It Flows Downhill

I have been leading client negotiations for agencies and freelancers for nearly twenty years.

A couple of questions that routinely come up during these negotiations are:

(1) Will there be any subcontractors also performing services for the client; and

(2) Are there terms in the client agreement that will need to be included in the agreements with those subcontractors?

These are referred to as "flow-down" terms and the lead agency negotiating with the client needs to be very thoughtful about: (a) what terms will ultimately apply to its subcontractors; and (b) making sure that those terms make it into its subcontractor agreements.

Diligence in this regard is critically important for the lead agency - to not only ensure it is honoring its compliance obligations to its client, but also to make sure it is not imposing unnecessary burdens on its subcontractors.

Unfortunately, lead agencies often do not do the heavy lifting and end up agreeing to unreasonable flow-down terms that they then try to impose on their subcontractors.

Nothing great comes from this.

One possible outcome is that one or more of the subcontractors eat it. They begrudgingly take on the unreasonable terms, associated risks and/or costs, and hope that nothing awful comes of it. In this instance, the best case scenario is that a lead agency has put its subcontractors in a difficult situation. A worse case scenario is that an unreasonable flow-down term is triggered and a sub is crushed under its weight.

Another possible outcome is that one or more of the subcontractors refuse to accept the unreasonable terms. If a sub who refuses is irreplaceable (either because the sub possesses unique skills or the lead agency simply does not have time to find a suitable replacement), the lead agency finds itself in the hurt locker. It is now breaking its compliance obligations to its client and has to hope that the client never finds out.

Hope is a shitty strategy.

A better approach? The lead agency needs to carefully negotiate with its client to make sure the flow-down terms strike an appropriate balance between protecting the interests of the client and not imposing unreasonable requirements on the agency's subcontractors.