Legal Tips before Executing an Outsourcing Agreement: Lawyers Advice

In today’s fast paced world of transnational open markets, competition between businesses have become a main stay. More firms today, prefer to not carry out all their business processes in – house. There are usually third parties that specialise in the particular area and offer their services at cheaper rates. As a result of this, firms outsource a significant share of their business processes. The processes that are outsourced are usually those that are not at the core of the objective of the business.

The laws that govern the process of outsourcing in India are; (a) Indian Contract Act, 1872; (b) Specific Relief Act, 1963; (c) Foreign Exchange Regulations; (d) Foreign Trade (Development Regulations) Act, 1992; (e) Department of Telecommunications (DoT) policies and guidelines; (f) Information Technology Act, 2000; (g) Companies Act, 2013; (h) Intellectual Property Laws; (i) Labour Laws; (j) Transfer of Property Act, 1882; (k) Competition Act, 2000; (l) Income Tax Act, 1961; (m) Indian Evidence Act, 1872 and; (n) The Code of Civil Procedure, 1908.

Along with the perceived advantage of outsourcing, there may be several risks involved in the process itself, making it imperative that the executor exercises several precautions in order to build a meaningful relationship with the firm to which the process is outsourced. This article elucidates and examines those precautions. Some of the general aspects to keep in mind are –
Outsource the Right Activities: One of the primary things to consider before outsourcing is the choice of activity to outsource. Care has to be taken to ensure that the competitive advantage that the company has is not lost. Aspects that are unique to the business should not be outsourced as this will ensure that the factors that make the product/service popular with the customers is retained.
Consider all Costs: Costs that are not initially envisages at the beginning of the outsourcing relationship can arise in due course. Networking website fees and legal fees are the most common costs that are overlooked. Travel costs are often overlooked when the agreement involves travel of the firm’s personnel.
Choose Carefully: The urge to hire the first vendor that is contacted has be managed. Finding the vendor that best suits the needs of the outsourcing firm is a time-consuming affair. It is essential to compare a contrast the strengths and weaknesses of similar firms in the outsourcing market. Considerations such as flexibility, location, experience, language and cultural barriers has to be taken into account.

Important Clauses to be Inserted in an Outsourcing Agreement
Defining the Scope of the Agreement: Perhaps the most important clause of an outsourcing agreement is the clause that defines the scope of the agreement. Services that are included/ excluded have to be expressly delineated in this clause. This has to be done with accuracy to ensure that unnecessary disputes are avoided in the future. A well-defined scope will serve as a strong foundation upon which the rights and liabilities of the parties is based.
In Nabha Power Limited vs. Punjab State Power Corporation Limited (Civil Appeal No. 179 of 2017) the Hon’ble Supreme Court held that, when a particular clause in an outsourcing agreement is not clear, it is not to be presumed.

Ownership of Intellectual Property (IP): Several classes of intellectual property may be transferred upon the execution of an outsourcing agreement. These includes product designs, patents, trademarks etc. Pre – existing IP may exist or new IP may be created during the time in which the agreement is in force. It is important to factor for this in the agreement itself. It should be spelled out in clear terms as to who the IP will belong to.

Protection of Confidential Data: Data is arguably the most valuable resource in today’s business economy and has to be managed diligently. A high level of information may be shared while engaged in an outsourcing relationship. This information may include sensitive business information, data of third parties and personal information of the customers. Therefore, it is essential that the standards of data security to be followed by the vendor be specified in the agreement.
Several safeguards can be mandated. For example, the vendor can be made to sign Non –Disclosure Agreements (NDA) with its employees; provisions can be included for physical safety and compliance with ISO standards on data protection can be made mandatory. The obligations of each party in the case of a breach of data should also be mentioned.
It was held by the Punjab and Haryana High Court in the case Mohinder Pal Singh and Anr. v. State Bank of India and Anr (Civil Writ Petition No. 11662 of 2010) that an outsourcing agreement should include risk and risk mitigation strategies.

Incorporation of Entry & Exit Clauses: The time period for which the contract is to be in effect has to be provided for in the agreement. In general, an outsourcing agreement is one which is entered into for a significant period of time and the arising of disputes in not uncommon. Certain events, the occurrence of which will lead to the termination of the agreement should be provided for.
While providing for an exit clause, it would be prudent to ensure that exit from the agreement is done in a phased manner. This will ensure that both the vendor and the customer have sufficient time to allocate their resources, either with a new vendor or customer as the case may be.

Dispute Resolution Clause: This is a clause that is oft overlooked. In today’s global economy, a large number of outsourcing agreements are transnational in character. Therefore, it is imperative to provide for the jurisdiction in which any potential disputes are to be resolved. While choosing a particular jurisdiction, being specific as to the particular court is needed. The incorporation of an arbitration clause would be beneficial as it would save on time and money that comes with litigation.

In Bhatia International v. Bulk Trading S.A. (2002 (4) SCC 105) the Hon’ble Supreme Court held that “unless language of the provisions of Part 1 of the Arbitration and Conciliation Act, 1996 are excluded by agreement between the parties either expressly or by implication, Part 1 of the Act including section 11 would be applicable even where the international commercial agreements are governed by the clause of another county.”
The secret behind the successful functioning of any outsourcing agreement is to research on your preferred vendor beforehand. Once this is done, the nuances that the potential relationship might entail may be understood and the outsourcing agreement can be drafted accordingly.
Authored By: Adv. Anant Sharma & Vismay G.R.N.