With the changing economic climate, businesses are outsourcing their non-core functions with a view to increase their efficiencies and cut down costs. Such outsourcing arrangements are very common in the information technology (IT) sector, where companies are outsourcing back-end processes, data processing, systems development and maintenance, etc. to an outside vendor.
The terms and conditions of such outsourcing are captured in the outsourcing agreement and consequently, businesses should familiarize themselves with the main legal issues with respect to such outsourcing arrangements. This article provides a high-level overview of the relevant contractual clauses in a technology outsourcing agreement, which businesses should take note of while negotiating an outsourcing agreement.
Please note that while there may be sector specific guidelines/regulations applicable to a particular outsourcing arrangement, for the purposes of this article we are not discussing such regulations/guidelines and are concentrating on the typical contractual provisions in such agreements.
1. Scope of Work
- This clause should be drafted with utmost precision and clarity to avoid any room for confusion. It should comprehensively define (in the main agreement or as a schedule to the Agreement) all the services covered by the Agreement.
- To avoid confusion at a later stage, the scope of services should be reviewed/confirmed by the technical/commercial teams of the concerned parties.
- There should be necessary provisions to enable the parties to change the nature/scope of services.
- Parties should specifically mention if this is the exclusive agreement between the customer and the service provider for the provision of the services.
2. IPR Protection
- Parties should first identify all the intellectual property (IP) involved in the provision of the services IP to be provided by customer, service provider’s IP, third party IPs which will be used by the service provider and the IP which will be produced while providing the outsourced services.
- The ownership or the terms of use of IP must specifically mentioned in the agreement itself. Where a new IP is created in the process of provision of services, it is essential to set out in clear terms who will have ownership of the IP.
- The service provider must expressly state in the agreement it has the necessary authorization/license to use and incorporate any third party IP in the provision of services.
3. Confidentiality and Non-disclosure
The agreement should provide:
- a clear definition of ‘confidential information’, the obligations of the parties to protect such confidential information and consequences of such breach; and
- provisions for physical security, signing of non-disclosure agreements with the employees, consultants, etc. of the service provider, compliance with relevant laws and industry standards to minimize the risk of breach of confidentiality.
4. Sub-Contracting
Typically, any sub-contracting requires prior permission of the customer. The agreement should specify the extent of liability of the service provider and the subcontractor, requirement of permission for sharing information to the subcontractor, etc. The subcontractor should also be bound by terms of confidentiality and indemnity.
5. Warranties
Typically, such agreements contain warranties which inter-alia relate to equipments, IPR, maintaining performance, work standards, service levels, maintaining security and data protection, compliance with applicable laws, etc. Parties may also negotiate exclusions to such warranties.
6. Term and Termination
- The specific term of the agreement (if any), the events which might lead to termination of the service by either party or one of the parties, mode of termination, obligations post termination, etc. should be spelt out in the agreement.
- To ensure that there is no disruption to the services in the event of termination, the agreement should provide for provision of transition services by the service provider till a new vendor or the customer takes over the services, the time period of such transition services and other terms and conditions of such transition services.
7. Governing Law and Dispute Resolution
- The clause dealing with the governing law and the jurisdiction of the competent court is relevant in the event of a dispute between the parties. Parties should consider the jurisdiction of the courts under the agreement and the implications of obtaining a foreign judgment.
- The structuring of the aforesaid clause enables the customer to maximize its ability to recover against the service provider’s assets in case of a dispute or to obtain an interim relief against it.
- In the case of a dispute, a dispute resolution clause outlines the approach the two parties will follow in order to come to a consensus. Arbitration continues to be the most preferred means of dispute resolution.
8. Remuneration
Different models of payment can be used by the parties depending on their commercial agreement. The amount payable or method for determining the remuneration, schedule of such payments, penalty for late payment (if any), responsibility of payment of taxes, procedure for raising invoices, etc. should be clearly spelt out in the agreement. Performance related incentives and penalties may also be spelt out.
9. Indemnity
Such agreements typically have an indemnity clauses which imposes an obligation on the service provider to indemnify the customer from all losses, claims, costs and legal expenses attributable to the breach of representation, warranties and covenants by the service provider. Indemnities can also be limited to breach of specific obligations. Further, parties may also negotiate to limit the liabilities of the service provider.
10. Technology Refresh clause
Since outsourcing agreements tend to be have a long term, such a clause ensures that the service provider will replace its technology with current technology or update the existing technology within agreed time frame.
11. Auditing Rights
It is wise to include audit rights to ensure that the customer can verify that the service provider is complying with the terms of the agreement and providing the services as per the industry standards. Provisions conferring rights on the customer seeking necessary information from the service provider are also included in such agreements.
12. Transfer of personnel
In certain models of outsourcing, there is transfer of employees. In such cases, to avail exemption from retrenchment related laws, including payment of severance dues at the time of transfer, the terms of employment with the transferee entity should not be less favorable than the terms of employment with the transferor entity.
Please note that the list of legal issues as set out above is not exhaustive and the final terms of any outsourcing agreement will be subject to the facts and circumstances of a particular case.