August 28, 2019
Subcontracting in the IT industry is rife. Either you are bidding with another third party, or you have won the bid and need to get a Subcontractor onboard or just simply a Customer you are working with needs a new component to your deliverable which you can’t provide and need a third party to provide you with it.
How you contract with that third party is of vital importance when balancing this precarious 3-way relationship. These are 4 helpful tips and explanations to understand the potential issues and giving you an effective legal way forward.
Whether you like it or not, as the Main Contractor, you may have to enter into supply contracts with Subcontractors to support your services to your Customers. Not often will the Customer take on this challenge for you, by contracting directly with these third parties (even if that would make everyone’s life much easier, especially in relation to licence or support arrangements!) This means that as the Main Contractor you need to ensure that you have the right agreement in place with the Subcontractor to protect against any risk, problems with delivery of the services, protection against third party intellectual property claims, robust indemnities and warranties and the such. What happens when your Subcontractors happens to have their own terms and conditions and wants YOU to sign up to this? How effectively do you control the issues you face when held liable for your Subcontractors under your Customer Agreement and how then do you build in that risk management into the subcontractor documents? Contract nightmare! I have a solution but first these problems are classic flow up and flow down issues which you need to understand…
Flow Up and Flow Down
Flow Up is when you need to flow up certain rights to your Customer which comes from your Subcontractor’s offering. For example, if your Subcontractors happen to offer licence rights and support (and they could be a relatively large organization- larger than you) then you want to ensure you can sub-licence those rights and give the benefit of those additional warranties and support arrangements to your Customer. The likelihood of those rights already being built in to your signed up Customer Agreement is pretty slim so you need to be proactive in this regard. Conversely, flow down is where there are certain rights and responsibilities found in your signed up Customer Agreement (such as a lovely big limitation of liability cap) that you need to ensure your Subcontractors adhere to. There is nothing worse (in terms of risk management) than having wide reaching indemnities or a cap of 200% of the contract value when your Subcontractor is trying to limit their cap to 100% of their contract value. If you are responsible for actions of your Subcontractor under the Customer Agreement and your Subcontractor will only pay you half of what you owe your Customer (when they did all the damage) then your risk portfolio (as well as the guy who signed up to these subcontractor terms) has flown out of the window. So how do you get by this? All will be explained…
When Mud Hits the Fan
How often have you simply signed up to the Customer Agreement and then later simply signed up to your Subcontractor terms and conditions and hoped for the best (and that they simply meshed very well by some miracle?) I’m sure my reader is not one of them but it happens under intense time pressure when needing to deliver the project on time so it can happen to the best of us all. Why is it not ideal? Simply because the terms will conflict in some or large part and you, as the Main Contractor will be left holding all the risk in the contract with your Customer whilst the Subcontractor can limit all its exposure. There may also be risk and compliance issues within your Customer Agreement whereby you could be in breach from day one of hiring a Subcontractor if you don’t ensure your Subcontractors have certain policies, ISO compliance or Business Continuity and Disaster Recovery policies in place. Just a big mess could be left on your desk whilst everyone is simply looking at you for all the answers. You might have quite a big bill to pick up on your failed Subcontractor’s part and haven’t got the ability to claim it all back. It’s like going out for a dinner with your other half and a friend joins you half way, drinks that whole bottle of Bollinger and then disappears before the bill comes to the table. Nice…
Back to Back Agreements
As you are the Main Contractor you have the ability to dictate to your Subcontractors how you want to contract with them. The likelihood is that either you are about to agree the Customer Agreement or have already agreed and signed up to the Customer Agreement in which case you need to flow down the main terms of the Customer Agreement to your Subcontractors in a back to back agreement template. If there are specifics that your Subcontractors needs to provide to you to flow up to your Customers such as licence rights (sub-licence rights), better warranties, support arrangements etc then put it in the Statement of Work and have your Customer sign up to the additional terms of the Statement of Work (be sure to make sure it prevails in the event of conflict with the Customer Agreement). These templates are very simple as they simply set out the mechanics of the relationship between the three parties and cross references the Customer Agreement as what the Subcontractor will adhere to. Please do get in touch if you need help with getting a good template in place for all your subcontractors/main contractors going forwards.
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