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Loss Of Profits - Holding subcontractors responsible |
A subcontractor's faulty workmanship led to fires in five properties after it failed to properly box some downlights prior to installing insulation. The lead contractor sought, but failed to win, damages from its subcontractor for loss of profits of a potentially lucrative contract. |
The subcontractor was working for a company contracted by the Commonwealth of Australia to replace wool insulation in residential properties as part of the Sydney Aircraft Noise Insulation Program. |
The work to be carried out on each property was its own discrete contract, and while it was expected, due to past experience and other factors, that the government would enter into a number of such contracts with the contractor, this was not a certainty. |
Following a quality audit after the fires, the Commonwealth terminated the contract with the contractor for faulty workmanship. The contractor then sued the subcontractor for loss of profits from the contract and also the potential profits in the expected large number of future, now lost, contracts. |
On appeal, the court found that the subcontractor was not liable for the loss of the potential lucrative contracts, focusing on the disparity between the price payable to the subcontractor for the work and the very large and disproportionate claim for damages for lost profits. |
One solution to the potential problem of recovering damages following a breach of a contract by a subcontractor is the inclusion of an express clause in the contract. This could clearly allocate risk in the event of a breach occurring, identifying possible damages that might flow and responsibility for that damage. |
Of course, parties are often unwilling to clearly identify and allocate all potential risks, particularly higher value risks, at the start of a project, as this may lead to difficult risk discussions or agreement not being reached, but it should be considered. |
