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Do I need a Subcontractor Agreement?

What is a subcontractor agreement?

A subcontractor agreement is a contract between an independent contractor and another individual or entity. Generally, a subcontractor might be contracted to carry out certain functions or specific tasks in relation to a separate contractor agreement.

The process can be summarised as follows:

Often a subcontractor will perform specific tasks where the contractor does not have the relevant experience or know-how. For example, where a contractor is commissioned to create software, then a sub-contractor may be contracted to carry out testing for bugs.

Important clauses in a sub-contractor agreement

Sub-contractor agreements can vary in complexity, depending on the specific tasks that the subcontractor is required to perform, and the complexity of the original agreement between the company and contractor. The following clauses are generally considered important to defining the obligations of parties to a subcontractor agreement.

Relationship of the parties. It is important that the subcontractor agreement defines the legal relationship between the parties, that is as an independent contractor. The contractor may want to avoid entering into an agreement where the relationship between the parties is unknown or could possibly be construed as employer/employee or that of agent/principle.

Liability and indemnity. Perhaps the most debated subjects when negotiating a subcontractor agreement between parties is who bears liability, and whether or to what extent a party is willing to indemnify the other. It is important for the contractor to consider how they may be liable to the company under the original contractor agreement, if the subcontractor fails to perform under the subcontractor agreement. In that context, it is not uncommon for a contractor to seek to be indemnified by the subcontractor for failure to perform a specific obligation, or more generally breach of the subcontractor agreement.

Scope of work and payment. The subcontractor agreement should clearly set out the scope of work involved, and how and when payment is to be made to the subcontractor. This means that the contract should provide clarity to the parties about expected performance and completion of the work.

Confidentiality. In some instances, the sub-contractor may be in possession of sensitive information about either the company or the contractor. A confidentiality clause may cover important matters such as protection of trade secrets, customer or client information, and information relating to the finances of the company and contractor.

Project Deadlines. It is not uncommon for a subcontractor agreement to set out binding deadlines on the subcontractor. This may be for completion of the entire task or alternatively for a set of discrete work items.  Often, the subcontractor agreement will set out penalties for breach of a deadline, which may vary depending on the importance of the task to be completed. Common penalties include cause for early termination of the subcontractor agreement by the contractor, or alternatively may be cause for a financial payment from the subcontractor to the contractor.

Take-away points:

  • A subcontractor agreement is commonly used where a contractor wishes to engage an independent contractor to perform a specific task under a contractor agreement;
  • Consider how the relationship between the parties is to be defined;
  • Parties to a subcontractor agreement should consider whether and to what extent they wish to indemnify the other.

Sam Gilbert, IP and Technology Consultant, B.A., LL.B  University of Technology, Sydney

If you would like to know more about this article, or need assistance with a contract, please do not hesitate to get in contact with the team at W3IP Law on 1300 776 614 or 0451 951 528.
Disclaimer. The material in this post represents general information only and should not be taken to be legal advice.

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