MANAGING CONTRACTUAL RISK IN THE SUPPLY CHAIN
In a typical services arrangement, a customer will engage a service provider and will expect that service provider to provide the services itself. However, there are many instances where the selected service provider may need to subcontract its obligations to a third-party subcontractor. The subcontractor may then in turn need to further subcontract to another third party, and this could be the beginning of a complex supply chain. How can the customer manage the contractual risks related to a third party in the supply chain failing?
It is usual, although not always the case, that where a subcontractor fails to perform its obligations in accordance with the subcontract, this will lead to a breach by the service provider under its contract with the customer. Clearly, a failure by a subcontractor to perform its obligations under a subcontract leading to the breach of the contract by the service provider will be of concern to the customer.
The rights the service provider will have against the subcontractor will depend on the terms of the subcontract. Generally, due to the concept of privity of contract, the subcontractor will not be contractually liable to the customer. However, the subcontractor may be liable to the customer for acts or omissions carried out in performance of the subcontract (for example, in negligence if it can be established that there is a breach of a duty of care owed by the subcontractor to the customer) or for breach of a statutory provision. The customer can also obtain direct contractual rights against a subcontractor via a deed poll or collateral warranties.
Jul-Sep 2022 Issue
CMS Cameron McKenna Nabarro Olswang LLP