subcontracting clauses (delegation of contractual obligations to third parties)

When a party takes on a contractual obligation, they are legally required to perform the obligation.

That same contracting party is still entitled to subcontract out the work to another service provider, unless the contract:

1. is a contract for personal services, such an employment contract
2. contains an express term preventing subcontracting out the work, or an implied term

 

Difference: Subcontracting & Assignments

Subcontracting is not the same as an assignment of contractual rights (properly referred to as a "transfer"). Although the end result may be the same from a commercial standpoint:

1. an "assignment" transfers the entire legal obligation to perform to the party assigned the obligation;
2. subcontracting leaves the primary obligation to perform the obligation with the contracting party.
   Subcontracting is a substitute performance of the contract by another person

Example

Let’s take an example:

1. Two parties enter into a contract.
2. The contract says the supplier will:
   1. host its own SaaS software for use by the customer
   2. maintain the SaaS software in the cloud computing solution to run continuously
   3. provide consultancy services to examine the requirements of the customer for the purposes of customising the software for the customer
   4. develop the software to the requirements of the customer, once those consultancy services have defined the deliverables.

There are 4 different types of services in the contract: hosting, maintenance, consultancy services and software development services.

Most SaaS companies won’t have the resources in-house to:

1. host the software on its own equipment, in its own data centre. Not to mention monitor developments in online security to keep it secure
2. have employees perform all of the maintenance on the software required. The supplier may want to contract out that work
3. provide highly customised industry specific consultancy services. The supplier might hire in contractors to do those specific tasks, and not use its own employees
4. use their own employees to do the software development.

The general law allows the supplier to subcontract out - or delegate - services which it is contracted to supply to its own customer – without the permission of the customer, unless it falls within one of the narrow exceptions above.

When services are subcontracted out, that doesn’t prevent the supplier from being primarily liable to the customer if the subcontractor does a bad job. When a subcontractor does a bad job, the chain of liability is:

1. the customer has a breach of contract claim for damages against the SaaS company,  and
2. the SaaS Company may have a claim for breach of contract against the subcontractor for substandard work. It depends on the terms of the contract between the SaaS company and the subcontractor. 
   (a breach of contract of the first contract may not be a breach of contract of the second contract)

The customer has privity of contract with the supplier only – not the subcontractors used by the SaaS company. So the customer can’t sue the subcontractor for a breach of contract (but see Third Party Rights Clauses).

That’s quite different to assigning the benefit or burden or a contract, as is the case with Assignment Clauses.

Subcontracting clauses used in contracts confirm or prevent the legal ability of companies to subcontract out the supply of products or services.

Example Subcontracting Clause

The Supplier shall not without the prior written consent of the Customer subcontract any of the services to be supplied by the Supplier to the Customer.

Using clauses such as this prevent subcontracting out the contract work altogether.

In the context of the SaaS company example above, would mean that the SaaS company would be in instant breach of contract to its customer.