Subcontracting clause – extensive

A subcontracting clause secures quality of performance. To prevent uncontrollable subcontracting, more elaborate supply-chain provisions are necessary.

A subcontracting clause typically prohibits the involvement of third parties in the due and timely performance under the agreement, whether it is the long-term supply of products or provision of services. In many cases, subcontracting is subject to prior approval, usually providing that such approval or consent is not to be unreasonably conditioned, delayed or withheld. Sometimes, the subcontracting by affiliated companies is carved out (and if this is not done explicitly, the entire context or other provisions would permit such ‘subcontracting’).

The key regarding subcontracting clauses is this: to prevent that a subcontracting clause is invoked inadvertently, it is important to clarify in advance what happens. If someone in your organisation ‘approves’ subcontracting, is is important to also obtain (some) control over such subcontractor: that the customer is entitled to contact such subcontractor directly; that supplier-reporting is also done by (or in relation to) such subcontractor; that the subcontractor itself complies with various (often ESG or CSR-related) requirements, as if it were bound itself. Such requirements to report or comply should ideally also be directly enforceable by the customer vis-à-vis the subcontractor.

A tiered supply chain introduces efficiency and optimises the ongoing supply of products or services (i.e. the customer’s first-tier supplier takes care of multiple approved sub-suppliers while remaining the responsible for the end-result). Also, allowing subcontracting means that not the customer but the supplier should stay up-to-date about developments in the market in which the subcontractors operate. The responsibility and this market knowledge justify a margin on prices. However, at some stage, the knowledge of what is needed and who can deliver a the right quality, may become monopolised by the supplier (and then a higher price may be understandable but not necessarily justified anymore). If the consequences of an approval are not predefined, it may happen that legal counsel is not involved, and that the customer loses control over quality or price. An elaborate subcontracting clause should prevent this.

In a complex supply chain, in regulated markets or in a business where compliance with ESG and CRS is essential, it is also key that the customer can communicate with subcontractors directly (even bypass their first-tier supplier). If this is not imposed upon approving a subcontractor, then the customer has no control (and probably also no right to terminate the contract with the supplier).

An elaborate subcontracting clause improves the involvement of subcontractors or sub-suppliers, and establishes control over the supply chain. It is important to note that further improvement of the clause requires the reference to specific rules and regulations (specific to the underlying business or sector, or the customer’s products). Parts of an efficiently operating supply chain (and direct access to and responsiveness by an approved subcontractor) can be reflected in a dedicated clause on Reporting and periodical evaluation.

As a side note: interestingly, it is rarely defined what subcontracting entails. Does it include the hiring of consultants (non-employees who would furthermore operate with the party’s email address)? When should the involvement in the perfomance be qualified as subcontracting (as anticipated by the no-subcontracting clause)? These questions are hardly ever defined, leaving a short-swing (no) subcontracting clause anyhow problematic.