Subcontracting clauses in contracts

Many service or supply contracts will prohibit subcontracting, either in the miscellaneous chapter or under the article on contract scope:

No subcontracting. No obligations under this Agreement or a Statement of Work, which may cause Customer, any of its subcontractors or customers (including end-users) to infringe upon third party’s Intellectual Property Rights shall be sub­contracted, unless it is approved by Customer, which approval shall not be unreasonably withheld or delayed. Service Provider shall procure that:
(a) Article 6 [on quality, compliance and audit rights] shall extend to each sub­contractor and their subcontractors; and
(b) each subcontractor shall comply in all respects with the provisions of this Agreement (as if it is Service Provider itself).
Supplier shall remain the primary debtor and be responsible for the due and timely performance by any subcontractor.

The practical merits of this clause are not as severe as it may appear. The background of this is certainly not limited to a desire to understand or manage a service provider’s costs accumulating in the supply chain. Responsible business parties wish to be fully aware of the identity of all their suppliers in the supply chain. A customer often wants to make sure that know-how required for, or developed in connection with, the services obtained from a service provider does not become diluted over an extensive chain of subcontractors. Also, responsible business parties cautiously monitor the supply chain for generally unacceptable matters, such as child labour, remarkably bad working conditions or environmentally hazardous production methods.

Although some variations amongst national laws are likely to exist, communis opinio may tend to allow subcontracting, as the Common Frame of Reference shows:

IV. C. – 2:104: Subcontractors, tools and materials
(1) The service provider may subcontract the performance of the service in whole or in part without the client’s consent, unless personal performance is required by the contract.
(2) Any subcontractor so engaged by the service provider must be of adequate compe­tence.
(3) The service provider must ensure that any tools and materials used for the performance of the service are in conformity with the contract and the applicable statutory rules, and fit to achieve the particular purpose for which they are to be used.
(4) Insofar as subcontractors are nominated by the client or tools and materials are provided by the client, the responsibility of the service provider is governed by IV.C. – 2:107 (Directions of the client) and IV.C. – 2:108 (Contractual obligation of the service provider to warn).

In many cases, the no-subcontracting clause merely triggers an information requirement to the customer, who does not intend to reject a request to have certain of the supplier’s obligations performed by a third party. Note however, that the prohibition does imply a ‘veto right’ and if the customer established a (dual) supplier policy, the agreed performance is likely assumed to be personal. In that case, the subcontracting clause will be enforced (or result in the ongoing evaluation of the subcontractors).

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