In past editions of the TLQ, we have discussed on several occasions the various substantive provisions of outsourcing, offshoring and similar tech commercial agreements. In the next two editions, we will consider some of the so-called boilerplate clauses in these types of agreements.
These seemingly innocuous-looking provisions tend to be clustered at the end of the vendor's standard form agreement, and often the customer has "run out of steam" in terms of interest and energy by the time they get to these clauses, with the result that the more important ones do not get the legal scrutiny they deserve. Accordingly, what follows is a discussion of the more important boilerplate provisions, and what issues customers should think about when approaching them.
Why A Governing Law Clause
The first point to make about a governing law clause is that your outsourcing, offshoring or other tech commercial (or just about any other commercial) contract should have one. Before you chuckle and say, "Well, who would sign a material commercial agreement without one," I remind you of a case a few years ago relating to a major commercial project between an Ontario company and a supplier based in Europe that didn't have such a clause. In the litigation, one of the threshold questions was precisely which law — that of Ontario or Italy (the supplier was based in Rome) — would apply.
Where both parties to the commercial deal are based in the same Canadian province, it is perhaps not fatal to address governing law, particularly if the performance of the agreement will also be carried out in the same, common jurisdiction. On the other hand, where you have a Canadian customer of outsourcing services, and a non-Canadian supplier, it is imperative that you include in the agreement a governing law clause. If you do not, and a dispute arises, the litigation surrounding the issue of which jurisdiction's law should apply can be quite involved and unpredictable.
Indeed, in today's globalized commercial world, the following fact pattern is not at all unusual. The customer for the outsourced IT-related services is headquartered in Toronto, but the main recipient of these particular services will be its US affiliate based in Massachusetts. The supplier of the outsourced services is headquartered in India, but the actual services will be performed from sites in India, California and Argentina. The agreement itself is signed by principals of both companies attending a trade show in Barcelona, Spain.
Such a fact pattern reads like a law school exam in the conflicts of law course, but in reality is a very common scenario in today's outsourcing/offshoring commercial environment. And it would be difficult to predict with any certainty what a judge would conclude as to the applicable governing law.
Whose Law to Govern?
Assuming you (sensibly) provide in your commercial contract for a governing law, which jurisdiction should it be (as between the Canadian customer and the non-Canadian supplier)? Many years ago, some larger US suppliers were able to insist on US governing law (such as the state of New York), but those days are generally long behind us. Nowadays, most Canadian customers can prevail in insisting upon the law of their province as the governing law. In some cases, the law of Ontario is chosen as a compromise (with Canadian customers located outside of Ontario). In some cases, the supplier will ask for a neutral governing law jurisdiction. This can occur where the supplier is concerned that the customer is a quasi-public entity, and therefore perhaps the supplier could not secure an impartial hearing in an Ontario (or other Canadian) courtroom.
In such (rare) instances, a third-party governing law jurisdiction (such as New York State, in the US, or the United Kingdom) might work, but you have to ask local counsel in those other jurisdictions whether their governing law selection rules allow such a choice by parties not located in their jurisdiction.
Arbitration Versus the Courts
Where one party (or both) is worried about impartial treatment in the courts of the jurisdiction of the counterparty (should a dispute go that far), it is not just governing law that is important to consider. Perhaps more germane is venue; that is, the contract should specify where disputes would be decided. The other (perhaps even more fundamental) issue raised by this concern is the very process of dispute resolution itself — namely, whether instead of the usual court litigation process, the parties should provide for arbitration.
Arbitration differs from the court process of dispute resolution in several important respects. In no particular order of importance, they are as follows.
With arbitration, you pick your own dispute decider (the arbitrator, or arbitrators in some instances). This can be useful, particularly where the dispute centres around a very technical issue, and therefore it might make a lot of sense to have a technical expert (with a lot of experience in your particular dispute) decide the matter. On the other hand, if the issue is a general "legal" one, then frankly an experienced judge (who makes his or her living deciding just such disputes) is probably a better choice than a non-legal technical expert. Indeed, seemingly ironically, retired judges are in high demand as arbitrators in such cases.
A key difference between court-based litigation and arbitration is that the latter can be kept confidential. Court pleadings are generally public, and the trial itself is invariably open to the public as well (though sometimes, in rare circumstances, certain trade secret evidence may be kept confidential, by being disclosed only to the presiding judge but otherwise "sealed" from general disclosure). This raises, however, the central question of whether confidentiality helps or hinders dispute resolution (and other objectives you may have).
For example, it is sometimes the very prospect of a claim becoming public that drives the parties to settle a dispute early on. The converse concern is that without the threat of such a potential spotlight, parties may be more willing to arbitrate cases (instead of settling them quickly). There is, of course, no right and wrong on this sort of question; rather, as you approach each deal, you need to think about the underlying dynamics relative to these points and issues, and then make a deal-by-deal decision.
If you are going to choose arbitration, then you have some subsidiary issues to think through. In terms of the number of arbitrators, I've never fully understood the rationale for three arbitrators (especially where each side picks one — presumably someone partial to their respective case — and then these two pick the true "decider," the neutral third arbitrator). Essentially the same result is achieved by a single, neutral arbitrator, without the added expense and logistics difficulty of the two extra arbitrators.
If it's an international deal (as are most tech deals involving outsourcing nowadays), then don't forget to specify the language of the arbitration. The choice, typically, will be English. And if you anticipate the need for translation, also be clear to specify "serial" versus "simultaneous" translation. Years ago, I was involved in an arbitration with serial translation, which can extend the time for hearings by about 50%. (The question is put to the witness in English, then translated into the non-English language, then the answer is given in the non-English language, which is then subsequently translated into English.) This type of translation is not only very time-consuming, it really interrupts the flow of North American litigators, who are not used to the disjointed process.
As for picking the venue of the arbitration, one device that can counteract the concern that resorting to arbitration is too easy (noted above) is the useful provision that the location for the arbitration proceeding will be in the city of the party that did not bring the arbitration claim. That is, the party that does bring the arbitration claim has to do so in the backyard of the other party. Now this approach might not work where one party is very uncomfortable with the other party's legal environment for arbitration — or the legal ability to enforce an arbitration award rendered in that jurisdiction, so it may not be a useful feature in all cases. But it illustrates nicely the kind of creative fine-tunings you can construct for arbitration-based dispute resolution regimes.
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.