Back-to-back contracts are frequently used in construction contracts. While they are here to stay, Tom Kapapa of Quantum Global Solutions asks if these contracts truly protect contractors and subcontractors.
Qatar’s construction market is booming, dynamic and expanding at a very fast pace. The next few years will continue to see even more volatility with increasing construction activities as we count down to a few major events and ultimately the 2022 World Cup.
While the growing number of projects means more business for contractors and subcontractors, it also poses challenges to them along with other industry stakeholders. The spectrum of risks is therefore expanding, forcing stakeholders to look at ways of managing and controlling the externalities in order to protect their interests.
Let us first define what they are meant to be. Back-to-back contracts are simply back to back. Stated differently, as per these contracts, the rights, liabilities and interests the contractor has under the main contract are the same rights, liabilities and interests the subcontractor will share with the contractor under the subcontract in relation to the subcontract’s scope.
Interestingly, by looking at this simple definition, this should be a very positive contract arrangement in which if a contractor gets extension of time, it will give the same extension to the subcontractor. Similarly, if the contractor gets prolongation costs, subcontractors will have a share in it.
“There are gaps in back-to-back contracts, which simultaneously present problems and opportunities.”
Does this explain why they are so prevalent here in Qatar? Or is there another motive behind; that is to transfer all the pain instead of sharing the gain? It seems to me that the latter reflects the common purpose of such contracts, leading to many disagreements.
In practice, there cannot be a true back-to-back contract, as opposed to the general understanding. This perhaps could be why the likes of the International Federation of Consulting Engineers (FIDIC) have not produced a standard back-to-back contract.
Also it is important to note that under the main contract, the main contractor is fully responsible for the whole works including those carried out by his subcontractors.
As such, back-to-back contracts come into question for a number of issues: (1) the scope of main contract is wider than, and incorporates, the subcontracted works; (2) the main contractor is fully responsible for the planning and monitoring of the whole works; and (3) the main contractor is the overall responsible party for the interface management and coordination between/with other trades subcontracted for the works. The question then is, can any of the afore-mentioned responsibilities of the main contractor be transferred to the subcontractors. What is currently evident within the industry is that contractors seem to think such responsibilities are transferable under the guise of back-to-back contracts.
These gaps simultaneously present problems and opportunities. In general, subcontractors’ liabilities towards the ultimate employer or client are limited by the subcontract terms and conditions. However, the rights given to subcontractors through back-to-back contracts allow them to have more claims and entitlements. These powers flow from the employer’s instructions or risks as stated in the main contract.
“In a back-to-back contract, the rights, liabilities and interests of the contractor under the main contract are the same as rights, liabilities and interests of the subcontractor under the subcontract in relation to the subcontract’s scope.”
Clearly, a back-to-back contract is more encouraging for subcontractors. As subcontractors become fully aware of their limited liabilities and responsibilities, they can take advantage of the opportunities these back-to-back contracts offer. Contractors are seemingly hesitant to use standard provisions, which provide a tried and tested balance of risks and opportunities. This could be due to the rise of bespoke contracts imposed by project owners with strong buying power while attempting to transfer all risks to contractors. That said, risks also bring opportunities, and as long as the parties understand and identify the risks and establish a proper live risk management system, these opportunities should be maximised (in theory).
While there is common belief that back-to-back contracts shift all the risks from top to bottom of the project supply chain, I believe this is practically or contractually impossible. According to Article 140 of Qatar Civil Code, if a party uses its influence to conclude a contract in his favour while exploiting the rights of the other party, “the judge may, at the request of the party who is a victim of such undue influence, reduce his obligations or increase the obligations of the other party or annul the contract.”
In other words, what matters is who is best placed to manage the risks. Back-to-back contracts are here to stay with contractors believing this is the best way to protect or transfer their risks and obligations to maximise their interests. While main contractors should beware of the opportunities afforded to subcontractors through back-to-back contracts, subcontractors need to be fully aware of the opportunities they have through such contracts.
Tom Kapapa, Operations and Technical Director
Tom Kapapa is the Operations and Technical Director at Quantum Global Solutions. He is a member and Qualified Professional Surveyor of the Royal Institute of Chartered Surveyors. QGS is acknowledged as one of the leading management consultancies dedicated to serving the interests of national and international construction and engineering organisations.
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This article was previously published in the July 2015 edition of Qatar Construction News Magazine