International Services Outsourcing
Key issues and clauses to consider in your next deal.
By Gabriela N. Smith
Outsourcing aspects of a business—such as customer service of many varieties—is standard practice nowadays because businesses do not want the direct responsibility and expense of becoming specialists in the mundane aspects of their business. They want to become the best at the product they manufacture or the service they provide.
Take, for example, a manufacturer of tennis rackets. The manufacturer wants to worry about making the best tennis rackets, sponsoring the top tennis players, and finding the best distribution and sales channels. The manufacturer does not necessarily want to take upon itself the responsibility for talking to the customers, filling out order requests, issuing refunds, resolving disputes, responding to customer inquiries, and myriad other tasks that can take significant expertise, knowledge, and effort. Other common forms of international outsourcing are software development, software programming, and similar technical activities.
Outsourcing vendors are often located in the United States, but outsourcing “internationally,” where the services are fully provided in a foreign jurisdiction, is also a very common practice. Frequent destinations include the Caribbean, Latin America, and Asia.
International outsourcing contracts require innovative legal thinking because they exist and operate, even in their most basic of forms, in a dual jurisdiction ecosystem where the laws of two countries intersect and where risks and dangers can be massive if the crafter of the agreement is not versed in the details.
In many ways, a U.S. sourcing agreement and an international outsourcing agreement will be similar, but the international nuances make a big difference. Below are some rules of thumb to apply when crafting an international outsourcing agreement. These rules are provided from the perspective of a U.S. company, not the vendor, and are not meant to be an exhaustive list of issues to consider.
Rule No. 1: Know your vendor.
This is more of a due diligence item than a contract item. What do you know about the vendor and people behind the vendor? Do they have a track record with other U.S. companies? Not all call centers are created equal, and the cultural and work ethic divide can be very real when conducting international business. The vendor to a U.S. company should understand the U.S. business expectations, and this ranges from engaging in ethical practices to providing a safe and compliant workplace in the foreign jurisdiction—and everything in between.
Rule No. 2: Know your transaction.
Your job as the lawyer drafting an international outsourcing contract is going to be largely driven by an attempt to curtail exposure. What kind of exposure? It will depend on the details of the operation, the level of responsibility delegated to the vendor, and other factors. As the lawyer, you must fully grasp the business elements and identify the risk inherent to the particular transaction.
Rule No. 3: Understand the basics of employment
law in the local jurisdiction.
Human resources are at the core of any services outsourcing transaction and can have an enormous impact on how the transaction is drafted. The outsourcing agreement should consider items such as the local workforce’s availability to provide services during local holidays (which are not identical to U.S. holidays), overtime costs, paid leave, and other local requirements. Even though the “employer” of local personnel is the vendor, the costs of employment are generally passed on to the U.S. company.
Rule No. 4: Have
appropriate measures to protect confidentiality of information and
understand how confidentiality is treated in the local
Not all jurisdictions cherish confidentiality of information as dearly as U.S. companies, and not all outsourcing vendors understand that. U.S. companies don’t want confidential information becoming exposed because a vendor failed to monitor an employee who spilled the beans online. The outsourcing agreement must provide for appropriate measures to ensure nondisclosure of confidential information, prevent misuse, and properly and regularly train the foreign workforce on appropriate use of confidential information. It should require the vendor to execute agreements with specific confidentiality language with its personnel and should have an appropriate remedy to redress issues. The foreign workforce must be constantly trained in these matters and must understand that conversations in the hallways, the bar, and in other settings outside of the production floor are not acceptable.
One key issue to note is the availability of emergency court procedures in the foreign jurisdiction to prevent irreparable harm. Not all jurisdictions have the procedural safeguards—such as injunctive relief and emergency restraining orders—that can be used in the U.S. to protect spillage of confidential information, trade secrets, or other valuable assets or rights. If the vendor (or its personnel) engages in egregious activity that must be prevented immediately but the local court system moves sluggishly, the U.S. company undoubtedly will face a very difficult scenario. Emergency measures issued in the U.S. against a foreign party where the wrongdoing took place abroad may prove worthless, as the international vendor is generally not subject to the jurisdiction of U.S. courts.
Rule No. 5:
Be smart about the law that applies to the contract.
This rule and the next rule are tough and uncertain choices. Should U.S. law, and then, a particular state law, apply to the outsourced services that will be provided in another jurisdiction with personnel that is not subject to the U.S. courts? Should the law of the foreign jurisdiction, a law that is unknown to the U.S. lawyer, apply? It is helpful to work with local counsel to understand the pros and cons of the choice of law but that does not provide the seal of certainty that lawyers like to have. This is why it is important to understand the details of the deal. For instance, if the vendor will develop software, then the U.S. company must secure the assignment of the intellectual property to the U.S. company and should understand how assignments work under the local law.
Rule No. 6:
Understand the jurisdiction and venue provisions.
The U.S. company will want to address any wrongdoing by the international vendor in the most efficient way. As discussed in Rule No. 4, swift resolution by a foreign tribunal may not always be easy to obtain in emergency situations.
For non-emergency disputes, U.S. tribunals would be ideal, but they are not the perfect fit. The outsourcing vendor’s assets are in the foreign location. If the U.S. company wins the case on U.S. soil, there will be (presumably) no assets to recover in the U.S., and recovery will have to happen in the vendor’s jurisdiction. But for that to happen, the U.S. judgment will have to be validated in the foreign jurisdiction in accordance with the local procedural rules. A similar scenario would likely apply for international alternative dispute resolution—not an easy task.
In most international outsourcing deals, businesspeople can generally resolve their problems without resorting to formal legal proceedings and end up engaging in informal meetings and mediation to reach a resolution. If the problem is serious enough, they will need the lawyers to draft modifications to the existing agreement or memorialize the outcome of the negotiations.
Rule No. 7: Restrictive covenants.
Restrictive covenants can be another gray area where lawyers will need to give their full attention. The first question is, What is the exposure? Does the outsourcing vendor impose a risk to the U.S. company? The answer is not always yes, and the U.S. client may or may not be concerned about this. Sometimes, the U.S. company has such power and leverage that this alone will act as a restrictive covenant (although I would never counsel a client to leave it to chance…). Other times, particularly where the U.S. company is a smaller player, the restrictive covenants must be prominently stressed in the contracts. Even if they are, however, the question remains: Where will they be enforced and under what law? Then we go back to the law, jurisdiction, and venue concepts described above.
Rule No. 8:
A key way to keep operations in order is to maintain the right to audit finances, books, records, compliance, and operational documents of the international outsourcing vendor. This can be as broad as the U.S. company wants to make it and can help curtail the risk imposed by the choice of law, jurisdiction, and venue provisions, which present the uncertainty described earlier. For instance, auditing confidentiality and information security compliance frequently can detect and prevent headache situations before they come up.
Outsourcing deals are fun to work on. In many respects, they follow the pattern of local outsourcing deals but they bring the added complexity of dealing cross-borders. A good Texas lawyer will ensure that he or she has competent legal counsel in the local jurisdiction to help work through the agreement and review the transaction from both sides of the border.TBJ
GABRIELA N. SMITH
represents companies engaging in business transactions across borders, primarily in the services industry. Her office is located in the Dallas area, and she is the 2019-2020 chair of the State Bar of Texas International Law Section.