Subcontracting? – check your obligations
When we engage someone to perform a task, it is a common expectation that it will be that person or organisation who actually does the work. This is particularly the case for professional advice, consulting or areas of knowledge where the expertise of specific individuals is a key reason for entering into a contract for services.
Subcontracting happens all the time
However, organisations subcontract services to third parties all the time, therefore it is also common for service contracts to either prohibit subcontracting or require the consent of the principal in order to do so.
The New South Wales Supreme Court recently had reason to consider such an arrangement in relation to a contract between Daintree Contractors Pty Ltd (Daintree) and Advanced National Services Pty Ltd (Advanced) for the cleaning of Daintree client premises.
The contracts required Advanced to obtain written consent to subcontract or assign any obligations under the contracts.
The parties agreed that the services had been provided and that there was no issue with quality. However, upon discovering that Advanced had used unauthorised subcontractors to complete 90% of the work, Daintree terminated the contract the breach and refused to pay for services rendered prior to termination.
The Court held the contracts were not merely contracts to produce a result but rather contracts for the personal performance of cleaning services. Ultimately, it mattered to the parties whether the work was performed by Advanced itself or by an unauthorised subcontractor.
Key factors
This result was influenced by factors including:
The contracts prohibited the assigning or subcontracting of performance without written approval;
The contracts used the verb “perform” rather than a more general expression such as “provide” or “supply” cleaning services;
The contracts imposed extensive conditions on Advanced in the performance of the work, including among other things the level of insurance, OH&S training and compliance reporting.;
If unauthorised subcontractors had been permitted, many of the contractual protections for Daintree would not apply.
Compliance issues
Ignoring a requirement to obtain consent before subcontracting the performance of a contractual obligation may result in the termination of the contract and may also entitle the innocent party to refuse to pay for services delivered by unauthorised subcontractors.
For service providers, be aware of what rules and restrictions apply to subcontracting or assignment of service obligations and strictly comply them.
In order to avoid uncertainty, contracts should deal with subcontracting rights, and be clear about the consequences if unauthorised subcontractors are used.
Paul Gray
Principal
T: 03 5225 5231
E: pgray@ha.legal
Alexander Gulli
Lawyer
T: 03 5226 8573
E: agulli@ha.legal
