Third Party Clause

Subcontractor and Agent Provisions

Governs how confidential information may be shared with subcontractors, consultants, and agents, including required approvals, flow-down obligations, and liability allocation.

Medium Complexity

What This Clause Does

A subcontractor provisions clause defines the rules and conditions under which the Receiving Party may share confidential information with third parties who assist in the permitted purpose, such as subcontractors, consultants, agents, advisors, and service providers. This clause typically addresses whether prior approval is required, what contractual protections must be in place, and who bears liability if a subcontractor causes a breach.

Why This Clause Matters

Extends Protection to Third Parties: Without proper provisions, confidential information shared with subcontractors may not be adequately protected, creating gaps in the confidentiality chain.
Maintains Control Over Disclosure: Approval requirements give the Disclosing Party visibility and control over who accesses their sensitive information.
Establishes Clear Liability: Flow-down obligations and liability provisions clarify who is responsible when a subcontractor causes a breach, preventing disputes later.
Enables Business Operations: Many companies cannot perform their obligations without engaging specialists or service providers. This clause allows necessary sharing while maintaining protection.
Addresses Practical Reality: In modern business, outsourcing and contractor relationships are common. NDAs must account for this reality to be workable.

Legal Context

Under general contract principles, a party is typically liable for breaches by its agents acting within the scope of their authority. However, the extent of this liability and whether the Receiving Party remains liable for subcontractor breaches can vary by jurisdiction and contract terms. Courts generally enforce flow-down requirements and hold the contracting party responsible for ensuring their subcontractors comply. Written agreements with subcontractors are often required for the Disclosing Party to have any direct recourse against a breaching subcontractor, since there is typically no privity of contract between the Disclosing Party and the subcontractor.

Subcontractors and Agents The Receiving Party may disclose Confidential Information to its subcontractors, consultants, and agents who have a need to know such information for the Permitted Purpose, provided that such subcontractors, consultants, and agents are bound by confidentiality obligations no less restrictive than those contained in this Agreement. The Receiving Party shall be responsible for any breach of this Agreement by its subcontractors, consultants, or agents.

Basic Version: Permits sharing without prior approval, requires equivalent confidentiality protection, and makes the Receiving Party responsible for breaches.

Disclosure to Subcontractors, Consultants, and Agents 1. Permitted Disclosure. The Receiving Party may disclose Confidential Information to its subcontractors, consultants, agents, and professional advisors (collectively, "Representatives") who: (a) Have a bona fide need to know such information for the Permitted Purpose; (b) Are informed of the confidential nature of the information; and (c) Are bound by written confidentiality agreements containing protections at least as restrictive as those in this Agreement. 2. Prior Notice. Before disclosing any Confidential Information to a Representative, the Receiving Party shall provide the Disclosing Party with written notice identifying the Representative and describing the need for disclosure. The Disclosing Party may object to any proposed disclosure within ten (10) business days. If the Disclosing Party does not object within such period, disclosure shall be deemed approved. 3. Flow-Down Obligations. Any agreement with a Representative must include: (a) Confidentiality obligations at least as restrictive as this Agreement; (b) Use restrictions limiting use to the Permitted Purpose; (c) Requirements to return or destroy Confidential Information upon request; and (d) The right of the Disclosing Party to enforce the agreement as a third-party beneficiary. 4. Continuing Liability. The Receiving Party shall remain fully liable for any breach of this Agreement by its Representatives, regardless of whether such Representative has signed a separate confidentiality agreement. Any act or omission of a Representative that would constitute a breach if performed by the Receiving Party shall be deemed a breach by the Receiving Party. 5. List of Representatives. Upon request, the Receiving Party shall provide the Disclosing Party with a list of all Representatives who have received Confidential Information.

Standard Version: Balanced approach with notice requirements, specific flow-down terms, third-party beneficiary rights, and clear liability allocation.

Strict Subcontractor and Agent Controls 1. Prior Written Approval Required. The Receiving Party shall not disclose any Confidential Information to any subcontractor, consultant, agent, advisor, or other third party (collectively, "Third Parties") without the prior written approval of the Disclosing Party, which approval may be withheld or conditioned in the Disclosing Party's sole discretion. 2. Approval Process. To request approval, the Receiving Party must provide: (a) The identity and background of the proposed Third Party; (b) The specific Confidential Information to be disclosed; (c) The business justification for the disclosure; (d) A copy of the proposed confidentiality agreement with such Third Party; and (e) Evidence of the Third Party's security measures and compliance programs. 3. Mandatory Agreement Terms. Any approved Third Party must sign a confidentiality agreement provided by or approved by the Disclosing Party that includes: (a) All obligations imposed on the Receiving Party under this Agreement; (b) Direct liability to the Disclosing Party for any breach; (c) The right of the Disclosing Party to audit the Third Party's compliance; (d) Consent to jurisdiction in any forum chosen by the Disclosing Party; and (e) Joint and several liability with the Receiving Party for any damages. 4. Absolute Liability. The Receiving Party shall be absolutely liable for any unauthorized disclosure or use of Confidential Information by any Third Party, regardless of whether the Disclosing Party approved the disclosure or the Third Party's confidentiality agreement. This liability shall include all direct, indirect, consequential, and punitive damages, without limitation. 5. Right to Revoke. The Disclosing Party may revoke approval for any Third Party at any time and for any reason. Upon revocation, the Receiving Party shall immediately cause the Third Party to return or destroy all Confidential Information and certify compliance. 6. Background Checks. The Receiving Party shall conduct and provide results of background checks on any Third Party personnel who will have access to Confidential Information, subject to applicable law. 7. Insurance. Each approved Third Party must maintain errors and omissions insurance and cyber liability insurance with coverage of at least $5,000,000, naming the Disclosing Party as an additional insured.

Warning - One-Sided: This version gives the Disclosing Party near-total control over subcontractor relationships. The approval process is burdensome, insurance requirements are high, and unlimited liability provisions may be unenforceable. Receiving Parties should negotiate for deemed approval after a notice period, reasonable insurance thresholds, and liability caps.

1
Push for Notice, Not Approval: If prior approval is required, negotiate for a deemed-approved process where failure to object within a reasonable period (10-15 days) constitutes approval. This prevents the other party from blocking necessary disclosures through inaction.
2
Pre-Approve Categories of Recipients: Negotiate for blanket pre-approval of certain categories of Recipients, such as accountants, lawyers, or existing strategic partners, to reduce administrative burden for routine disclosures.
3
Resist Audit Rights Over Third Parties: Requirements allowing the Disclosing Party to audit your subcontractors can damage your business relationships. Either remove these provisions or limit them to document requests rather than on-site inspections.
4
Cap Liability for Subcontractor Breaches: While you should remain responsible for subcontractor breaches, negotiate for the same liability caps that apply to your own breaches. Unlimited liability for third-party actions creates unquantifiable risk.
5
Negotiate Reasonable Insurance Thresholds: If insurance is required, ensure the coverage amounts are commercially reasonable and available in the market. Excessive requirements may make it impossible to engage necessary service providers.
6
Address Existing Subcontractor Relationships: If you have existing subcontractors who will need access, negotiate for their pre-approval as part of the NDA or a streamlined approval process for established vendors.

Sole Discretion Approval

Language allowing the Disclosing Party to withhold approval "in its sole discretion" gives them unlimited power to block necessary disclosures. Push for "reasonable discretion" or objective criteria for denial.

Joint and Several Liability

Provisions making you jointly and severally liable with your subcontractors mean you could be held fully responsible for their breaches even if you did everything right. Negotiate for liability only for your own failures to comply with flow-down requirements.

Right to Revoke at Any Time

Unlimited revocation rights can disrupt ongoing projects. If revocation is permitted, negotiate for reasonable notice periods and transition assistance to protect work in progress.

Required Use of Their Form Agreement

Requirements to use the Disclosing Party's confidentiality form with subcontractors remove your control over your own business relationships and may impose terms your subcontractors will not accept.

Background Check Requirements

Mandatory background checks on subcontractor personnel may violate privacy laws in some jurisdictions, damage your relationships with vendors, and create significant administrative burden.

Subcontractor and Agent Provisions

What This Clause Does

Why This Clause Matters

Legal Context

Sole Discretion Approval

Joint and Several Liability

Right to Revoke at Any Time

Required Use of Their Form Agreement

Background Check Requirements

Related Clauses

Permitted Disclosure

Indemnification

Return of Materials

Regulatory Compliance

Need Help With This Clause?