To what extent is a supplier responsible for the acts of its subcontractors?

The recent case of Topalsson v Rolls-Royce Motor Cars Ltd, which was decided in the High Court, doesn’t change the law in this area, but it does confirm it, so now seems like a good time to address the point.

A supplier is responsible for the acts of their subcontractors so it’s very important to ensure that your contracts with subcontractors contain adequate protection to ensure that if your customer claims against you for loss, you can recover from the relevant subcontractor. To this end, we recommend having your own standard form of agreement for your subcontractors, rather than contracting on their terms. As the Judge in Topalsson said:

‘Regardless whether he felt under any pressure [from Rolls Royce] to collaborate with RPC, it was a commercial decision for him. For the purposes of the Agreement, RPC was Topalsson’s sub-contractor and Topalsson remained responsible for RPC’s performance.’

So, even if you feel that a subcontractor has been foisted on you by your client, you’re still responsible for your subcontractor’s actions.

The Topalsson judgment also discussed the question of what is meant by time being of the essence of a contract. The Judge noted that:

‘Where, as in this case, time is of the essence, it is a condition of the contract and therefore delay in performance is treated as going to the root of the contract without regard to the magnitude of the breach.’

To clarify what this means, she went on to quote from the 1987 Court of Appeal judgment of Lombard North Central Plc v Butterworth, where Lord Justice Mustill said:

1. ‘Where a breach goes to the root of the contract, the injured party may elect to put an end to the contract. Thereupon both sides are relieved from those obligations which remain unperformed.
2.  If he does so elect, the injured party is entitled to compensation for (a) any breaches which occurred before the contract was terminated, and (b) the loss of his opportunity to receive performance of the promisor’s outstanding obligations.
3.  Certain categories of obligation, often called conditions, have the property that any breach of them is treated as going to the root of the contract. Upon the occurrence of any breach of condition, the injured party can elect to terminate and claim damages, whatever the gravity of the breach.
4. It is possible by express provision in the contract to make a term a condition, even if it would not be so in the absence of such a provision.
5.  A stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely performance is a condition of the contract. The consequence is that delay in performance is treated as going to the root of the contract, without regard to the magnitude of the breach.
6.  It follows that where a promisor fails to give timely performance of an obligation in respect of which time is expressly stated to be of the essence, the injured party may elect to terminate and recover damages in respect of the promisor’s outstanding obligations, without regard to the magnitude of the breach.’

While Topalsson doesn’t involve any important new legal issues, it does provide useful summaries on these two points. Finally, I’ll turn to what some might consider the key point in the judgment. Could RR terminate for delayed performance when it had already agreed to a revised timetable for performance (as it purported to do in its first notice to terminate)? No. It couldn’t but there was nothing to stop it terminating for breach of the revised timetable so its second attempt at serving notice to terminate was valid, even though its first notice to terminate was invalid.