From Checkout to Crisis: Subcontractor Risk in Retail Contracts

Today's retail operations rely on more than just products or e-commerce design. Behind the scenes, fulfillment providers depend on regional couriers, cloud-hosted payment processors, and outsourced customer service teams. These multitiered networks help retailers meet expectations for speed and convenience but also introduce potential failures that can disrupt service, delay deliveries, or compromise data.

When a subcontractor fails, the impact can quickly ripple through the supply chain. Stock may remain in warehouses, next-day deliveries might be missed, and customer service backlogs can grow. Even if the issue is several layers removed, the retailer is often the brand customers associate with the problem, facing both reputational and financial consequences.

Extending Contractual Obligations Downstream

Retail supply chains often involve many specialist providers, from logistics partners to last-mile couriers. To keep performance consistent, retailers are increasingly embedding “flow-down” obligations into their contracts. Service credits for late deliveries or quality issues can be applied through the chain, ensuring that service standards do not erode at the subcontractor level. The principle of passing obligations through the supply chain applies broadly, whether to safeguard creative assets or maintain consistent fulfilment performance.

Aligning Liability Across the Chain

Retailers can face liability gaps if a subcontractor’s actions cause losses that are not matched by contractual recovery rights. A practical example is requiring all subcontractors involved in order fulfilment, warehousing, or customer transactions to carry the same level of insurance coverage as the primary contractor. For instance, if a third-party delivery partner mishandles a high-value shipment, aligned insurance provisions ensure the retailer can recover the loss without facing uninsured gaps. These clauses typically specify the type of cover, such as goods-in-transit insurance, public liability, or cyber risk, and minimum coverage levels that reflect the value and risk profile of the products.

Increasing Visibility and Control

From seasonal warehouse staff to outsourced returns processing, subcontractor appointments can change quickly in the retail sector, especially during peak trading periods. Retailers are responding by requiring regular operational reports from key suppliers and advance notice before subcontractors are swapped or added. For example, a contract might require that any change in last-mile courier services be notified a certain number of days before implementation. This allows time for performance vetting, brand compliance checks and, where relevant, customer communication planning.

Planning for Continuity

Even with multiple layers of suppliers, retailers need to maintain service continuity to protect revenue and customer trust. Step-in rights can be crucial, allowing the retailer to temporarily take over a subcontractor’s operations where feasible and practical — e.g., if a warehouse operator can no longer dispatch orders due to a systems outage. These clauses can help avoid order backlogs, keep click-and-collect services running, and ensure minimal disruption to store replenishment schedules while alternative arrangements are put in place.

Extending Data Protection Measures

Retailers handle vast amounts of personal and transactional data, from payment details to loyalty program histories, and much of this data passes through subcontractors such as payment gateways, marketing agencies, or delivery partners. Contracts are increasingly requiring these subcontractors to implement security measures like encryption, access controls, and regular audits, and to follow the same data breach notification timelines as the primary supplier. This alignment supports faster incident response and strengthens consumer trust in a competitive retail market.

Conclusion

In retail, seamless customer experiences rely on unseen providers. By embedding provisions for downstream obligations, liability, visibility, continuity, and data protection, retailers can manage risks in layered supply chains, ensuring operational resilience and maintaining the brand promise that keeps customers returning.

Rahul Kapoor is a partner and the local practice group leader of Morgan Lewis' Silicon Valley and San Francisco corporate and business transactions practice and global co-leader of the firm's India initiative.

Charlotte Cavendish is an associate at Morgan Lewis, specializing in commercial, technology, and outsourcing transactions, with a focus on the leisure, retail, and financial services sectors.