Agency would likely be held liable for subcontractors abroad

By Mark Pestronk
Mark PestronkQ: We recently won a large corporate account with offices in the U.S. and two other countries. The account wants us to choose one agency in each country to handle the account's employees based there. Under the contract drafted by the client's legal department, we would be the prime contractor and the local agencies would be our subcontractors. Would this structure make us legally responsible for the subcontractors' errors and omissions? If so, is there another structure that would avoid such responsibility?

A:
Unless the contract stated otherwise, you would probably be held responsible for the other two agencies' performance. If they failed to meet the contract criteria, such as offering the lowest fares, you would be liable for the breach.

From the account's point of view, one can see the logic of wanting to look only to your agency. It chose you and not the local agencies, and it prefers a single point of contact.

To ensure that your agency would be held responsible, the legal department's draft may well spell out what would be implied anyway. So, a typical contract might state, "Agency shall be responsible and liable for the acts or omissions of each Local Agent as if they were, in each case, Agency's own acts or omissions."

Then, to add extra, albeit redundant, protections, the typical contract would further state that you and each local agency must enter into a subcontract containing the same performance standards as those in your contract with the client. Finally, the agreement would provide that your agency must indemnify, hold harmless and defend the client against the local agency's acts and omissions.

Incidentally, if you have errors and omissions insurance, liability created by your subcontractor would probably not be covered. The standard policy states that coverage is not provided for "any claim ... based upon or arising out of an insured's breach of contract ... except claims for tort liability of another party assumed by the named insured under a hold harmless or indemnification agreement contained in an incidental contract."

The client's claim against your agency would typically be one arising out of your breach of contract, so it would not be a claim for "tort liability," which is different from contract liability. Tort liability means liability for negligence and the like resulting in personal or economic injury.

From your point of view, I can see the logic of refusing to be responsible for the local agencies' failure to perform according to the standards of the contract. Therefore, when the account presents the contract, you can propose three alternatives.

First, instead of being liable for the local agencies' acts or omissions, you could propose that your agency must use best efforts to cause the locals to perform their duties under their subcontracts with your agency. As long as you could show that you made those efforts, you would be protected against claims for breach of contract.

Second, you can propose that the account enter into its own contracts with each local agency, so that their failure to perform would not create any liability for you.

Finally, you could designate the account as a third-party beneficiary of your subcontracts, which would allow the account to make a claim against the local agencies directly instead of making a claim against your agency.

Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at mark@pestronk.com. 
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