The no-subcontracting permitted clause is often included by way of a miscellaneous provision. Often not very thoughtfully, since the service provider or seller may probably invariably in one way or another engage subcontractors. This blog post is about (no) subcontracting.
Many service or supply agreements prohibit subcontracting, either in the miscellaneous chapter or under the article addressing the contract’s 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. Finally, many companies do not directly or indirectly want to incorporate the technology of their competitors in their own products. An effective contractual instrument to monitor and control this would be a no-subcontracting clause.
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).
Finally, if the agreement containing the subcontracting clause contains restrictions or covenants on quality controls, compliance, sharing or confidentiality of information or any specific other aspects, it is recommendable to provide that those provisions are ‘forwarded’ to the subcontractor or that the principal may communicate directly with the subcontractor. For example:
Supplier shall facilitate direct technical discussions between Customer and its key suppliers and subcontractors, if Customer so wishes. Supplier has the right to and shall be invited to attend such discussions. Customer shall notify any required changes or proposals identified during such discussions to Supplier who shall process these in accordance with Section x.
Supplier shall bind its subcontractors and other second-tier suppliers to at least similar conditions as are applicable to Supplier under this Agreement with regard to the subcontracted part of its performance and shall ensure that those parties comply with these conditions, including obligations of such subcontractor or second-tier supplier vis-à-vis Supplier, as well as with respect to conditions concerning assignment and licensing of intellectual property rights. Upon Customer’s first request Supplier shall provide Customer with documentation sufficient to confirm that Supplier has complied with its obligation arising from this Section. Supplier shall report on a [monthly] basis how its key suppliers and subcontractors have performed in the preceding year with respect to people, planet and profit.
Reporting requirements (including limits on the frequency of requests for the reports) shall be agreed upon with the Supplier Account Team.
