Business subcontract agreements

Where contractual obligations cannot be assigned to a third party, a subcontract can be an effective way of transferring or delegating contractual obligations to a third party. A subcontract is a separate contract entered into by a supplier under a main contract under which they agree with a third party (the subcontractor) that the subcontractor will perform certain of their obligations under the main contract for an agreed fee. The party seeking to sub-contract the performance obligations may need to seek the permission of the customer to the main contract, depending on the terms of the main contract.

Unlike a novation in which the original contracting party is effectively replaced by a third party, the supplier remains liable for the performance of the main contract, and liable to the other party to the main contract for any default in performance by the subcontractor. Equally, the customer to the main contract may not entitled to sue the subcontractor for breach of contract due to there being no privity of contract, although they may have an action in tort. In general the supplier to the main contract would include an indemnity in the subcontract whereby the subcontractor indemnifies the supplier for any loss, damage or liability sustained by the supplier as a consequence of the actions of the subcontractor whether caused by its negligence or otherwise.

Subcontracts are commonly used in a number of trades and industries including construction, transportation, manufacturing and information technology. They are also used a great deal in various business services businesses and other trades businesses, such as signage and civil engineering based businesses. The customer in the main contract may in certain circumstances be obliged to accept the subcontractor's performance if the contract is silent on the whether the supplier can appoint a sub-contractor. This may not suit the customer, but if the customer has failed to prohibit subcontracting expressly in the contract, it may in certain instances be deemed that the supplier is permitted to subcontract some of its performance legal obligations.

The question of whether a party to the main contract may subcontract performance of his contractual obligations depends on "the proper inference to be drawn from the commercial contract itself, the subject-matter of it and other material surrounding circumstances".