The Subcontractor/nominated Subcontractor means a partner and an essential part of the process of the Contractor performing the contract it signed with the employer. With its important role, the Subcontractor can support and facilitate the Contractor:
- Control costs and minimize (or allocate) risks during project implementation more easily.
- Access to large, complex projects that require experience, skills, resources, and in-depth insights in one or more specific areas is paramount.
- Optimize the implementation of jobs, and ensure that different parts of a project (or package) are performed by contractors with expertise and knowledge in each specific field.
- Save costs and minimize responsibilities related to personnel issues such as temporary residence declaration, temporary absence; Immigration; personal income tax; insurance; labour safety.
However, the provisions of Vietnam law on Subcontractors in general and nominated Subcontractors, in particular, are still limited, making it difficult to implement/initiate projects, thereby leading to Disputes that are unnecessary or cannot be resolved because there is no clear and appropriate mechanism.
The most obvious proof is that in all the provisions of the Construction Law No. 50/2014/QH13 dated June 18, 2014 (“Construction Law 2014”), there is not even any provision to define the sub-contractor. The definition of sub-contractor can only be found in the Construction Law No. 16/2003/QH11 of November 26, 2003 (“Construction Law 2003”), whereby:
“Subcontractor in construction activities means a contractor signing a contract with the main contractor or a construction general contractor to perform a part of the job of the main contractor or general contractor.”[1].
Regulations detailing the implementation of Construction Law No. 2003, and Construction Law No. 2014 also provide very limited provisions for sub-contractors. Specifically:
“Subcontractor is an organization that signs the contract with the contractor to perform a part of the contractor’s Work”[3].” or “Sub-contractor is an organization that signs the contract with the Contractor”[4].“
Nominated Subcontractor
Similarly, even Construction Law No. 2003, and Construction Law No. 2014 did not have many provisions on dominated sub-contractors and it was until Decree 37/2015/ND-CP dated April 22, 2015, and then Circular No. 09/2016/TT-BXD dated March 10, 2016, was issued, and the concept of “Nominated Subcontractor” – Subcontractor appointed by the Employer appeared. Whereby:
“The Subcontractor designated by the Employer (hereinafter referred to as “nominated Subcontractor”) refers to any Subcontractor who is appointed by the Employerto help the main contractor or general contractor carry out demanding jobs; or where the general contractor or main contractor fails to meet requirements for HSE, quality or construction progress at the Employer’s request.”[5]’’
The difference between the Sub-contractor and the Nominated Sub-contractor
From the above provisions, it can be understood that, in essence, the nominated Subcontractor is a Subcontractor because it is hired by the main contractor or the general contractor to perform a part of the project or package.
However, there are three important/fundamental differences (in definition) between the Subcontractor and the Nominated Subcontractor:[6]:
- Firstly, the nominated Subcontractor is designated (appoint/introduced) for the Contractor by the Employer, and not chosen by the Contractor itself.
- Secondly, a nominated Subcontractor can only participate in 02 typical circumstances (i) work is a part of the project/package with high technical demand; and/or (ii) the Contractor does not meet the contract’s requirements.
- Thirdly, the contracting parties shall agree on particular situations that the Employer can appoint a nominated Subcontractor.
Limit and inadequacy of a nominated Subcontractor under Vietnam Law
Hence, it can be understood that the Employer is not free to appoint a Subcontractor, it can only appoint in some particular situations and such nomination shall be agreed upon between the Employer and the Contractor.
In other words, the Employer’s entitlement to appoint a Subcontractor and make a project implementation plan that suits the project’s characteristics and context is restricted.
Moreover, the above provisions mean that the Employer can only appoint a Subcontractor when the contract between the Employer and the Contractor is signed, and under no circumstances can such an appointment occur before the contract is concluded.
Besides, the appointment of the Employer when the Contractor does not meet the requirement of the contract has no practical significance or it may lead to many risks to the project development, because:
Firstly, once the Contractor does not meet the requirement of the contract, the Employer shall use its right to terminate a part of the Contractor’s work and transfer that part to another contractor. Then, that “another” contractor will sign the contract directly with the Employer to carry out that part to limit the risks of continuing to implement the project by the Contractor.
Secondly, if the project is carried out under the name of the Contractor and the Subcontractor is nominated to directly perform the work, then there may be a possibility that the Contractor does not comply with the contract or the risk that the Subcontractor does not receive any payment from the main contractor/general contract may happen, which can directly affect the project implementation.
The benefit of nominating a Subcontractor
Contrary to the rather restrictive and binding approach mentioned above on Nominated Subcontractors of Vietnam laws, the practice has recognized positive benefits from using the Nominated Subcontractor and therefore the appointment of Subcontractors during the project’s implementation is not uncommon.
Benefits that the Employer can obtain from adopting the Subcontractor nominating mechanism include:
Firstly, it is convenient for the Employer to arrange and plan to perform the project when it is entitled to nominate the Subcontractor.
Although the Employer’s resources and bases have not yet been fully prepared before its invitation for bids, for example, the finish of designs, technical requirements or the detail of the overall construction schedule, the provision of the Employer’s entitlement to nominate a Subcontractor in a reasonable time and specify one or several parts of the project which shall be performed by it in the tender document will help the Employer to implement the project and finish the relevant procedures/issues.
The work items which are performed by the nominated Subcontractor will be determined based on “Provisional Sum” or “Prime Cost Sum” and that allows the Contractor to take the “Profit & Attendance” – P&A. The Contractor will calculate the value (or percentage) for P&A.
In other circumstances, when some work items take a longer period to finish than the main subject of the project, nominating a Subcontractor before choosing a Contractor will help the item implementation to be prompt and synchronous with the project.
Secondly, the Subcontractor nomination allows the Employer to choose the best Subcontractor.
Nominating a Subcontractor helps the Employer to have a chance to consult, use and take advantage of the experience, skills, and necessary knowledge of the Subcontractor in the field/particular work that is not the Contractor’s scope of expertise.
In some circumstances, the nominated Subcontractor will work with the designers, and managers and operate the project (for example hotel management units, building management units, and property management units) to set up the use standards, and design standards, to reduce cost (budget) or create highlights for the project/work.
Thirdly, nomination helps the Employer to maintain a good relationship with the Subcontractor and control the transaction.
There are circumstances that the Employer and the nominated Subcontractor maintain a good relationship in many different projects.
Through the nominating mechanism (i) the Employer and the nominated Subcontractor will enhance the chance to cooperate, and support each other; (ii) the Employer can set out the requirements and conditions that the Subcontractor needs to meet, in exchange, the Subcontractor will enjoy the benefit when the Employer nominates it to the Contractor.
Fourthly, nominating a Subcontractor helps the Employer save costs and reduce the project risks.
The Employer’s evaluation of the nominated Subcontractor’s ability and experience can be reviewed again by the Contractor in the nomination process (as analyzed in The procedures nominate a Subcontractor).
In case there are bases showing that the nominated Subcontractor does not meet the work requirements (based on the documents, ability, experience, and necessary resources of the nominated Subcontractor), then, the Contractor totally has the basis to object to the nomination, and the Employer shall review the nomination, hence reducing risks.
On the other hand, after approving the appointment, the Contractor is considered to accept the responsibility of managing, supervising and coordinating different works of the project/package. Hence, the costs of operation, management and supervision of the Employer for the Subcontractors at the project are minimized.
Finally, the Employer can (through a prior agreement with the Contractor) provide the Site facilities for the nominated Subcontractor. The use and payment of the arising cost (if any) will be arranged and agreed upon between the Contractor and the nominated Subcontractor. The Employer is involved in this matter at least.
Besides the benefits that the Employer may obtain, the abuse of this mechanism may cause specific risks to the project development such as the ability to control, coordinate and manage of the Contractor, the quality of the nominated Subcontractors as well as the ability to divide the package of the Employer.
Basic differences between the nominated Subcontractor and Subcontractor
| No. | Evaluation criteria | Subcontractor | Nominated Subcontractor |
| 1 | The mechanism for participating in the project implementation | Through the appointment of the Contractor
In some cases, the Employer can approve or has to approve those choices. |
Chosen and nominated by the Employer
The Contractor approves (or objects to) the nomination. |
| 2 | The Employer’s participation in subcontracting conditions | The Employer is not involved in the Subcontract.
However, the main contract shall conclude provisions which would entitle the Employer to require the subcontract to be assigned to the Employer or to specify some obligations that the Subcontractor shall comply with.[7]. |
The Employer will directly (or through the Engineer) discuss and specify basic issues of the Subcontract such as value, time of performance, guarantee, payment, and other essential clauses.
The Contractor can consult or ask for the opinion of the Employer about arising issues (if any) during the implementation of the appointment. |
| 3 | Payment | In most cases, the Subcontractor can only request the Contractor (not the Employer) to make a due payment according to the Subcontract.
In some particular cases, for example, a risk of bankruptcy, or default for the Contractor, then the Employer can directly pay the Subcontractor or pay the Contractor and that payment shall be specific to pay for the Subcontractor. |
The Subcontractor is directly paid by the Contractor.
However, it is obligated that the Contractor shall pay the Subcontractor within a certain time unless the Contractor has a clear reason for that late payment (or non-payment) Before submitting the Application for Payment Request, the Contractor shall submit the evidence that the nominated Subcontractor has received all amounts due.[8]. Besides, practices also recognized some cases in which advance payment is paid directly to the nominated Subcontractor by the Employer and the parties will carry out the clearing procedure in the next payment – advance payment. If the Employer directly pays the nominated Subcontractor, both parties shall have a specific agreement, or according to the proposal of the Contractor.[9]. |
| 4 | Guarantee/Bond | The Subcontractor itself arranges and submits the Advance Payment Bond and Performance Security to the Contractor. | The nominated Subcontractor shall submit the Advance Payment Bond to the Employer or shall mention the Employer as a beneficiary.
In some cases, the nominated Subcontractor will provide the Employer with Performance Security because of the management and coordination requirement of the Contractor towards the Subcontractor. |
| 5 | The Contractor’s responsibility | The Contractor is responsible for the default of the Subcontractor that it employs.[10]. | It is not certain whether the Contractor is responsible for the default of the
nominated Subcontractor (after the Contractor approves the nominated Subcontractor). However, in most cases, the limit of the Contractor’s responsibility is what the Subcontractor has to be subject to under the Subcontract, and the Contractor will attempt to exclude its responsibility if it is the Subcontractor’s default. |
The procedures to nominate a Subcontractor
The procedures to nominate the Subcontractor can be represented as follows:
The Employer nominates
The procedure to appoint a Subcontractor begins with the Employer compiling information and agreements between it and the Subcontractor and sending to the Contractor a Letter of Appointment attached thereto are the basic issues that the Contractor needs to perform or comply with. The main contents of a Letter of Appointment include:
Approving the nomination
The Contractor, after receiving the Letter of Subcontractor Nomination, will have two choices: performs the works specified in the Letter by sending the nominated Subcontractor a Letter of Acceptance clearly stating the conditions under which the Contractor approves the Subcontractor to participate in the project as a nominated Subcontractor or refuses to the nomination and clearly states the reasons.
The nomination approval shall be made within a reasonable (not to say short) time as any delay of the Contractor in approving the nominated Subcontractor will lead to a delay in the project.
In parallel with sending the Letter of Acceptance to the nominated Subcontractor, the Contractor may have to modify some clauses in the Contractor related to the P&A cost, the Extension of Time (if any), other arising costs and excluded obligations (if any) from the approval of the Employer’s nomination.
Performance of the nomination
After receiving the Letter of Acceptance from the Contractor, the nominated Subcontractor will accept the established terms and conditions if they faithfully reflect the previous communications and agreement between the nominated and the Employer.
However, it is also not excluded that the nominated Subcontractor, after receiving the Letter of Acceptance from the Contractor, refuses to execute and perform the Letter of Acceptance if (i) the conditions established do not reflect the previous agreement made by the Subcontractor, (ii) the conditions established in the Letter of Acceptance are not feasible – because the bases for the tender, performance and completing the Subcontract have been changed and there is a need of other agreement.
In such circumstances, the Contractor will have to take the initiative in arranging and obtaining the consent of the Employer and the Subcontractor.
Object to the nomination
The Contractor’s right to object to the nomination according to the Vietnam law is limited and restricted to only two cases, specifically:
Other cases of objecting to the nomination
However, to ensure the interest of the Contractor in receiving, managing and coordinating the nominated Subcontractor, or to facilitate the Contractor with a basis to limit the abuse of the Employer’s nomination, the practice also recognizes various circumstances under which the Contractor can exercise its right to object, such as[11]:
There are bases to believe that the nominated Subcontractor is unable and lacks resources and financial capacity;
The Subcontract does not specify that the nominated Subcontractor shall ensure that the Contractor bears no consequences arising from the negligence or improper use of the goods of the nominated Subcontractor, agents or nominated Subcontractor’s employees;
The Subcontract does not state that for the work of it (including design, if any), the nominated Subcontractor must undertake to the Contractor the legal responsibilities and obligations that relieve the Contractor from his contractual obligations and responsibilities, and
The Subcontract does not state that the Subcontractor shall indemnify the Contractor from all liabilities and responsibilities arising out of or in connection with the contract and from any of the Subcontractor’s defaults in the performance of such responsibilities or fulfilment of those obligations.
Challenges always arise for the Contractor in assessing the ability, resources or financial capacity of the nominated Subcontractor because it may lead to disagreements with the Employer and the nominated Subcontractor.
In addition, the object to the Subcontractor nominated by the Employer is intended to remove the Contractor’s liability for defaults by the nominated Subcontractor or for explicit warnings by the Contractor which is left unsolved.
The Employer’s choice
Depending on whether the Contractor approves or objects to the nomination, the Employer will have different options to ensure that the various objectives of the project are still achieved, in particular (see map below):
The Contractor’s obligation to the nominated Subcontractor
While the responsibilities of the Contractor to the Subcontractors are specified, accordingly:
“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“[12] and
“The EPC Contractor shall be responsible before the law and the Employer for the quality, process of performing the work under the signed contract, including the work performed by the Subcontractor and shall pay material compensation for the damage caused by his default“[13],
the Contractor’s responsibility to the nominated Subcontractor is not clearly stated.
The unclearness of the Contractor’s responsibility to the nominated Subcontractor can be expressed through these questions:
Is the Contractor entitled to object to the nomination after signing up the Letter of Acceptance?
Shall the Contractor take responsibility in case the nominated Subcontractor fails to meet the specified conditions, for example, the nominated Subcontractor falls into bankruptcy, insolvency, or other reasons belonging to the nominated Subcontractor?
Shall the Contractor be responsible for the defaults of the nominated Subcontractor?
The limit (if any) in case the Contractor shall be responsible for the defaults of the nominated Subcontractor?
Two ways to effectively limit the liability
To limit the risks and responsibilities of the Contractor related to the defaults of the Subcontractor in general and the nominated Subcontractor in particular, the Contractor usually uses two important ways: “back-to-back” and “pay upon pay”.
“Back – to back” obligation in the Subcontract
In Vietnam, back-to-back obligations can be considered common and applied in most real estate development projects or large-scale infrastructure. However, each party, depending on its position, capacity and interests, has different interpretations of “back-to-back”. Take the example below:
The Contractor signs a contract with the Employer to construct and complete a 5-star hotel. During project implementation, the Contractor signs subcontracts with Subcontractors for the following packages: elevator, facade, lighting and sound, landscape, mechanical – electrical – engineering art, and interior finishing. The following interpretations of back-to-back obligations were raised by the parties and could not become mutual:
Firstly, “back-to-back” means the Subcontractor(s) shall comply with all of the requirements of the Contract, whether those provisions are applied to the Subcontractor(s) or not;
Secondly, “back-to-back” means the Contractor shall only pay for the Subcontractor(s) after it received payment from the Employer.
Thirdly, “back-to-back” means applying the same obligations of the Contract between the Employer and the Contractor. For example, the Contract between the Contractor and the Employer stipulates that “The Employer is obligated to pay the Contractor within (x) days from the date of receipt of the payment request”, then the Contractor is also obligated to pay the Subcontractor(s) “within (x) days from the date of receipt of the payment request”.
Fourthly, “back-to-back” means the Contractor shall only sign and approves arising issues, Extension of Time, or signs the handover and acceptance minutes to the Subcontractor(s) after receiving the Employer’s approvals, instructions and minutes.
Fifthly, “back-to-back” means a mutual obligation to perform, complete the work and correct the defects accordingly to give the Employer a complete construction/project. All issues about the rights, interests or responsibilities of the parties for each different issue in the contract are not the factor or basis for assessing the nature of “back-to-back”.
CNC supports the latter view because it represents the true nature of the relationship between the parties. When a request is made by the Employer, all parties will have the same effort and obligation to fulfil the requirements of the Employer.
The fact that each party enjoys rights or assumes obligations when implementing the Employer’s requirements will be done based on specific relationships, circumstances and contexts and cannot be relied on whether or not the rights have been received or have been waived by the parties.
In other words, when the Employer has only one project to complete, all parties involved in it will have the same obligation. The rights or obligations that they incur are from the level of their participation and agreement between them and others. Only then will the relationship between the parties in each contract be independent and limit the potential disputes arising when performing the contract.
However, no matter how understood and applied, “back-to-back” should not be the basis, and provisions that cause a party to suffer damage, take on too many risks or increase implementation costs because when “back-to-back” is fully applied (from the Employer to the Contractor, to the Subcontractor, and Subcontractors thereafter) the risk of dispute is very high. At that time, the meaning and purpose of “back-to-back” to serve the interests of the Employer cannot be maintained.
Hence, when drafting contracts (especially subcontracts), it is necessary to ensure coherence, anticipate the most possible bad situations and have an appropriate handling mechanism, such as:
The issue of the time limit for performing the works and obligations of the contract: It should be noted that the time limit for the Subcontractor to perform the obligations is usually shorter than that of the Contractor because then will the Contractor have time to inspect and request correction of defects (if any).
Dispute resolution issues: In the course of implementation, if defaults or liabilities arise, the Employer will always want to assign the responsibility to the Contractor – who is directly involved in the Contract. Similarly, the Contractor will assign this responsibility to the Subcontractor who directly performs/deploys the work. As a result, the Contractor will be in a binding relationship with two different contracts and may be involved in two or more disputes over the same issue.
Suspension and termination issues: A very typical situation is that, when the contract between the Employer and the Contractor is suspended or terminated, the subcontract will also be suspended or terminated. At that time, the Subcontractor will not be able to require the Contractor to continue to perform the subcontract or to compensate for damage, unless the suspension or termination of the contract is due to the default of the Contractor.
“Pay upon pay” in the Subcontract
As the name implies, the payment obligation to the Subcontractor appears only when the Contractor has received payment from the Employer. This clause means that the risk of not receiving payment from the Employer of the Contractor now passes to the Subcontractor.
Of course, no Subcontractor would wish to include such provisions in their subcontracting, as all contractors expect to be paid immediately when their parts of the work have been completed without depending on any third party or other conditions or factors.
To minimize the risk that the Subcontractor may face when there is a problem with the Employer’s Financial Arrangements and still ensure that the Project is carried out by the Subcontractor, some contracts will stipulate that the Contractor will still pay the Subcontractor in some cases even if the Contractor has not received payment from the Employer.
However, in this situation, the Contractor shall also make great efforts to arrange their finances before participating in the project to ensure that they can flexibly improvise when any bad situation occurs.
In addition, to ensure that the Contractor is not irresponsible (unfaithful, honest in protecting the legitimate rights and interests of Subcontractors), the subcontract shall stipulate (i) the Subcontractor’s ability to assist the Contractor in the preparation and submission of claims to the Employer; (ii) on the clear, transparent and timely nature of the Contractor during the process of working with the Employer.
In the Subcontractor’s position, the “pay upon pay” clause should be avoided in the subcontract. The reasons (or grounds) for the Subcontractor to refuse to apply this mechanism stem from the complicated and overlapping nature of the application; relieves the Contractor’s obligation to retrieve the Subcontractor’s benefits from the Employer, and more importantly, each contract is prepared and performed based on offering different prices. The payment obligation of the Contractor to the Subcontractor cannot depend on the payments that the Contractor receives from the Employer.
In the Employer’s position, it is of the utmost importance to ensure that there is no contractual relationship (even in the case of nomination of subcontractors) between the Employer and the Subcontractor, and therefore the Employer’s payment obligation to the Contractor is separate and not payable to the Subcontractor. The Subcontractor does not have any right or basis to demand direct payment from the Employer, except in exceptional circumstances or in connection with a serious breach by the Contractor.
Build a standard form of Subcontract
Currently, Vietnam has not issued a form of subcontract for construction and installation activities. Therefore, the Contractors often have to prepare one (or several) subcontract forms for their purposes and suitable for each specific case.
In case a nominated Subcontractor is used, the Employer usually tends to use a form(s) of subcontracts published by reputable organizations in the world, such as FIDIC.
Two forms of subcontracts published in 1994 and 2011 are recommended by FIDIC to be used in conjunction with the contract forms issued in 1987 and 1999, which are the two most popular contract forms today and are widely applied in the world.
Based on the application of two subcontract templates issued by FIDIC and the practice of consulting for many famous Contractors in Vietnam, CNC has concluded and drafted a complete contract form based on the standards and intentions conveyed by the Association of Consulting Engineers and to overcome the risks and disputes of the parties that CNC has resolved in practice.
We hope that the Subcontract form that CNC has built will be a reliable reference and an effective tool for the Contractor to use to make sure that all important matters of the Subcontract will be mentioned and best structured with the ultimate goal of protecting the interests of the parties involved in the contract as well as the value that the Employer wishes to aim for and under the regulations of Vietnam law.
CONTACT
Mr. Le The Hung | Managing Partner
T: (+84-28) 6276 9900
Ms. Nguyen Thi Kim Ngan | Senior Associate
T: (+84-28) 6276 9900
CNC© | A Boutique Property Law Firm
28 Mai Chi Tho, An Phu Ward, Thu Duc City,
Tp. Ho Chi Minh, Vietnam
T: (+84-28) 6276 9900 | F: (+84-28) 2220 0913
cnccounsel.com | contact@cnccounsel.com
Disclaimers:
This article is prepared or used for the purposes of introducing and updating clients on information pertaining to issues/developments of legal perspectives in Vietnam. The information contained within this article shall not constitute an advice of any kind and could be subjected to change without prior notification.
References:
[1] Clause 12 Article 2 Decree No. 37/2015/NĐ-CP.
[2] Furthermore, in the guidelines for the implementation of Law on Construction 2003, Law on Construction 2014, the limitation on scope of application by nature is only applied to state-funded project and/or parties to the contract are related to the state.
[3] Article 1.8, Contract for Construction Template, enclosed with Circular No. 09/2011/TT-BXD dated 28, June 20211 of the Ministry of Construction.
[4] Article 2.12, Decree No. 37/2015/NĐ-CP.
[5] Actually, this provision on Subcontractors inherit the spirit of Circular No. 09/2011/TT-BXD: Article 14.2.a, Contract for Construction Template, enclosed with Circular No. 09/2011/TT-BXD dated 28 June, 2011 of the Ministry of Construction.
[6] Clause 2 Article 9, Circular 09/2016/TT-BXD.
[7] Sub-Clause 4.4(d) [Subcontractors], Sub-Clause 4.5 [Assignment of Benefit of Subcontract], FIDIC Red Book 1999.
[8] Sub-Clause 5.4 [Evidence of Payments], FIDIC Red Book 1999.
[9] Article 14.3, Contract for Construction Template, enclose with Circular 09/2016/TT-BXD dated 10, March, 2016 of the Ministry of Construction.
[10] Sub-Clause 4.4 [Subcontractors], FIDIC Red Book 1999. Article 77.2(c), Article 86.2(c), Article 113.2(l), Law on Construction 2014.
[11] Sub-Clause 5.2 [Objection to Nomination], FIDIC Red Book 1999.
[12] Sub-Clause 4.4 [Subcontractors], FIDIC Red Book 1999.
[13] Clause 3 Article 11, Circular 09/2016/TT-BXD.
