As a general counsel or in-house lawyer, many of the contracts your company receives will contain clauses relating to subcontracting and insurance. Although not necessarily related, these clauses both fit within the ‘boilerplate’ category. Just because they are considered to be boilerplate clauses, does not mean that they should be overlooked. This article will outline:

  • what each clause means;
  • why it is important;
  • what position you should take when negotiating the clause;
  • common issues that arise with these clauses; and 
  • how to avoid these issues.

Subcontracting Clause

A subcontracting clause will set out whether or not your service provider can subcontract the provision of any parts of the services. This clause is important because it gives you control over who exactly the services will be provided by.

If subcontracting is permitted, it should specify that the service provider cannot subcontract without your company’s written consent, which you can withhold if you choose to. It should also state that:

  • any approval by your company to subcontract does not release the service provider from any liability; and
  • the service provider takes full responsibility for the subcontractor’s work.

Subcontracting clauses may also specify that certain clauses in the agreement will apply to the subcontractor as well. These clauses include those dealing with: 

  • the quality of the services; 
  • compliance with the agreement;
  • compliance with the law;
  • confidentiality; or
  • audit rights.

For example, if subcontracting is permitted, the subcontractor will need to comply with the main agreement. They must also subcontractor keep records, which you have the right to audit.

Issues can arise in a few different scenarios, including if the:

  • clause is unclear on whether or not subcontracting can take place; 
  • clause does not require your company’s written consent to subcontract. This may mean that the service provider could subcontract without your permission; or
  • service provider does not take responsibility for the subcontractors. The service provider needs to take full liability for the provision of the services, including their use of subcontractors. This should be set out in both the subcontracting clause and the liabilities clause. 

Insurance Clause

Many contracts will also include a clause setting out the service provider’s obligations when it comes to insurance. This clause should set out who is responsible for arranging the insurance – either your company or the service provider.

An insurance clause will set out whether your service provider is entitled to the benefit of your company’s insurance. More often than not, they will not. 

It will also usually set out:

  • the types of insurance the service provider should obtain;
  • the level of insurance; and
  • that you can request evidence of the insurance.

An insurance clause may also state that the service provider must inform your company if any issues arise which could result in a claim under an insurance policy required by the contract in question.

The types of policies that your service provider should maintain will be relevant to the transaction, and may include: 

  • workers’ compensation;
  • product and public liability; or
  • professional indemnity.

Insurance clauses may also set out that insurance is maintained for a certain period of time. 

For example, this period of time could be during the length of property lease and a specified time after. When services are being provided, the insurance period may continue for several years after the services have been completed. 

If insurance clauses are not drafted adequately, your service provider may not obtain adequate insurance which can be costly in the case of breach of contract. 

Key Takeaways

The subcontracting and insurance clauses in contracts are often skimmed past when reviewing, but this can be detrimental to your company. It is best to ensure that these clauses align with your company’s position on each matter. There must be strict procedures in place for approval of subcontractors, and the service provider needs to take responsibility for their subcontractor. In regard to the insurance clause, you need to make sure that your service providers have the appropriate level of insurance in place, and that it is clear who is responsible for taking out the insurance policy. If you have any questions about contractual clauses for your in-house team, contact LegalVision’s contracts lawyers on 1300 544 755 or fill out the form on this page.

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