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Benefits of Executing an Outsourcing Agreement for Foreign Corporations

 > Business Laws  > Benefits of Executing an Outsourcing Agreement for Foreign Corporations

Benefits of Executing an Outsourcing Agreement for Foreign Corporations

Nowadays, businesses are persistently adopting Offshore Outsourcing opportunities to minimize the costs involved and intensify the productivity with an ultimate motive of stepping up the shareholder value. In a nutshell, “Offshore outsourcing” is basically the practice wherein Foreign Companies contract out non-core and routine services to third party providers based in a country different from the one where the client company (i.e., the ‘outsourcer’) is based, with an aim to take advantage of their experience, expertise and efficiency.

There exist abundant benefits that the Foreign Companies can avail after outsourcing its services overseas but before anything, both the participating companies need to be very perspicacious about the fact of entering into a well drafted and executed Outsourcing agreement. So rather focusing on the benefits of Outsourcing practice solely, the Foreign Companies must pay heed to the benefits they can avail with the help of an Outsourcing Agreement. There are several unsettled legal issues that have been observed in International Outsourcing Corporations, that continued to outsource their services without any properly executed agreement like legal issues with respect to enforceability, Intellectual property laws, data-privacy, multi-jurisdictional issues for resolution of arising disputes, and many more. Therefore, despite making rosy predictions, it is way better to be cognizant of the legal complexities and liabilities associated with International Outsourcing Agreements.

Issues of Enforceability of the Terms & Conditions in the Absence of a legally valid Agreement and/or Contract:
Before moving towards enforceability, it should be clear that in legal parlance there is a difference between an Agreement and a Contract. An agreement enforceable by law is a contract and enforceable typically means whether or not the law recognizes the understanding between two parties as a contract or not. Agreements and contracts that are appropriately prepared and contain all the required components are enforceable by the law. There can be oral or written agreements, however written agreements are preferred more because Companies can have written record of terms and conditions between the parties. An oral agreement (express or implied) complying with all the essential requirements of validity of a contract, can also be enforceable in the court of law but if any dispute arises, it becomes difficult for the court or any deciding forum, to determine the exact nature of facts and terms of the agreement. Nanak Builders and Investors Pvt. Ltd. vs. Vinod Kumar Alag (AIR 1991 Delhi 315) is considered as the landmark case of enforceability and legal validity of an oral agreement. The lawfulness of an oral agreement, cannot be interrogated, if it cascades under the realm of the necessities stated in Section 10 of the Indian Contract Act, 1872. The onus of proof lies on the person who claims that there exists an oral agreement and if the person fails to establish the existence and furnish sufficient evidence, the agreement becomes non-existent and unenforceable (T Jayaram Naidu vs. Yasodha and Ors 2007 C.M.P.No. 1538 of 2006). So initially to assure enforceability of any agreement, it should comply with certain essential elements that are common in almost every country. In India, the Indian Contract Act 1872, Section 10 lays down the requisites of a valid contract. So, in toto the six potential elements of an enforceable agreement are: –

  1. Competency/ Capacity to Contract
  2. Free consent of the parties
  3. Offer and acceptance
  4. Lawful consideration
  5. Lawful Object
  6. Certainty and completeness of terms

There have been instances when there is an agreement, but it lacked proper execution and when the dispute arose, aggrieved parties had to bear with the long processes of Litigation to prove the existence of Agreement. Like in the case of B. Rajamani v. Azhar Sultana AIR 2005 AP 260, although the contract was held enforceable in the end, where an agreement to sell the property was in writing but it was not signed by the parties, nevertheless improper execution costed the parties to go for litigation. The Court observed that the contract came into being when both parties agreed and the fact of non-signing did not mean there was no contract. The Enforceability of International Agreements depend upon the Governing Law and the Dispute Resolution Mechanism that the Companies have chosen and incorporated while drafting the Outsourcing Agreement in order to have clarity with regard to any dispute that may arise either related to the breach of terms or any jurisdictional issue per se.

Are Pre-Contractual Negotiations Enforceable in the Court of Law similar to an Agreement?
Generally, the rule that has been perceived as a result of a lot of precedents, Pre-contractual Negotiations are inadmissible as an evidence. In the case of Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896, it was stated while interpreting a contract that the meaning which a written document can convey to a prudent man is not the same as the meaning of his words. Furthermore, in the case of MCST Plan No 1993 v. Liang Huat Aluminium Ltd., the dispute was regarding Interpretation of a Contract which was in the form of an Indemnity deed. The Defendant Company while defending itself from paying the damages for breach of terms of the deed, argued on the basis of some oral discussions that the parties had before the execution of the formal contract. The majority decision of the Court of Appeal of Singapore was in favour of the Plaintiff and the contentions of pre-contractual discussions and negotiations raised by the Defendant were explicitly rejected. However, one of the Judges of Appeal had a dissenting opinion regarding blanket exclusivity of pre-contractual discussions from being admissible as evidence. He believed, that for the purposes of flexibility of law, rather considering the discussions before the contract as inadmissible, there should be consideration of the objective facts that indicate the intention of the parties to the transaction. But ultimately the majority opinion prevailed. So, it is always better to have a written agreement with all terms and conditions properly acknowledged by both the parties to avoid the cost of admitting oral, informal discussions as evidence in the court proceedings.

As we know that every rule has an exception, some precedents appeared to be favouring the admissibility of pre-contractual negotiations where the dispute was regarding the existence of a contract or related to the legality of any terms of the contract. For example, the presence of a letter of intent which was issued by one party to the other, was upheld to be a contract been concluded between the parties by the court of law. (Tesco Stores Ltd. v. Costain Construction Ltd. [2003] EWHC 1487 (TCC)).
Though it is not at all advisable for the Foreign Corporations to perform Outsourcing Businesses without an Agreement, there are certain international conventions which allow Pre-contractual Negotiations to be admissible like the Vienna Convention on Contracts for International Sale of Goods [Article 8(3)], the Unidroit Principles of International Commercial Contracts [Article 4.3(a)], and the Principles of European Contract Law [Article 5.102(a)].

How can Foreign Companies benefit after entering into an Outsourcing Agreement?
So, in order to reduce the likelihood of future disputes, some of which have been mentioned above, it becomes essential in situations of International Business Outsourcing to have written agreements that are capable of balancing every sort of plausible matters that are exclusive to international business. All the benefits revolve around the central idea of legally binding the service provider to abide by the terms and avoid breach of the agreement otherwise he/she has to face the consequences as determined in the contract. The common benefits of executing an Outsourcing Agreement are:

  1. A written Outsourcing agreement will prove beneficial as it prevents any sort of misunderstandings that may arise.
  2. There will be a written record of all the terms that have been agreed by the Foreign Corporations which can be furnished as an admissible and enforceable evidence in case of disputes. Having said that, the parties cannot deviate from the terms mentioned in the contract and articulate as per their whims and fancies.
  3. When the agreement has been duly signed by the outsourcer and the service provider, the execution comes into place which legally binds both the parties to the duties and obligations enlisted in that contract.
  4. A duly executed Outsourcing agreement in written form lowers the probability of controversies related to payments, obligations and delays because all of these clauses will be incorporated in the agreement itself which can make the other party liable to pay the damages for any sort of breach in the agreement.
  5. Being an international business transaction, it becomes arduous in cases of breach that which law will prevail. By entering into a written Outsourcing Agreement, parties can decide mutually the governing law and the dispute resolution mechanism together.
  6. With the help of an Outsourcing agreement, Foreign Corporations can legally bind the other service provider party to protect the Company’s IP rights and not to breach the confidentiality terms signed in the agreement.

Basic Clauses in an International Outsourcing Agreement:
An excellent outsourcing agreement is the one that provides an inclusive road map of the duties and obligations of the outsourcer as well as the service provider, both. It consequently reduces complications in case any predicament surfaces. That’s why it is pertinent to pay attention while drafting an outsourcing agreement like for example, the first and foremost requirement is that the outsourcing agreement must include the introductory information such as the effective dates of the agreement as well as the names and addresses of the contracting parties. The other significant key clauses that need to be incorporated while drafting and reviewing an outsourcing agreement are as follows:

  1. Detailed Project Scope: The outsourcer should explicitly mention the operational activities or the service requirements that needs to be outsourced.
  2. Duties and Obligations: The duties and obligations of the outsourcing corporation and service provider, must be specifically defined under this clause separately.
  3. Confidentiality: As outsourcing involves exchange of services, technology and information to coordinate better so as to achieve the best results, it is pertinent for both the parties, i.e., the outsourcer and the service provider to incorporate confidentiality clause or sign a separate Non-Disclosure Agreement in order to protect proprietary information related to banking or financial records, data, design, R&D, marketing plans etc., as this information if disclosed to any third party other than the contracting parties, can cause irreparable loss to the one, whose information has been disclosed. In the case of Danieli Corus BV v. Steel Authority of India, [(2018) 246 DLT 329], the Delhi HC ruled that when the parties to an agreement have preserved and defined certain things to be confidential in nature then both the parties are legally bound to it and none of the parties cannot contest the legitimacy of the clause after captivating benefit from it and furthermore the court ordered the file statement of claims with International Chamber of Commerce within 30 days, as the contract included an arbitration clause.
    John Richard Brady v. Chemical Process Equipments Private Limited AIR 1987 Delhi 372 (“Brady Case”) is considered as the Landmark case that encompasses the principle for protection of Confidential information in absence of a contract. The Delhi High Court pronounced its ruling in accordance with the comprehensive principles of equity, that who has obtained data in confidence shall not take undue advantage of it. In the interest of Justice, the court restricted the defendant company from taking advantage of the expertise, specifications, and other technical data associated with the plaintiff’s machine which was assigned to them under express stipulation of strict confidentiality.
  4. Fees and Payment Terms: The mutually decided amount, payable to the service provider, also needs to be incorporated in the agreement and that should be subject to tax deduction at the source.
  5. Breach of Contract: This clause is one of the highly negotiated clauses, as it imposes penalties for contract breach either in the nature of delays, unsatisfactory work or for not complying with terms of the agreement. A breach of contract is described as a failure to perform anything agreed as a part of a contract. The aim associated with including this clause in the agreement is to make the party clear as to what procedure will be opted, in case a breach of contract occurs. Most of the times, for getting monetary damages for breach, a set penalty is integrated in a ‘breach of contract’ clause and a particular amount is mentioned that the service provider must pay the Outsourcer party for breaching the contract.
  6. Jurisdiction/Governing Law: In International Outsourcing Agreement, it is essential to explicitly mention that which state’s laws will govern the agreement. Hence, the parties should mutually negotiate and then specify the nation in the agreement, under this clause, that will have jurisdiction in case any dispute arises.
  7. Dispute Resolution: It is utmost important to mutually elucidate dispute resolution plans in the agreement itself for any future disputes. Commonly, international businesses include an Arbitration clause to resolve disputes rather through the process of litigation because firstly, arbitration is a confidential process and secondly, the New York Convention provides an efficient process to enforce arbitral awards in member countries. Parties should clearly mention their choice of international arbitration tribunal, venue of arbitration, the number of arbitrators, and the common language which will apply during the process.
  8. Inspection and Acceptance: The outsourcing company shall continuously monitor, inspect and assess the performance of the service provider in order to take necessary actions and avoid unnecessary delays. Also, the service provider gives its acceptance in the agreement that it will allow the outsourcing company to monitor and inspect the tasks (related to the purpose of the outsourcing agreement) that will be done by its staff.
  9. Force Majeure: This happened to be a boilerplate clause earlier but currently after this Covid-19 Pandemic situations, it has become one of the most important clauses that needs to be drafted with great attention.
  10. Details of Service Provider Staff: The outsourcer foreign companies must ask the service provider to provide details of the staff appointed by him/her on a regular basis to have a check on the work updates as well as the payment amount outsourcer is paying per person engaged for outsourcing purposes.
  11. Termination: There needs to be an already decided transparent exit plan incorporated in the agreement if termination gets necessary depending upon the circumstances and the parties need to negotiate on certain issues like how many days prior written notice of termination is required, what will be the penalties for non- performance, how will the confidentiality be maintained after termination, which assets will be retained by service provider and outsourcing company, etc.
  12. Indemnification: This proves to be an advantageous clause to the Outsourcer, as the service provider agrees to indemnify the outsourcer company for any violations of the terms of the agreement. Mostly in IT Outsourcing Contracts, the service provider promises to indemnify the outsourcer, either for not complying with the conditions that were stated by the outsourcer company to create the decided software or for any Intellectual property rights violations.
  13. Representation & Warranties: Through this clause, the service provider company assure the outsourcer company that firstly they are competent to offer the expertise required by the outsourcer company and represent that they will complete the work on or before the deadline period decided. Furthermore, through warranty clause the party warrants that if the services provided by them to the Outsourcer have any kind of technical glitches, then the service provider will fix that issue or replace the product without any costs and in turn, the outsourcing company assure that they will provide timely payments and other required services to the service provider.

The disparities among the various legal systems need to be taken sincerely and accordingly, the Foreign Companies must always assess and analyse the profile and past records of the service provider in order to be sure of availing the expertise from that company (or individual) and to decide whether that third party company will be capable of preserving the outsourcing company’s trade secrets. Outsourcing will definitely help any national or international corporation to escalate its growth and development graph, provided it is done appropriately and the Outsourcing agreement must contain all the components of a well-drafted agreement as discussed in the above segments in order to legally bind both the parties by the defined terms and conditions. In the end, it can be said that if International Outsourcing agreements are in oral form or are not even in any form of agreement, it becomes strenuous to prove their enforceability and due to that, it is not recommended to conduct Outsourcing Business practices without any agreement. Thus, to sum up in essence, the best suggestion for Foreign Corporations with respect to avoiding all the legal risks and challenges associated with Outsourcing Transactions, is to enter into a well-executed International Outsourcing Agreement.
Authored By: Adv. Anant Sharma & Neha Sharma

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