Restrictions in having subcontract agreements

Not all contractual obligations may be performed by a subcontractor. These contracts do not suit every type of business – or the nature or the work involved. Alternatively the main contract may restrict the right to sub-contract the performance obligations.

Typically, subcontracting is not possible where one of the following applies:

• The main contract prohibits subcontracting. The main contract may provide expressly or by implication that the contracting party will perform a particular obligation and is not entitled to delegate performance to a subcontractor. If the customer is concerned about subcontracting and the involvement of third parties, a provision against subcontracting should be expressly included in the main commercial contract.
• The contractual obligations are of a special nature that require personal performance by the original contracting party. Some contractual obligations are manifestly too personal to be subcontracted because the original party's performance is the essence of the contract, for example, a contract to paint a picture or to write a book or play.
• It can be implied from the circumstances that the parties do not intend to allow subcontracting. The test here is whether the supplierhas agreed personal performance or merely a result. If the latter, the customer to the main contract may in certain situations bound to accept the subcontractor's performance. However, if it can be shown that the supplier was chosen because of its particular qualifications, skill, competency or financial position, then it may not be possible to subcontract performance obligations. In this situation the supplier may be in material breach of the main contract if it does not undertake the performance obligations itself.

Whether personal performance is essential to the contract will depend on a number of factors including the parties' common intention inferred from the nature of the services, the terms of the contract and all the circumstances of the case. If the customer can show that it is placing reliance on the supplier's particular skill or expertise, then the contract may be regarded as being of a personal nature.

It is advisable that the terms of a formal sub-contract should be agreed. The terms of the sub-contract should mirror the performance obligations of the main contract. If the performance obligations do not mirror these terms then it could cause the supplier to breach the legal terms of the main contract.