Canada: International Technology Outsourcings Give Rise to Unique Legal and Business Challenges

Last Updated: July 28 2006
Article by Lisa K. Abe

Technology and business process outsourcing is going global and law firms worldwide are embracing this specialized practice area. The increased complexity of international deals has given rise to unique legal and business issues, many of which were discussed at the recent American Bar Association Section of International Law Spring Meeting held in New York City April 5-8. The meeting had 1,350 attendees from 48 countries. The meeting’s International Outsourcing program brought together representatives from organizations and industries engaged in cross-border outsourcing transactions to share their experiences as lawyers, providers and purchasers at each stage of the international outsourcing process. The panelists included Rajesh Nambiar, Director of Tata Consultancy Services, one of the largest companies in India, Kenneth Rashbaum of Sedgwick, Detert, Moran & Arnold, Brian Segnit of Xerox Global Software Operations, Charles Stiller of Barclays Capital, Edward Tucker, of Bayer Healthcare and Lisa Abe of Fasken Martineau DuMoulin LLP. The program was co-moderated by Ian Kyer of Fasken Martineau DuMoulin LLP and Alan Jackimo of Sidley Austin Brown & Wood LLP. The panelists addressed crucial current topics in international outsourcing, such as dealing with privacy and data protection, ensuring quality and value, the increasing complexity of structuring international deals, governance issues, dispute resolution and exit strategies.

International technology and business process outsourcings require dealing with multiple parties, on both the customer and service provider side, in multiple jurisdictions. A typical international outsourcing involves lead parties of both customer and supplier (e.g. their respective parent companies) in lead countries, each of which have affiliates (or subcontractors) in many jurisdictions that require the outsourced services in local jurisdictions. Privity of contract and enforceability become a key issue. To address this, the lawyers have to craft a deal structure that ensures the rights and obligations of all parties involved in the outsourcing are adequately protected and liability risks are appropriately limited. This may involve structuring a master agreement between the lead parties, with the affiliates entering into ancillary agreements that incorporate certain terms of the master agreement. The issues of which parties get enforcement rights and rights to exercise certain remedies, such as indemnities, also need to be addressed. For example, a parent company may not want each and every affiliate of the other party to be entitled to bring breach of contract claims against the parent, but may prefer to streamline any disputes through the other party’s parent company.

International technology and business process outsourcings also often involve the movement of resources, data and personnel across borders. Even though the laws of one jurisdiction may expressly govern outsourcing contracts, one cannot escape the application of local laws to issues such as contract enforcement, transfer of money, tax, insolvency, creditors’ rights, employment, real estate, regulated industries, privacy, data protection and intellectual property. Certain jurisdictions have laws that hold the customer liable for failures by the service provider to comply with local laws, such as in the context of employment, in particular where the customer exercises some control over the provision of the services. While a customer may want involvement or control over outsourced services in a domestic outsourcing, such activity could pose additional risks on an international scale. The EU and other countries also have mandated transfer provisions to protect employees in the event of a service cessation. Therefore when acting for the customer on an international outsourcing, one needs to consider obtaining additional indemnities from the service provider for such risks. Suppliers on the other hand will be reluctant to assume all the risks of off-shoring.

In addition, differences in culture, business, political and legal climates, have implications that require an international technology or business process outsourcing transaction to be negotiated differently from a domestic outsourcing. To ensure a successful international outsourcing, lawyers negotiating and drafting the agreements must take these differences into account. For example, the terms dealing with transitioning, governance, business continuity and disaster recovery, events of force majeure, service levels, benchmarking, managing change, dispute resolution and termination, may not be the same for each country. The parties from different countries and regions often have different priorities, incentives, models, policies and internal processes. While a "big bang" transitioning or termination may work in a domestic relationship, on an international scale such events may need to be phased in based on local priorities. Benchmarking and service level requirements become a challenge for global comparisons. What works in one region may not work in another. As well, business processes will need to be harmonized among all of the entities involved globally. Governance becomes a key provision to be negotiated, since it ties back to assuring the services are met, the customer gets the quality and value for the services that it is expecting and issues such as privacy, security and change are properly managed. International committees consisting of key members of the customer and service provider need to be set-up, to ensure the lines of communication are kept open and any potential disputes are averted.

As businesses continue to expand into new markets, it is important to be mindful of the differences between technology and business process outsourcing on a domestic versus global scale. Advice from local counsel from each applicable jurisdiction should be sought. Given the variety of jurisdictions and parties involved, lawyers must recognize the unique risks and added layers of complexity and strive to negotiate and draft appropriate international outsourcing contracts that address these issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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