Food supply chain contracts: subcontracts
10 March 2022
Food supply contracts often involve multiple subcontractors carrying out different roles in the supply chain. For instance, a food producer may engage various subcontractors to source, cook and package the produce.
Subcontracting can be an effective way of delegating contractual obligations to a third party and providing the supplier under the main contract with an opportunity to provide the most cost effective service to its customers. Suppliers involved in food supply chains that wish to subcontract their obligations have a number of key considerations to take into account and some of which are set out below.
Is subcontracting permitted?
This will depend on the wording of the main contract. If the contract is silent as to subcontracting, in general the supplier can freely subcontract its obligations under the main contract to a third party (subject to the restrictions mentioned below).
If the main contract expressly or implicitly (i.e. states that the contract is personal to the parties) prohibits subcontracting, the supplier will not be entitled to subcontract (unless the counterparty to the main contract provides its consent).
Additionally, the parties will need to consider whether appointing a subcontractor results in that sub-contractor being a subprocessor of personal data. For food supply contracts, it is likely that only small amounts of personal data will be exchanged but the parties must still have regard to the applicable data protection legislation and additional consents might be required to permit subcontracting.
If you are in any doubt as to whether your contract permits subcontracting, you should seek legal advice on the terms of the contract in question.
Terms of the subcontract
A supplier must bear in mind that subcontracts are generally treated as separate contracts and do not affect the position of the parties to the main contract.
For example, a food retailer (ABC Ltd) engages a food producer (DEF Ltd) to produce vegan sausages (the Main Contract). DEF Ltd subcontracts the packing of the sausages to a manufacturing company (GHI Ltd) (the Subcontract). GHI Ltd has no rights and obligations under the Main Contract. ABC Ltd has no rights under the Subcontract. If the food produce supplied by GHI Ltd does not meet the requirements of the Main Contract, DEF Ltd will be liable to ABC Ltd for this failure and will need to take action against GHI Ltd under the Subcontract. Therefore, the liability clauses in the Main Contract and the Subcontract need to be carefully drafted in order to fairly apportion risk.
Subcontracts do not need to be in writing but the usual rules on contract formation still apply. It is in the parties’ interests to ensure that each party’s obligations are clearly documented in a written contract to seek to avoid any uncertainty.
In a food supply context, it is often the case that not all of the obligations in the main contract will be performed by one subcontractor. The terms of each subcontract will need to be carefully considered and drafted to ensure that the obligations of each subcontractor are clearly set out in order for the supplier to be in a position to comply with the main contract.
A ‘back-to-back contract’ could be used where the rights and duties of the subcontractor to the counterparty to the main contract closely mirror the obligations in the main contract. As stated above, if the subcontractor is only carrying out some of the obligations under the main contract, the scope of work that the subcontractor is required to carry out needs to be clearly defined.
Alternatively, a standalone subcontract could be used which can be read independently of the main contract. The supplier will need to ensure that all relevant terms of the main contract are included in the subcontract in order to ensure that the supplier is able to comply with the terms of the main contract. This could be time consuming unless the responsibilities between subcontractors in the food supply chain can be clearly demarcated.
Terms of the main contract
The contractual terms in the main contract should also be considered where it is known in advance that the supplier intends to subcontract all or some of its obligations under the main contract.
A customer to the main contract might request that certain terms are incorporated into any subcontract. These are known as flow-down terms and the main contract would need to set these requirements out. The most commonly included terms that are flowed down are:
- conditions relating access to customer sites (for example, to ensure proper food safety obligations are being fulfilled);
- compliance with the customer’s corporate policies (such as social responsibility, modern slavery and anti-bribery); and
- step-in rights (which would involve the customer taking over the subcontract itself).
Additionally, a customer might want to consider requesting that a clause is included in the subcontract that permits the customer to enforce the terms of the subcontract directly against the subcontractor. In the absence of such a clause, the customer will not have the right to enforce the subcontract against the subcontractor.
If a supplier has experience of working with a subcontractor, it should consider whether there are any terms that should be incorporated into the main contract that are relevant to the subcontractor. For example, if the growing and processing of corn used in the supply of corn-based snacks is subcontracted to a corn supplier, that corn supplier might require the customer under the main contract to make commitments on order forecasting in order for the corn supplier to manage production cycles.
Whilst some of the key considerations when subcontracting are identified in this article, it is not intended to be an exhaustive guide and each contract should be reviewed in light of the potential issues and risks applicable to the facts of the matter.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2022.