What is the Law When a Project Involving Subcontractors (Re-Contracting) Fails?

System development projects do not always conclude with business transactions solely between the user who orders the work and the vendor who accepts the order. There may be instances where subcontracting (re-commissioning) is utilized, anticipating the need for additional personnel or the incorporation of technical knowledge not possessed by the original vendor. In such cases, it is conceivable that disputes arising from a stalled project may not be confined to just the user and vendor. If a project has been carried out based on complex relationships involving three or more parties, how is the determination of responsibility made if the project stalls midway? In this article, we will discuss the unique project burnout risks associated with subcontracting (re-commissioning) and provide guidelines for responding to such situations.

How does the utilization of subcontracting (re-commissioning) change the legal aspects of system development?

Disputes involving multiple parties of three or more can potentially evolve into complex cases. However, even in such cases, it is important to have a general understanding of the nature of disputes between two parties, namely the user and the vendor. System development projects typically progress through mutual cooperation between the vendor, who is a technical expert, and the user, who has a wealth of knowledge about internal operations. Close collaboration is required over a long period of time. A good example of this is when a project is stalled due to user circumstances. We explain this in detail in the following article.

https://monolith.law/corporate/interrruption-of-system-development[ja]

In the above article, we explain that even if the user proposes to stop system development, the legal responsibility for this does not necessarily fall on the user. In other words, it’s not easy to determine who should be held responsible for the failure. If there is a discrepancy in understanding between the two parties, the responsibility can easily be reversed, and the dispute can become mired in controversy. Terms such as the “duty of cooperation” that the user bears and the “project management duty” that the vendor bears have often been used in past court judgments. The basic form of system development law, which takes the form of a “struggle” between these two duties, evolves into more complex issues when subcontracting (re-commissioning) is involved.

Extent of the Effect of Contract Termination When a Project Fails

If a contract between a user and a vendor is terminated due to certain circumstances, the scope of its impact becomes an issue. If the series of projects remains solely a problem between the two parties, the effect of contract termination is limited to relieving the obligations each party owes to each other, in other words, they are mutually obligated to “restore the original state”. However, if the relationship between the subcontractor (re-contractor) and the original contractor, who did not directly conclude the contract, is also terminated at once, it can cause unforeseen damage to the subcontractor (re-contractor) and can sometimes be a harsh situation. However, if the original contractor and the subcontractor (re-contractor) are bound indefinitely even though the project that is the premise of the subcontract (re-contract) has already failed, that can also be an irrational situation. So, how should we organize this point?

Important Court Cases Related to the Scope of Termination Impact

The Tokyo District Court’s judgment on December 24, 2012 (Heisei 24) can be referred to regarding the scope of the impact of termination made between the user and the vendor. In this case, the scope of the impact of the mutual agreement termination between the user and the original contractor was an issue, and it was indicated that this effect also affects the relationship between the original contractor and the subcontractor (re-contractor).

In this lawsuit, it is assumed that the part of the subcontract related to the same work has been terminated, and the part of the original contract related to the same work was mutually terminated on April 20, 2009 (Heisei 21). Therefore, due to this mutual termination, the part of the subcontract related to the same work is considered to have naturally ended because there is no object of performance, so there is no legal meaning to the termination intention shown by the defendant afterwards.

Tokyo District Court, December 25, 2012 (Heisei 24)

In this judgment, it was indicated that due to the impact of mutual termination, the subcontract is “naturally considered to have ended”. Especially in the case of low-generic tasks that have no particular meaning to perform without the user’s commission, the validity of this conclusion can be considered to be even higher. In this judgment, it was indicated that the subcontractor (re-contractor) could not claim compensation, but if all cases of mutual termination are resolved in this way, there may be problems from the perspective of fairness in trials. Therefore, it is considered that the judgment criteria for such cases have not yet been fully established.

Whether a Subcontractor (Re-contractor) Can Claim Compensation Needs to be Organized by the Cause of Termination

In the aforementioned court case, it seems that it was indicated that if a mutual termination is made between the user and the original contractor, the subcontractor (re-contractor) cannot claim compensation in principle. However, it seems necessary to organize this point by dividing it according to the cause of termination in order to lead to a more reasonable conclusion. For example, if the contract is terminated due to the negligence of the original contractor, if a mutual termination is made without the consent of the subcontractor (re-contractor), it is considered fair to allow the subcontractor to claim compensation. On the other hand, if it is judged that the original contractor is not at fault, especially if the subcontractor (re-contractor) has concluded a contract, receiving compensation is not naturally possible, so there may be cases where compensation claims must be treated as impossible. The issue of risk burden in such a non-fault-non-fault relationship is a story in the area called “risk burden” in civil law.

Article 536
1. Except in the cases provided for in the preceding two Articles, when it becomes impossible to perform an obligation due to a cause that cannot be attributed to either party, the obligor does not have the right to receive the counter-performance.

The risk burden itself is one of the very general topics related to civil law, not limited to IT and system development. For example, it is typical in cases where goods are lost before delivery due to a sudden large-scale natural disaster in a sales contract. It is considered that the provisions of risk burden will be applied in situations where the relationship between the original contractor and the subcontractor (re-contractor) becomes an issue as to how to regulate the “non-fault-non-fault” relationship.

Considerations for Contract Termination Involving Subcontractors (Re-contracted Vendors)

Related to the above topic, in contracts concluded between the prime vendor and subcontractors (re-contracted vendors), there may be clauses stipulating that payments are made only after receiving payments from the user. However, even if such clauses are included, it is considered that the payment deadline for the subcontractor (re-contracted vendor) arrives when the prime vendor has no prospect of receiving payment. In other words, even if such clauses are included, there are limits to refusing payment to subcontractors (re-contracted vendors) based on them. In terms of legal issues related to subcontracting (re-contracting), it would be beneficial to understand these points in conjunction with the scope of the impact of contract termination.

Summary

When system development projects progress involving subcontracting (re-commissioning), the situation tends to become complex. Therefore, it can be difficult to resolve issues with simple measures such as imposing an obligation to compensate for losses on the party who violated obligations, based on the user’s “duty to cooperate” or the vendor’s “project management duty”. The complexity of “flaming” incidents in projects involving three or more parties seems to be very well reflected in aspects such as the scope of impact of contract termination. In this regard, it is considered important to wait for the accumulation of court precedents and to formulate arguments based on individual cases.