Subcontracting: An Overview and Should you Back-to-Back?

Subcontracting is seen in a number of sectors including construction, transportation, manufacturing and information technology. A subcontract will always be related to another contract – often called the ‘main contract’ or the ‘prime contract’. Two parties will have entered the main contract and then one of those parties may wish to subcontract some of their obligations. The scope of these subcontracted obligations can be as wide as the parties wish (subject to any subcontracting rules in the main contract). The key point here is that the main contract is still in place with the two original parties remaining liable to one another. The party to the main contract who subcontracts will therefore remain liable for any work undertaken by their subcontractor.

Subcontracting – general

For clarification we will use the following terms throughout this blog:

• Customer – the party to the main contract who is paying the Main Contractor for the work that the Main Contractor must carry out.
• Main Contractor – the party to the main contract who has agreed to carry out the work that the Customer needs.
• Subcontractor – the third party who has been subcontracted by the Main Contractor to carry out some or all of the work that the Main Contractor has agreed to carry out under the main contract.

In general, the Customer is obliged to accept the Subcontractor’s performance if the Subcontractor fulfils all that the Main Contractor had agreed to do under the main contract. Although this may not suit the Customer, if they failed to expressly prohibit subcontracting in the contract they will be deemed to have consented to the subcontract, unless they can bring themselves within the scope of one of the legal restrictions on subcontracting.

Subcontracting – liability

This is the way the chain of liability will work in a subcontracting relationship: if the Subcontractor’s work does not fulfil its assigned obligations in the main contract, the Customer will be able to sue the Main Contractor for breach of the main contract, and the Main Contractor will be able to sue the Subcontractor for breach of the subcontract:

Customer

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Main Contractor

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Subcontractor

It would seem therefore that the Subcontractor would not be liable to the Customer. This is not always the case, however. A Subcontractor could be liable in tort, for example, where the Subcontractor is found to owe a duty of care to the Customer and is negligent in carrying out the work such that they, for instance, cause physical damage to the Customer’s property.

Back-to-back or stand-alone?

The term ‘back-to back’ agreement is used to refer to a particular kind of subcontract. This expression is used when all of the terms used in the Main Contract are incorporated by reference into the back-to-back subcontract. They are normally used when the rights and duties of the Subcontractor in relation to the Main Contractor closely mirror those under the main contract. Creating a back-to-back agreement might be as simple as changing the names of the parties on the main contract and including a ‘back-to-back’ clause therefore transferring all the duties in the main contract to the subcontractor. However, as we discuss in the next section, this can create problems.

In a full back-to-back subcontract agreement, the Main Contractor is essentially a front man for the Subcontractor. As such, the Subcontractor will normally be willing to assume full liability for the performance of the works as defined in the main contract, and there is often little difference in the pricing or wording of the two contracts. In a partial back-to-back agreement, the Subcontractor agrees to discharge some but not all of the main contractor’s obligations under the main contract.

A stand-alone subcontract agreement can be read and understood without reference to the main contract. The clauses in this sort of subcontract might have little in common with those in the main contract. The Main Contractor will need to be careful to ensure all the relevant obligations and liabilities are still passed to the Subcontractor.

Disadvantages of back-to-back agreements

Many reasons are given for being wary of back-to-back agreements. These include:

• A mirror back-to-back layout will most likely not be appropriate for every clause in a main agreement. Careful consideration should be given to the question as to whether the simple transfer of an obligation from the main agreement to the back-to-back agreement will result in obligations that achieve the original intention of the parties and that they are enforceable. Provisions that might not ‘back-to-back’ neatly include intellectual property, confidentiality, limitations of liability, liquidated damages and data protection.

Example:

The main contract says that the Main Contractor will keep the Customer’s (as defined above) intellectual property confidential. The back-to-back subcontract will then say that the Subcontractor will keep the intellectual property of the Main Contractor confidential. This is wrong. The subcontract should say that the Subcontractor will keep both the Main Contractor’s and Customer’s intellectual property rights confidential (or any other arrangement agreed by the parties)!

• Where there are multiple subcontractors and a complicated specification in the main agreement it can be difficult to work out which obligation falls on a particular subcontractor. Defining the subcontractor’s scope of work may result in as much effort as the drafting of a stand-alone subcontract.
• A back-to-back contract is only as good as the main contract. The customer might be content to have simple sweeping obligations in the main contract, but the main contractor might see the need to spell out more detailed obligations in a tailor-made subcontract.

Should we have a standalone (not back-to-back) contract?

It depends on the context. As the answer will usually require careful analysis it is advisable to seek professional guidance. The solution we usually come up with is a hybrid – a back-to-back contract which also covers those areas in the contract where simply back-to-backing rights and obligations doesn’t work.

Restricting subcontracting

The following are ways in which subcontracting can be restricted:

• The main contract expressly or implicitly prohibits subcontracting. If a party wishes to stop subcontracting, they should include an express clause in their contract stating so. This usually comes in the form of a boilerplate clause.
• The contractual obligations are of a special nature that require personal performance by the original contracting party. Examples include contracts for composing music or writing a book.
• It can be implied from the circumstances that the original contracting party has promised performance. If it can be shown that the original contracting party was chosen because of their particular personal qualifications, skill, competency or financial position, then performance cannot be subcontracted.
• Statutory or regulatory restriction. Certain regulated contracts can only be carried out by authorised persons, for example, insurance contracts, consumer credit agreements. If the subcontractor doesn’t hold the appropriate licences, the subcontract will be unenforceable.

Subcontracting – Data protection

It is important to consider that data protection obligations will pass down the subcontracting chain. The Subcontractor will be a sub-processor and all sub-processing arrangements are prohibited unless the Customer has given prior written consent. The Main Contractor should check the data processing provisions and subcontracting provisions in the main contract to see what they say about sub-processing. The Main Contractor must enter into a sub-processing agreement with the Subcontractor that imposes the same data protection obligations on the Subcontractor as are imposed on the Main Contractor by the Customer. The Main Contractor, as with other obligations assigned, will be fully liable for the performance of the Subcontractors’ data protection obligations.

Checklist

• Is subcontracting allowed? Check that the main contract does not prohibit subcontracting.
• Boilerplates in the main contract. The back-to-back agreement will incorporate by reference all the terms of the main contract including boilerplate clauses. Boilerplate clauses are found at the end of most contracts and cover issues found in all contracts such as how notices should be given or which legal system the contract operates in. It will be important to check that the boilerplate clauses in the main contract, if back-to-backing, are giving sufficient legal protection and do not need adding to.
• Flow down of obligations from the main contract to a back-to-back agreement need to make sense.
• Where there is an international element to the arrangements you need to ensure that the governing law of the main contract gives the main contractor effective recourse against the subcontractor and vice-versa.
• Sub-contracting of data processing obligations – check that the Customer has given its prior written consent to the sub-contracting of any data processing obligation set out in the main contract.

Final thoughts

Subcontracting is common practice, especially in large projects requiring delivery of a range of skills and services, so it is important to understand how subcontracting works. If you are planning on engaging a subcontractor to help you deliver a project then make sure that you have the right contract in place that mirrors your obligations under the main contract. If your subcontract agreement is not drawn up properly you could be left being sued by the Customer because of your subcontractor’s poor performance while unable to sue the subcontractor yourself.

If you have any questions about subcontracting or about contract law more generally please contact Neil Williamson.