Canada: Outsourcing: from a Legal Perspective

Last Updated: July 26 2002
Article by Christopher Koressis

In the August/September 2001 issue of Canadian Treasurer, the author looked at the reasons why companies outsource their information technology functions and how to solicit bids from organizations interested in supplying services. This article takes a further look at the outsourcing question.

Many companies look at outsourcing a business or technology function as an alternative way to provide the service. The company contracts with an outside supplier to provide the same results as it formerly provided in-house.

However, from a legal perspective, it may be best to look at outsourcing as being much like selling off a part of an organization - with the option to buy it back in future. Seeing outsourcing in this way helps to clarify some of the legal and practical issues involved.

In this article, we will look primarily at outsourcing an Information Technology function that involves computer equipment and software. This is one of the areas that companies most commonly outsource. However, the principles discussed in this article can apply equally well to outsourcing areas such as pension-plan administration, in-vestment management and other elements of cash and treasury management.

Consider the similarities between a conventional sale and an outsourcing arrangement for two companies, Able Manufacturing Co. and Baker IT Services Inc.:

  • In both a sale and an outsourcing agreement, Able takes a standalone function (in this case, IT services) that was previously administered in-house and transfers the performance of the function to a third party.
  • Both generally involve the transfer of Able’s assets such as computers, peripherals, networks and supplies to Baker. They may also involve transfer of employees to Baker.

However, there are also differences:

  • In an outsourcing relationship, the sale is generally only temporary and lasts only for the term of the agreement. At the end of that time, Able may either decide to take the division back (i.e. not renew the agreement), sell it to another company (i.e. find another outsourcing partner) or re-sell it to Baker (i.e. continue the outsourcing agreement). Of course, Baker may also want to make some changes to the relation-ship when it comes up for renewal.
  • There is a much closer ongoing relationship between Able and Baker than there would be between Able and an outright purchaser of the division. The two companies must work closely together, and they share an interest in making Able’s IT functions work smoothly. However, in almost every other respect there is the potential for a win/lose, zero-sum dynamic.

Given this potential for conflict in an outsourcing agreement, the participants can resemble a married couple sharing a bed, with both spouses wanting all the covers.

The potential for conflict begins right from the start of negotiations, regarding the duration of the contract. Baker will likely want a long-term agreement, because it will likely lose money in the first part as it learns how to work with Able, and it will want as long a time as possible in which it can achieve profitability on the contract.

For its part, Able will likely want to keep Baker on a short leash. Partly, this is because Able knows that, at the end of the outsourcing agreement, it may be difficult to re-start its own in-house IT division. Having a short agreement will make this more feasible, increasing its bargaining leverage with Baker.

Another issue at the start of the agreement is Able’s computer equipment. Able may want Baker to buy some of its assets for a healthy sum, while Baker’s aim may be to avoid taking any of Able’s equipment, so it can do the work on its own equipment, set up to meet its specifications and procedures. It may consider Able’s equipment to be obsolete and question the compatibility of Able’s equipment with its own. Moreover, Baker may use this issue as a bargaining lever to get better terms from Able.

Along with the hardware comes software. Often, a company such as Able will have perpetual or multi-year licences with software vendors, which specify the number of users and how the software is to be used. The software provider may not be enthusiastic about transferring the software to Baker, because it will likely lose revenue from on-going support and maintenance fees payable by Able. Moreover, Baker may already have an enterprise licence to use the vendor’s software as an outsourcer. In that case, the software vendor loses Able as a customer and gets little or no incremental revenue from Baker. Baker may not even use the vendor’s software and will not want to pick up the licences even if it could. As a result, the software licences that Able paid for may become useless, and Able will not receive full benefit from its investment in them.

In addition to computer equipment and software, Able and Baker also have to consider the issue of personnel. Able’s people carry with them an invaluable inside perspective on how Able works. They can be vital to the success of the outsourcing project, particularly in its early stages, when Baker is still learning the ropes. For this reason Baker may be as motivated as Able for at least some of Able’s employees to receive a soft landing at Baker – with good jobs, at comparable seniority and benefits.

However, here, too, there is potential for conflict. Baker may be willing to take some Able employees, but at a lower rate of pay (which may be part of the reason they can offer the service cheaper than Able could do it in-house) and only if they pass a probationary period. Baker will almost certainly not want to take all of Able’s IT employees, as it has its own workforce to keep productively employed.

As the end of the agreement nears, another staffing issue rears its head. What happens if Able wants to take the function back in-house? How will the former Able employees react, having worked for several years at Baker and perhaps now considering themselves Baker employees? Will they want to come back to Able? And what if Baker offers inducements for them to stay at Baker? The two parties will need to settle this question ahead of time and cover this in the contract.

They will also need to agree in advance on levels of service, another source of potential conflict. Able will want strict covenants regarding reliability of service, and Baker may feel that such requirements are impractical and unnecessary.

Given these potential conflicts, is it possible to turn the dynamic of the out-sourcing relationship around, so it be-comes not win/lose, but win/win?

One way is to have not just penalties for the IT supplier’s failure to meet specified service levels, but incentives for exceeding them. To do this, it is important for Able to benchmark the service levels it can achieve in-house on its own with-out engaging Baker. These service levels can then be compared to the results achieved by Baker, the IT specialist.

A third-party performance auditor may well serve a useful function in this area - a company with credibility on both sides of the agreement, able to measure and report on service levels.

Having a legal framework that discusses issues such as this is also important. This agreement must take note of potential sources of conflict and indicate how to deal with these, ahead of time. This will not only allow both parties to evaluate whether they want to go ahead with the deal, it will also help them solve issues as they occur.

The result of a good outsourced IT function is better service, reassurance for the company receiving the service, and lower costs.

Christopher Koressis, LL.B., is a partner with Fogler, Rubinoff LLP, a Toronto law firm, who specializes in business law, including information technology and outsourcing initiatives. He can be reached at 416-941-8807 or 416-720- 1624 (

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions