If you would like advice or assistance in relation to the above or any other Commercial matters, please contact our accredited business law specialists and Partners Justin Thornton on jthornton@marsdens.net.au and Rahul Lachman on rlachman@marsdens.net.au or otherwise by calling them on (02) 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
