Image source: https://velocityglobal.com/blog/best-practices-handling-international-contract-extension/

This article is written by Kshitij Kothari, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

Outsourcing is a distinct method of conducting business that involves delegating work to a third party to save time and money. This process not only benefits the short and long-term business but also allows contracting out things that the entire department handles, such as IT, accounting, payroll, and so on. The outsourcing company enters into these agreements to focus on the core aspects of their business and outsource most of their miscellaneous functions. At present time, outsourcing has become a necessity for all business organizations, companies, and institutions to complete their tasks. Therefore, to begin outsourcing, a contract is initiated between the parties that negotiate what type of work will be handled by the third party, what terms and conditions must be followed, etc. In simple terms, the outsourcing agreement secures the investments of the outsourced company and also specifies how the third party shall get paid.

Essential clause to be drafted

Many businesses have made the same mistake while collaborating with an outsourcing firm. The Outsource Buyer mainly practiced providing the Service Provider with hazy specifications. They don’t pay special attention to making the contract and end up in circumstances like disputes, termination, etc. For example, a petroleum corporation outsourced all of its information system operations in the 1980s. When the invoice came after a month from the execution date, it was $500,000 higher than the agreed-upon charge. This occurred because the company’s managers ‘ASSUMED’ that the facilities provided by the Service provider would be covered by the agreed consideration through the outsourcing contract they signed. It was not, however, not included there. The outsourcing vendor was legally permitted to be paid for the additional amount since the services were over the agreed terms. 

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Most IT outsourcing firms have contracts and terms of service ready to be tailored to the new project. Before signing the contract, the parties should pay close attention to the terms of the agreement to avoid disputes and conflict of mind. Therefore there are some clauses which the parties shall discuss, negotiate and rely upon. 

Purpose

Before drafting any contract, the parties must agree on the specific purpose of the agreement. It specifies what assistance the outsourced company requires from the service provider. The purpose of the agreement must be clearly stated to avoid conflict between the parties. This will specify the primary deliverables that the Service Provider will provide to the client.

Benchmarks

Setting benchmarks is advantageous to both parties. The service provider is paid on time for the work completed on or before the deadline, and the outsourced company gets the work done timely. As a result, this process aids in motivating the parties to develop and meet the expectations.

Transfer of assets

While entering into an outsourcing agreement, various assets are needed to be transferred such as computer hardware equipment, telecommunication instruments, intellectual property rights (IPR), software licenses, etc. Therefore, a full-fledged lease agreement between the parties is necessary for the transfer of assets. As a result, a full-fledged lease agreement between the parties is required for asset transfer. While transferring intangible assets such as IPR and software licenses, there may be additional costs for licensing, taxes, and stamp duties. 

Representation and warranties

This clause determines the service provider’s efficiency; they represent to the outsourced company that they do similar business and are competent to complete the outsourced work. Also, the service provider must represent that the work will be completed on or before the Benchmark period, and will abide by the terms and conditions of the agreement. There may be various risks associated with the agreement in carrying out the obligations. As a result, by including a warranty clause, the service provider warrants that if the services provided by the service provider suffer from technical glitches or other issues, the service provider will repair or replace the item at no cost. Whereas for the ­­­outsource company, they represent that they will provide the Service Provider with timely payments and other conditions.  

Ownership of product

When entering into an outsourcing agreement, the parties must pay attention to the ownership of the software that has been programmed and created, because in many cases, the Service Provider may create their ownership, causing chaos. Furthermore, if the Service Provider is customizing their existing software, developing new software, or modernizing the application, the parties should include a clause in the outsourcing contract clearly stating the ownership rights of the software to avoid future disputes.

Intellectual property rights (IPR)

This clause is critical in these types of agreements. As we have already discussed the ownership quandary, the parties must also negotiate on this clause because intellectual property rights (IPR) are one of the most significant impediments for the Outsource Company, as they believe their ideas and intellectual properties will be fraudulently used when shared with the Service Provider.

Furthermore, the parties shall enter into a Non-Compete Agreement encapsulating clauses such as information transfer restrictions, non-disclosure, competition, and so on, so that the Service Provider is legally bound by these restrictions and complete Intellectual Property (IP) security is ensured. Also, make sure to include confidentiality and non-disclosure agreements for all parties involved.

  • The intellectual property is protected by copyright.
  • Trademark for software or other goods
  • The information’s trade secret
  • Patent application and protection

Payment clause

One of the elements mentioned in Section 10 of the ICA, namely consideration, is included in the payment clause. The parties may opt for cash payment, bank payments via demand draft cheque, NEFT, or other methods. Furthermore, the parties may agree on the stages at which the payment should be made. Outsource companies, for example, can make an advance payment, midway payments, or pay the amount after the obligations in the contracts are completed.

Duration for completion

A contract’s essence is time. The purpose of the agreement, like that of a fixed-cost model, the project scope is fairly clear, and determining a deadline is not difficult. It is essential to include a deadline or duration in a contract. The duration of the contract has a significant impact on the success or failure of your outsourcing venture. Here’s an example to demonstrate the point.

In 2004, BBC signed a 10-year monolithic contract with Siemens Business Services to outsource IT services, and the commitment cost it dearly. It wanted to outsource its IT services to different suppliers over time, but it couldn’t because of the IT contract it had signed.

As a result, the outsourcing company should set smaller targets from which the parties can quickly pass on.

Dispute resolution clause

A conflict between the parties is possible in a variety of contracts. Furthermore, if there is an exclusive conflict settlement clause, the parties may avoid going to court. As a result, it is recommended that the parties have an amicable resolution provision, mediation clause, an arbitration clause in an outsourcing arrangement where an arbitrator may be assigned to resolve disputes.

Sub-contracting

The parties must agree on whether the service provider can assign its responsibilities and duties to another third party or external company. If the outsourcing buyer allows for sub-delegation, the parties must have a clause stating that the service provider is responsible for the services delegated. This procedure will not result in a conflict between the parties since the service provider will be required to complete the work on time.

Other clauses

Indemnification clause

This provision means that the service provider will be held liable for any negligence on the part of the outsourcing business. By including this provision, the outsourcing buyer would be shielded from any form of loss caused by a failure on the part of the Service Provider during or after the project.

Termination clause

This provision is only used as a last resort by either party in the outsourcing agreements. There must be a transparent exit plan in place, with the parties negotiating on the following issues.

  • What assets do the service provider and outsourcing buyer retain?
  • Who would have ownership of the software?
  • What should the retention strategy be?
  • When will the funds be transferred back?

Conclusion

The outsourcing company must always review the profile and history of the service provider to protect their intellectual property rights and maximize the outsourced company’s profit. The company may also investigate the service provider’s track record to determine if they are capable of safeguarding the outsourced company’s trade secrets. Therefore, entering into an outsourcing agreement can be a cost-saving approach for a company to boost its efficiency. outsourcing will help the individual entity to promote growth as long as it is done correctly and starts with a well-drafted agreement. The relationship between the parties shall be drafted formally described, controlled, and regarded regularly. The aforementioned clauses shall be encapsulated to bind the parties by the terms and conditions.  

References 

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