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Using back to back agreements

This article sets out more generally what back to back agreements are as well as discussing when you might look to put a back to back agreement in place and what the advantages and disadvantages of doing so are.

What are back to back agreements?

Back to back agreements are commercial sub-contracts that mirror all or part of the terms of a main contract further up the contractual supply chain. The way that back to back agreements work is to pass down the same rights and obligations from one party to another so that the people carrying out the work or providing services carry the responsibility and are liable for any breach of the obligations that are passed down, rather than the ‘middle’ tier or tiers (in complex arrangements there may be more than one sub-contractor) of the supply chain. It effectively plugs any liability gaps in the contractual chain.

It also means that if the rights of Party A are passed down and included in the contract of Party B, Party B can enforce those rights directly. This can be important as it gives Party B more control and in theory should facilitate a quicker process to enforce the rights – timing of the enforcement of rights could make a difference to the costs and programme of any project a sub-contractor is working on.

In general, there are key provisions from a main contract that a party might want to include in a back to back agreement, including dates and deliverables (including reporting), notice periods and obligations relating to delivery of goods or services or relating to timings for making claims under the main contract.

Other provisions might include entitlement to be part of any dispute resolution process or court action set out in the main contract; to have the benefit of any claims that the main contractor is entitled to, including any rights to extensions of time or compensation for any loss or expenses arising out of the project; or entitlement to the same rights to suspend the contract or have the benefit of any collateral warranties, warranties or indemnities as are set out in the main contract. Whether liquidated damages are also reflected in a sub-contract will be a matter for negotiation between the parties to the sub-contract.

The term and termination provisions of a back to back agreement can also mirror the main contract, so if the main contract ends, the back to back agreement will then also end. Parties might want to make sure that they can exit a back to back agreement for the same reasons as the main agreement or for certain other reasons on written notice (for example the sub-contractor may try to negotiate a term that allows it to terminate the sub-contract if the contractor breaches a material obligation under the main contract).

Depending on the industry, there may be legislation that applies that sets out what can and cannot be included in connection with a back to back contract, for example in the construction industry, the Housing Grants, Construction and Regeneration Act 1996 states that a provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective (unless that third person, or any other person whose payment (directly or indirectly) is a condition of payment by that third person, is insolvent).

Are there other types of sub-contracts?

There are of course, other ways to contract along a supply chain, including stand-alone sub-contracts. Stand-alone sub-contracts are commercial agreements that do not incorporate terms from the main contract and may be used where Party A wants to include additional rights or obligations in Party B’s sub-contract, or to vary provisions from those set out in the main contract. For example, a main contractor might want to set deadlines for the sub-contractor that are earlier than those set by the employer so that the main contractor has some space if the sub-contractor is delayed or the sub-contractor’s work needs rectification.

When are they used?

A back to back agreement is usually a contract between other members of the same supply chain. Commonly back to back agreements are used in the construction industry by contractors and their sub-contractors or by global supply chains that work on a cross-border basis.

What are the common issues and risks?

The common issues and risks of a back to back agreement will depend on whether you are the main contractor or a sub-contractor.

Main Contractor Sub-contractor
Badly drafted back to back agreements can be difficult to interpret and might lead to disputes and project delays. Badly drafted back to back agreements can be difficult to interpret and might lead to disputes or the sub-contractor not being able to enforce the rights that it wants to under the main contract.
Provisions in the main contract are missed in the sub-contract. In particular, the sub-contractor should make sure that it is a party to the dispute provisions set out in the main contract.
Provisions in the main contract are incorporated into the sub-contract but the sub-contract does not accurately reflect the obligations that the contractor wants the sub-contractor to have (particularly timing and deliverables for example). Provisions in the main contract are incorporated into the sub-contract but are irrelevant to the sub-contractor.
  The sub-contractor should be careful that the obligations under the contract are not passed on wholesale without thought – some of the provisions may not be relevant or appropriate for the sub-contractor to bear the risk on.
The contractor should be mindful of payment terms – should the date that the sub-contractor is to be paid align with a milestone or when the contractor is going to be paid?  
The contractor may want to ensure that any deadlines in the main contract are shortened in the sub-contract so that the contractor has some time in case of delays by the sub-contractor or in case the sub-contractor’s work needs rectification.  
It is important to make sure that adequate data protection provisions are contained in the sub-contract if the provision of services of the sub-contractor involves the transfer of personal data.  
If the contractor is not performing any of the work, it may ask for an indemnity from the sub-contractor for any loss it incurs from entering into the sub-agreement and the main contract or arising out of the sub-contract works. An indemnity is a contractual obligation given by one party to another party to compensate that party for any loss that has been or might be incurred by that party and any loss incurred can be recovered by the indemnified party as a debt.  
  The sub-contractor might want to make sure that its liability is limited to the same amount under the sub-contract as the contractor’s liability is under the main contract.

How are back to back provisions created?

Back to back provisions can be incorporated into contracts in a variety of ways:

  • By reference: in some cases, sub-contracts may contain a general statement referring to the main contractor’s terms or include a link to the terms or a copy of the terms within the sub-contract. This has its disadvantages as it is likely that not all of the provisions in the main contractor’s contract will be appropriate or relevant to the sub-contractor. These provisions should be reviewed carefully to make sure that the sub-contractor is bound by the rights and obligations set out in the main contract. Usually if a sub-contract is incorporating terms in this way, the parties should specify which terms of the main contract apply, which terms are excluded, and which terms are varied in the sub-contract. This can be a quick and cheap way of incorporating the terms of the main contract however the process can be complicated, and mistakes can easily be made or provisions not cross-referenced correctly;
  • By drafting a stand-alone contract: another option is to draft a bespoke contract to make sure that the provisions of the main contract have been correctly incorporated into a sub-contract and are appropriate for the relationship and work that is going to be carried out by that particular sub-contractor. This type of agreement can be easier to interpret but the drafting of the individual contract may be more time consuming or costly; or
  • By using standard forms: sometimes in the supply chain there will be precedent, or industry accepted, standard form agreements that include back to back provisions from a main contract to a sub-contract. These types of agreement will depend on the industry in which the contracts are being used and are very rarely accepted ‘as is’. On the face of it this approach may be the most cost effective and quick way to pass down rights and obligations to a sub-contractor but amending standard terms can take time and there is usually some element of negotiation around which party is to bear the risks in the project.

The main point to note is that care should be taken when mirroring the terms of one contract into another contract and the context and relationship between the parties should also be taken into account so that the contract makes practical sense. Even though it is more time consuming and potentially more expensive, taking time to draft a comprehensive sub-contract that addresses the individual provisions of the main contract that are to be incorporated into the sub-contract is important to make sure that the contract is easy to interpret and the risk allocation between the parties to the contract is clear.

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