February 5, 2020
If this title caught your eye, it’s a fair guess you already understand the concept of subcontracting.
In the IT sector and beyond, everyone has learned that a company does better as a specialist rather than a generalist.
As a commercial technology law firm with a highly specialist niche interest – Microsoft Partners – we have encountered some understandable misgivings our clients have about entrusting their reputation and services to third parties otherwise known as Subcontractors.
What's the best way to work with third parties?
Start with correct contracts
Let’s assume that a contract has been signed between the Supplier (you) and your Client.
You will be using a Subcontractor to help fulfil some or all of your contractual obligations to your Client.
In doing so you expect the Subcontractor to fulfil their obligations in the same way that you have to fulfil under your contract with your Client.
Flow Down Terms in this case scenario will be flowed from you (as Supplier) to your Subcontractor and will incorporate the same or as similar as possible terms as the term you have in place with your Client.
Why is this important?
In commercial contracts it is the Main Contractor (you - as Supplier) who is liable to deliver the services to your Client.
It is clearly in your best interests to close any gaps between what you agreed to deliver and contract to and what your Subcontractor’s obligations are to complete the work. Why is this important?
Let’s take an example here:
You had a contract with a Client.
That contract stated that you would provide IT services to client by a deadline you stated you will in your Statement of Work / Scope of Works.
Let’s say you subcontracted a certain portion of the services and, yes, you guessed it…
The subcontractors delayed the delivery of services by quite some time!
The Client is irate, throws the contract at you.
What is your response?
If you had the identical terms in place with your Subcontractors as your client has with you, then you could throw the contract at your Subcontractor, demand the same that the client demands of you and flow up the responsibility.
You would be covered properly. If you didn’t have the same identical terms, you would likely be held liable under your contract with your client and would have nowhere else to turn.
That is real damage to your bottom line and not a situation to contemplate recklessly.
In a nutshell - Flow Down Terms effectively binds the Subcontractor to same standards and obligations to complete the works to the same standard and manner that you - as Supplier - have agreed to.
Failure of the Subcontractor to comply with the Flow Down Terms could cause a breach of contract with the Main Contractor; however, rights and remedies would be legally available to resolve the situation and have the right party pay for the damage caused.
This would not be possible without the Flow Down Terms.
What Gets Flowed Down?
Common Flow Down Terms include (but are not limited to) all obligations restrictions and warranties on the parties, payment terms (although these are often varied depending on certain party arrangements), audit, step in, restrictions relating to Client site access, data protection, information security, confidentiality and governing law provisions.
Key indemnities, liabilities and insurances and change requests should be included as part of the flow down – although dependent on the size of the works, and the overall proportion that the Subcontractor is supplying, these can be revised and scaled accordingly.
Technology service companies should be vigilant with the following specific considerations:
GDPR – the General Data Protection Regulation (EU 2016/679) states that when a processor of data uses another processor (a sub-processor) for the processing of personal data – the same data protection requirements apply automatically to the second processor (Subcontractor) as the main processor (Main Contractor).
The key consideration for businesses here is how to make this happen in practice.
The Network and Information Systems Regulations 2018 (SI 2018/506) (NIS) relate to such systems where a subcontractor is to manage these for the Client. Simply put – NIS Regulations impose cyber security and incident alerts to the Client.
To be compliant, these obligations must explicitly Flow Down to the Subcontractor via you-as Supplier. There are guidelines on how to manage this if is the Client is an essential services provider (NIS definition)
To help you dive deeper into this have a look at the National Cyber Security Centre guidance on managing supply chains.
Flow Up Terms
While Flow Down Terms primarily protect you as Supplier and Main Contractor, Flow Up Terms are an integral part of the contract negotiation as they protect the Subcontractor from gaps in service provision and expectations from both the Client and the Supplier.
To be done in conjunction with the other topics, Flow Up Terms address important logistical elements such as term of licensing IP (if applicable) the dependencies that it needs from the Client/Supplier to carry out the services and circumstances where service relief can reasonably be expected.
A vital term warranting careful consideration and implementation from all sides are the Services Levels to be applied. Constructing mutually agreeable and logistically effective SLAs (service level agreements) is often a sticking point.
To be successful these discussions should happen early in the project with all parties. Failure to adhere to SLAs will cause endless disruption and potentially have the ability to terminate the contract.
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When to Use a Back-to-Back Agreement?
A Back-to-Back agreement is used for both scenarios.
- If you are a Sub-Contractor and want to negotiate the Main Terms that the Main Contractor has in place with its Client; and
- A Supplier who is employing a Subcontractor and wants to cover all legal gaps between its relationship with its Client and the relationship it has with its Subcontractor.
How can Law 365 help?
Happily, Law 365 can make sure that you have the right Back-to-Back agreements in place which ensure the right Flow Down Terms are in place whether you are a Supplier (Main Contractor) or the Subcontractor.
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