Is Subcontract Allowed under Contract of Quasi-Mandate or Contract for Work? An Explanation Taking System Development as an Example

In the field of system development, it is common to see operations where a vendor who has been entrusted with development further subcontract another service provider.

Subcontracting has its advantages for the system ordering user, such as being able to fully utilize the skills of highly technical service providers. However, subcontracting can also carry the risk of leading to complex disputes that may involve the subcontracted service providers.

In this article, we will discuss the pros and cons of subcontracting, divided into quasi-mandate contracts and contract for work.

What is a System Development Contract?

In a contract to outsource system development (SES contract), two types of contracts are typically used: Contract for Work and Quasi-Mandate Contract.

In the case of a contract for work, it is promised that the system, which is the deliverable, will be completed by the deadline. On the other hand, in the case of a quasi-mandate contract, it is not the completion of the system that becomes the obligation, but rather the vendor promises to provide technical advice and support as the user performs tasks such as defining requirements.

There are various processes in system development, and it is required to select the appropriate contract according to the content of each task.

Therefore, it is common to conclude a basic contract that summarizes the clauses common to all processes, and then conclude individual contracts according to the personalityistics of each process.

For more details on the differences between a contract for work and a quasi-mandate contract in system development, please refer to the following article.

Related article: Distinguishing and Understanding the Differences Between Contracting and Quasi-Mandate Contracts in System Development

The Legal Implications of Subcontracting System Development

Subcontracting system development can lead to more complex disputes due to the involvement of multiple parties.

In system development, there are often cases where the progress of a project is hindered due to a lack of communication between the user and the vendor, or where a defect in the implemented program is discovered after delivery, leading to a dispute.

If subcontracting is not involved, these issues remain a matter between the user and the vendor.

On the other hand, when subcontracting is involved, the subcontractor also becomes entangled in any system development-related troubles, making it more difficult to understand the rights and obligations involved.

For example, if a defect occurs in the system after the project is completed, the question of who among the parties involved should bear the final responsibility becomes a three-party issue.

Furthermore, if subcontracting was prohibited in the first place, the vendor who subcontracted without permission may be held liable for breach of contract.

Therefore, it is important to first understand whether subcontracting is allowed depending on the type of contract.

Subcontracting is Generally Prohibited in Quasi-Mandate Contracts

Firstly, if you undertake system development through a quasi-mandate contract, it is generally prohibited to subcontract the work.

This is because the nature of a mandate is based on trust in the party to whom the mandate is given. Arbitrarily employing another contractor to carry out the mandated tasks would betray this trust.

Therefore, subcontracting without the user’s permission could potentially lead to issues of non-performance of obligations.

Subcontracting is Generally Allowed in Contracting Agreements

Next, if you undertake system development through a contracting agreement, you are generally free to subcontract.

Since the purpose of a contracting agreement is “to complete the work”, there is no problem in subcontracting the system development to another contractor as long as the system development is completed.

However, if the system development is not completed by the deadline, the original contractor will bear the direct responsibility for breach of contract, even if they have subcontracted to another contractor.

In the following articles, we explain in detail the points to note when concluding a contracting agreement for system development. Please refer to them as well.

Related article: What is the Completion of Work in Contracting Agreements for System Development?

Related article: What to Note When Concluding a Contracting Agreement for System Development

Important Court Cases Regarding Contracting Agreements and Subcontracting

The court case introduced here is a dispute that arose when a vendor started work before the formal contract was concluded for system development, but the user later refused to conclude the contract.

In this case, the vendor sued for compensation for the damages caused by the user’s unilateral change of mind.

In this court case, it was disputed whether the subcontracting fee to the subcontractor, which had been ordered before the formal contract was concluded, could be included in the damages.

As a conclusion, the court indicated that the subcontracting fee to the subcontractor is included in the scope of damages.

The plaintiff, in building the system in question, had proceeded with the development of the health check data transmission/reception management system (health check system linkage gateway and health check data collection system) on the premise of concluding a business consignment contract after the conclusion of this business consignment contract with X, who has know-how and a track record in the development of similar systems…

In response to this, the defendant argues that there is no fact that he accepted the work done by X as a subcontractor to the plaintiff… However… since it was not that the plaintiff was not allowed to use a subcontractor in building the system in question, whether the defendant accepted X as a subcontractor or not is irrelevant to whether the business consignment fee paid to X is the plaintiff’s damage.

Tokyo District Court, April 16, 2012 (Heisei 24)

As explained in the judgment, as long as the nature of the contract is a contract for work, the use of subcontracting is generally free, and the user’s consent is not necessary.

However, if the prohibition of subcontracting was promised in advance, it is considered that the use of subcontracting was not allowed even in a contracting agreement.

Key Points to Consider in Deciding on the Permissibility of Subcontracting

As stated above, the conclusion on the permissibility of subcontracting generally differs between qusai-mandate contract and contract for work. Here, we will highlight some points to be aware of.

Even in Contract for Work, Free Subcontracting is Not Allowed where There is a Special Provision

In contract for work, subcontracting can generally be freely conducted.

However, as a user, you may want to prohibit subcontracting to avoid potential disputes that may arise from it.

Also, when providing confidential or personal information to a vendor for system development, it would not be unusual for users to want to allow subcontracting only to trusted businesses.

Therefore, to prevent unauthorized subcontracting, users may establish a special provision prohibiting subcontracting without prior consent.

By establishing such a special provision, users can prohibit subcontracting in principle, or check the subcontractor in advance.

Therefore, even under contract for work, if there is such a special provision, you cannot freely subcontract without the user’s consent.

In Quasi-Mandate Contract, Subcontracting is Possible if the User Consents

Also, in quasi-mandate contracts, subcontracting is not allowed in principle.

However, with appropriate subcontracting, smooth and enriched system development can be achieved. Therefore, under the Civil Code, if the user approves subcontracting, it is stipulated that subcontracting can be allowed even in quasi-mandate contracts.

Therefore, even if a quasi-mandate contract is concluded, by understanding the significance of subcontracting and obtaining approval from the user, subcontracting is allowed.

Pay Attention to the Subcontract Act

The Subcontract Act (Japanese Act against Delay in Payment of Subcontract Proceeds, etc. to Subcontractors) is a law aimed at equalizing the trading relationship between prime contractors and subcontractors, where disparities in negotiation power tend to become significant, and protecting the interests of subcontractors.

In system development as well, transactions where the prime contractor re-commissions its contractual obligation to a subcontractor may be subject to the Subcontract Act.

When subject to the Subcontract Act, the prime contractor as the parent business operator is required to create and retain certain documents, and is prohibited from refusing to accept or returning the object of the contract.

If these obligations and prohibitions are violated, there is a possibility of being fined or receiving a recommendation.

Note that the Subcontract Act is basically applied between the prime contractor and the subcontractor, and does not apply to transactions between the user and the prime contractor.

However, if the user has system development capabilities and is manufacturing the system for in-house use, the Subcontract Act may apply to transactions where the user commissions system development to other business operators, so caution is necessary.

For more details about the Subcontract Act, please refer to the following article as well.

Related article: Explaining the Application of the Japanese Subcontract Act to System Development and Penalties for Violation

Beware of Disguised Subcontracting

“Disguised subcontracting” refers to a situation where, although the contract is a subcontracting or commission contract, the client is directing and using the workers of the contractor, and in reality, it is a worker dispatch.

For example, even if it is subcontracting, if the user, who is the orderer, gives instructions on the execution of work to the workers employed by the vendor, or manages their attendance, it falls under “disguised subcontracting”.

Under the Japanese Employment Security Act, it is generally prohibited to use workers under one’s management under the direction and command of others, which is referred to as “worker supply”.

However, it is specially recognized as “worker dispatch” when a dispatch business operator who has received permission based on the Japanese Worker Dispatch Law (Law Concerning the Proper Operation of Worker Dispatching Businesses and Protection of Dispatched Workers) dispatches workers.

In the case of “disguised subcontracting”, the vendor is not licensed as a dispatch business operator, but merely receives a commission for development from the user.

Nevertheless, allowing the workers employed by the vendor to work under the direction and command of the user not only constitutes the act of “worker supply”, but also the act of “worker dispatch” without permission.

Therefore, it could violate both the Worker Dispatch Law and the Employment Security Act, and there is a possibility of being sentenced to imprisonment or a fine.

Therefore, as a vendor, you must command and manage your own workers so that you are not judged to be “disguised subcontracting”.

Conclusion: If you’re struggling with subcontracting, consult a lawyer

In this article, we have explained whether subcontracting is possible or not, focusing on each type of contract for system development.

For system development, it is important for the user and the vendor to communicate closely and proceed with the project under a mutual trust relationship.

Therefore, regardless of the type of contract you choose, it is important to confirm in advance with the user and the vendor about the possibility of subcontracting, and in some cases, to provide special provisions.

In system development, there is a risk of many complex legal issues arising. To minimize such risks, we recommend consulting with a specialist lawyer once when you are subcontracting or receiving a subcontract for system development.