Many service or supply contracts prohibit subcontracting, either in the miscellaneous chapter or in the Article addressing the agreement’s scope. The prohibition to subcontract any part of a party’s rights and obligations is often mitigated by the phrase “which approval shall not be unreasonably withheld or delayed”. A contractual stipulation may also be expanded such that, once approval is granted, specific provisions apply. You may find examples of subcontracting clauses in the ITC Model Contract Book, such as the international corporate joint venture, Article 20 and the international long – term supply of goods, Article 25.
The practical merits of this clause are not as severe as they may appear. The background of this is certainly not limited to a desire to understand or manage a service provider’s costs accumulating in the supply chain. Responsible business parties wish to be fully aware of the identity of all their suppliers in the supply chain. A customer often wants to make sure that know-how required for or developed in connection with the services obtained from a service provider does not become diluted over an extensive chain of subcontractors. Also, responsible business parties cautiously monitor the supply chain for generally unacceptable matters, such as child labour, remarkably bad working conditions or environmentally hazardous production methods. Finally, many companies do not want directly or indirectly to incorporate the technology of their competitors into their own products. An effective contractual instrument to monitor and control this would be a no-subcontracting clause.
In many cases, a no-subcontracting clause merely triggers an information requirement, as the customer does not intend to reject a request from the supplier to have certain obligations performed by a third party. Note, however, that the prohibition does imply a ‘veto right’ – and if the customer established a (dual) supplier policy, the agreed performance is probably assumed to be personal. In that case, the subcontracting clause will be enforced (or result in on-going evaluation of the subcontractors).
Finally, if the agreement containing the subcontracting clause contains restrictions or covenants on quality controls, compliance, sharing or confidentiality of information or any specific other aspects, it is recommendable to provide that those provisions are ‘forwarded’ to the subcontractor or that the principal may communicate directly with the subcontractor.