As discussed in our article on Terms inInternational Commercial Transactions, contracts involving foreign entities have requirements for additional provisions to protect the parties since the typical laws existing in the United States will not necessarily apply. The reader should review that article before proceeding further with this analysis.
With increasing numbers of United States businesses utilizing outsourcing as a means to obtain access to high quality work at a fraction of the cost, the international type of contract actually becomes increasingly common, often without the United States company fully understanding that they are engaging in international transactions requiring additional considerations for the agreement. Often the United States company will conclude erroneously that because the “customer” is in the United States, that it is not an international agreement. More often the United States company will simply try to utilize its own standard forms that may work within the United States.
In reality, any contract between entities of different nations is an international agreement and those aspects discussed in the above article plus the issues below must be addressed or the parties may find themselves confronting laws that can be remarkably onerous.
One client found itself forced to provide a year’s severance to a Belgian consultant that under Belgian law had become a defacto employee. Another client discovered that the fringe benefits it was obligated to provide were twice as expensive as those for local employees.
Care must be taken in all aspects of the undertaking or what could be considered a cost savings can actually become a trap.
This article gives a brief outline of some of the unique issues facing such contracts but the client is strongly advised to obtain competent legal advice before entering into any such arrangement.
THE PRIMARY CLAUSES TO WORRY ABOUT:
The nature and purpose of outsourcing transactions requires modifications to common "boilerplate" contract provisions including:
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confidentiality and non-disclosure provisions;
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amendment provisions;
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the obligation to not utilize, return or destroy confidential information;
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the choice of law and forum provision; and
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the hierarchy of which document should govern in the event of inconsistent terms.
The clauses above require special attention, respectively, to protect the privacy of personally identifiable information; to prevent the terms of carefully negotiated Master Services Agreements from being inadvertently modified by electronic signature laws; to allow a party in an outsourcing transaction to obtain remedies in offshore countries and in other "local" countries when services are provided in multiple jurisdictions under a global outsourcing agreement, especially against breaches of confidentiality, privacy and intellectual property obligations; to take account of and avoid potential liability under the new Federal Rules regarding E-Discovery, which can apply to transactions as well as litigation; and to ensure that representations, warranties, indemnities and other similar terms in a Master Services Agreement are not modified in subsequently executed ancillary documents such as Statements of Works, project plans and the like.
1. Confidentiality Obligations vs. the Privacy of Personal Information:
Information which is "publicly available" is often excluded from commonly used confidentiality and non-disclosure requirements. This reflects the origin of these provisions in agreements used to protect trade secrets and confidential business information and the underlying theory that a party should not be subject to the expense and administrative obligations of keeping material secret which is already in the public domain. This rationale does not readily apply to outsourcing transactions. In many outsourcing agreements, the customer will provide personally identifiable information (often referred to as "PII") about its own customers and employees to the outsourcing provider. In addition, the customer will be under statutory, regulatory or contractual obligations to maintain such PII in confidence. Moreover, such obligations to maintain the privacy of PII are not automatically withdrawn if all or some of the PII is also theoretically (or practically) publicly available. This would occur, for example, if an individual's address is available as a result of a search of mortgage records at the county clerk's office or in other publicly accessible government records. It would also occur if a person – or, to add a probable scenario, if a search company – could review separate government records to associate one publicly available item of personal information (such as a person's name) with another item of PII (such as an address or salary, which could be obtained, for example, from an SEC filing).
The danger of using a "boilerplate" confidentiality agreement is that it would relieve the recipient of personal information (typically the outsourcing provider) from liability if it disclosed the PII even when the disclosing party (typically the outsourcing customer) would not be relieved of liability and in fact may be subject to increased liability and penalties if it disclosed the information. In many circumstances, the customer in an outsourcing transaction would be liable for the disclosure of the PII even if the provider's disclosure did not violate the confidentiality obligations because the information was publicly available. For example, the California database breach notification statute and other similar statutes require certain remedies in the event that unauthorized access provided to PII is kept in a database. A corporate customer in an outsourcing transaction generally would not be relieved from liability under such legislation if its outsource provider provided unauthorized access to such information to a third party even if the confidentiality obligations between the customer and the provider removed the obligation of non-disclosure because such PII was also in the public domain. As a result, the best practice in outsourcing transactions is to modify either the confidentiality agreement or the confidentiality provisions of the Master Services Agreement or other governing document to require that the recipient of PII maintain such PII in confidence even if it is otherwise publicly available. In other words, there should be an exception to the exception for publicly available information with respect to personally identifiable information disclosed in outsourcing transactions.
In some circumstances, there may legitimately need to be an exception to the exception. That is, it is conceivable that the outsource provider received PII before the disclosure of the same PII to it by an outsource customer, or may receive it in the future from a source other than the customer or its agents, and the provider may have received, or will receive, such information subject to a consent form or other grant of authority that allows it (the provider) to disclose the PII to third parties when the customer would not have such right. In such case, a provider should be able to disclose the PII pursuant to its pre-existing, or other, rights, but the outsourcing contract should place clear and unambiguous evidentiary obligations on the parties to make clear when the provider's rights to disclose such PII exceed the customer's.
2. Written Amendment Requirement vs. E-Signature Laws:
Common end-of-the-agreement boilerplate provisions often state that the agreement may be amended only by a written agreement of both parties. The potential problem is that this provision can be "undone" by the operation of the Federal E-Sign (electronic signature) Act and similar state legislation (to the extent not preempted by the Federal legislation). To over-simplify, the E-Sign legislation makes click-wrap agreements and other online agreements generally enforceable in that it provides that electronic manifestations of intent (that is, electronic signatures) are equivalent to "traditional" pen and ink signatures and that electronic "records" (that is, online agreements) are equivalent to typed or printed contracts. Indeed, one of the criticisms of the E-Sign legislation has been that the standard of what constitutes an electronic "signature" is so low that it can be satisfied by entering a PIN code in a cell phone to agree to pay for a online service from the mobile phone network provider.
A scenario in which a potential problem under the boilerplate provisions could arise is as follows. Assume that the parties to an outsourcing agreement carefully negotiated and allocated rights and responsibilities in a complex Master Services Agreement, and the resulting terms of the agreement reflect deliberate concessions made by each party in order to obtain the benefit of other provisions in the agreement. Now assume that some of the services are to be provided through a website that contains an electronic form that has different terms and conditions. For example, such an online agreement could disclaim or limit representations and warranties in a manner that contradicts what the parties agreed to in the "written" Master Services Agreement after careful negotiations. In such a scenario, the service recipient could argue that a low level employee did not have authority to bind the corporation and amend the Master Services Agreement, but there would at least be an open question that would best be left unopened.
One solution would be to modify the standard "boilerplate" in the master agreement to require that all amendments be made using "manual signatures" and to state that the terms of the Master Services Agreement cannot be amended by websites or other online agreements. "Manual signatures" can be defined to be pen and ink signatures made by authorized representatives of the parties on typed or printed amendments in a form attached to the master agreement (as a way to exclude online agreements). Furthermore, the corporate titles of authorized representatives should be specified. For example, a higher-level executive may be required to agree to an amendment of the Master Services Agreement while a lower level employee may be authorized to amend a Statement of Work to extend a milestone or deadline.
3. The Obligation to Not Use, Return and Destroy Confidential Information:
Depending on the nation involved and the enforcement procedures described below, this clause may be window dressing or an effective means to regain information that others may hire the outsource company simply to obtain. Record retention in many nations is scanty and quite often valuable information remains in boxes in a store room with no one taking the trouble to properly return or dispose of it.
Further, shredding and true destruction of records is seldom achieved in many nations, with waste being a valuable commodity sold to third party contractors for recycling. Likewise with computer storage discs, etc. the only way to assure full destruction of confidential records is to send personnel there to confirm or to require return of such information to your own company. While this is expensive and time consuming for your company, if the information is vital one must assume it is compromised absent such steps.
The Agreement must therefore provide these rights and impose upon the outsourced company an obligation to assist and, if appropriate, return all records previously forwarded. Ideally, such confidential information would self destruct in some manner due to becoming stale over time or computer programs built into the system.
4. Choice Of Law And Selection Of Forums:
As discussed in our article on International Transactions, the United States business person is often shocked at the “casualness” and lack of effective enforcement capabilities in other jurisdictions and often faces hostile or corrupt regimes which are not inclined to provide a fair trial. Most nations involved in out sourcing and providing cheap labor have a small educated elite and a large bureaucratic and often corrupt legal system that is incapable of providing effective relief and costs a great deal of money.
It is essential to provide not only for arbitration in a neutral locale for enforcement of the contract (Singapore is typical for Asia and London for Europe) but to also provide for selection of law that gives some protection. To create a powerful contract without providing for effective enforcement and use of United States law is to accomplish little, realistically.
One must also be aware that choice of law in contracts is often nullified by local employment and business laws thus it is vital to have local counsel review the agreement to determine if the protections are effective in that environment.
5. The Hierarchy Of Which Document Should Govern In The Event Of Contradictory Terms:
The “battle of the forms” is typical in many business transactions, with each party inserting provisions in the invoice or purchase order indicating that their own forms supersede the others. In the United States the law under the UCC is clear as to which form will prevail but that is not necessarily the case in foreign jurisdictions so a special provision must be inserted indicating precisely which form is the operative form and requiring written agreement to alter that fact. This clause, usually just a line in domestic contracts, is often many paragraphs, in bold, in such outsourcing contracts to avoid the all too common slipping in of new terms in the copious documents shipped back and forth in a typical outsourcing situation.
CONCLUSION:
The economic benefit of outsourcing is so great and the quality of work so high that it will remain a fact of life for many United States businesses. Even companies that never engage in international business, thus have not developed the expertise in drafting such documents, must recognize the international nature of outsourcing contracts and adjust accordingly or will face unpleasant surprises.
One company, which averaged eighty thousand dollars a year in savings by using a Pakistani entity to provide documentation on its projects, found itself spending hundreds of thousands of dollars in legal fees nine thousand miles from home and finally concluded that an “unfair” settlement was preferable to continuing to argue in such a locale. As the owner complained, the cost of extra insurance for his people to even appear and testify was “breaking” him.
All that could have been prevented by some intelligent drafting at the beginning. Be forewarned.