Sub-IC's errors can hurt host agency

Q: In last week’s Legal Briefs column, you looked at the verticalization of the retail travel industry from a sub-IC’s point of view. What about the host agency’s point of view? Is a sub-IC liable to us for their own errors and omissions, or is the sub-IC liable only to their own IC? If we don’t have a contract with a sub-IC who causes us to have a loss, can we successfully sue the sub-IC? If we were to have a contract directly with the sub-IC, what should it provide for? Could the sub-IC be reclassified as our employee by a taxing authority?

A: In theory, a host agency is not liable to clients of a sub-IC (a “sub”) for the sub’s acts or omissions. You are independent contractors of each other, so you have no liability for each other’s negligence or breaches of contract.

In practice, however, the clients will look to you for satisfaction if the sub does business in your name or your name appears anywhere in the documentation of the sale. Therefore, you certainly need some protection from client claims.

As far as suppliers are concerned, there is no distinction between your agency, on the one hand, and an IC or sub, on the other hand. If all the bookings come through your agency, every supplier will look to you for payment of debit memos and the like.

In the absence of a contract between you and the sub, I don’t see how you could successfully sue the sub for the latter’s negligence or breach of contract, as the sub does not owe you any fiduciary or other duties. So you would have to look to your contract with the IC for satisfaction.

Ideally, your standard IC agreement should provide that you have the right to approve any prospective sub and that the IC is responsible to you for the sub’s acts or omissions. The agreement should give you the right to withhold from the IC’s commission split any debts to clients or suppliers created by the sub that you have to pay. Further, if such a deduction is not sufficient to satisfy the liability, the IC should remain responsible for any balance due.

Armed with such clauses in your IC contract, there may be little need for a separate contract between you and the sub as far as liability is concerned. However, if the sub has access to your agency’s proprietary systems and special supplier deals, you probably need an agreement to protect you from abuse and misappropriation of intellectual property. You may also need an agreement if your consortium or franchise requires one to access its system.

It is conceivable that a taxing authority could rule that a sub is your employee if you impose rules on the sub about how, when and where to work. So another reason to have a contract between you and the sub is to help make clear that the sub is an independent contractor of both you and your IC.

More Legal Briefs columns on ICs and sub-ICS

• If you’re a sub-IC, get it in writing
• Exploring the ins and outs of sub-ICs
• ARC’s role in the verticalization of retail travel
• The path from IC to host agency
• Labor’s criteria for determining IC status

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