A balance will need to be struck when flowing down the obligations from the main contract to the subcontract – it may be tempting for a supplier to flow down all obligations and liabilities to the subcontractor and include indemnities to cover any potential breach or default.
However, there may be acceptable gaps in some subcontracts which reflect the risk and reward of the main contract – for example, the value of the main contract may be much higher than the value of the subcontract. Following due diligence, it may be more efficient to target key risks (for example, strict service level commitments from the subcontractor) or, as mentioned above, to seek security via a third-party guarantee.
A supplier should also consider what is being subcontracted, all or part of the suppliers’ obligations, and if the latter, then it is extremely unlikely that the subcontractor will or should have full responsibility for delivery of the main contract or take on all liabilities that may arise under the main contract.
Obligations which should always be flowed down include:
- key milestones for delivery (and the consequences for not meeting these);
- acceptance processes (to avoid confusion at delivery);
- any dependencies which a party might require from another party to satisfy its obligations;
- appropriate liability provisions and indemnities from the subcontractor;
- intellectual property provisions.
Additionally, it may be a requirement under the main contract that the supplier engages any subcontractors on the same or similar confidentiality terms as are in the main contract between the supplier and client.