Sign it up in Black and White – Drafting the Perfect Offshore Contract

05/03/2012 | Author: OptiSol Business Solutions | Posted in Small Business Resources

When it comes to outsourcing, cutting a right deal also comes down to having the most accurate legal agreements in place. The contract should be precise and should elaborate the level of service and the product/service lines client expects from the chosen service provider. Precise documentation is very crucial and the outsourcing contract is the first step towards a great working relationship with any offshore team. The quality of the contract, terms, conditions, scope and clauses will significantly influence the administration and outcome of the offshored engagement.

Many organizations take to be true that the contracts and agreements that they sign with a foreign provider are about the same as the in-country or onshore contracts when actually this is not the case. Onshore contract templates can never work for an onshore – offshore engagement without significant customization.  The buyer should be very clear with regards to items like security, confidentiality, legal adherence, compensation, terms, auditing rights, change process and dispute resolution process.  Technology research and advisory firm Gartner says ‘companies that have become expert procurers of information technology services on domestic shores need to be hyper-diligent when they contract offshore. Standardization might be the way to go for onsite IT services, but offshore contracts should be custom-made’.

Despite the fierce and rising competition among several countries in the IT outsourcing market, India still tops the list of many organizations’ choice in offshore production for numerous reasons. India has the 4th largest economy and the second largest pool of skilled English speaking workers. Apart from all the known factors like cost leverage, skillset, speed, capacity and expanded global reach, India stands tall also in the legal context. It has an independent judicial system and that mostly resemble the British common law system. The contract law in India is very similar to the principles of English contract law. This is an advantage to other countries for instance, the US whose law at both the federal and state levels was largely derived from the English common law system. Indian courts accept and apply terms and clauses rendering offshore arbitration. India has also signed the NY convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Albeit this solid rationale, a customer should still insist on univocal clauses in an operative contract. Over and above the provider’s ability and willingness to stand by the clauses in the agreement, challenges can pertain to drafting comprehensive agreements relevant to the contractual mechanisms that are enforceable in India. The most beneficial way out is to include jurisdiction and enforcement provisions which are carefully considered and crafted to provide the buyer with adequate and flexible rights applicable to both the countries. Goal should be to develop a contractual agreement in a way that allows for intended processes and follows a structure that can handle any complications that may arise. It should underline a system that applies to both the customer as well as the provider letting in shared gains, incentives and penalties, keeping a win-win situation in mind. Let me list down a set of must-have clauses that resolves any ambiguity issues and is vital for offshore engagement contracts.

Services - it should be a clear statement of the rights and obligations of both the parties. It should also contain the governance structure, representation and reporting requirements, generic write-up on security, privacy, warranties, definition of services, roles and responsibilities of each party in executing the engagement successfully.

Scope of Agreement -   The scope and detailed definition and description of the services and/or products expected to be delivered should be mentioned as exhaustively as possible. It should focus on both parties’ authority, obligation, representation and consent of deliverables plus the ownership of technical document, standards, location, place and time in accordance with the terms in the agreement. It should also underline the ownership rights of the materials involved in the project.

Statement of Work – SOW is generally signed off as a separate document rather than it being included it in a service contract. However there is no harm in reiterating here the milestone deliverables, schedule and compensation involved, the plan that will apply to the delivery and implementation of agreed products/services.

Scope change - The contract must provide enough flexibility to meet unforeseen demand changes upward or downward and a clear procedure for the parties to control changes to the project and agree on the impact that any changes will have on the timetable and the price. A Change Request (CR) will be the vehicle for requesting a change to the Milestone Deliverables. The CR will describe the change, the rationale for the change, the impact on the implementation timeline, and the impact on the Compensation. Both parties may initiate a CR. A written CR must be signed by both parties to authorize implementation of the CR.

Term, renewal, extension and termination - It also should include the terms involved, any limitation of liability, termination and re-negotiation conditions as well as the timeline of agreement and its extension criteria.

Dispute Resolution Mechanism - Define the procedures to resolve any disputes promptly and provide effective and commercially realistic remedies for both parties in the event of contractual default by the other. If any dispute arises in relation to this agreement, either party may notify the other in writing of the dispute and request resolution. The parties will then endeavor to resolve the dispute by negotiation. The parties may use mediation or other alternative resolution techniques to assist.

Compensation - Pricing is determined by many factors, such as complexity of the work, resource requirements, service level expectations, length of the contract, scope of work, technology and many others. It'll again depend on the mode of pricing which are Fixed Price, Time and Material, Dedicated resource model, cost plus et al to name a few basic types.

Indemnity – This simply states that the provider will indemnify and hold harmless the buyer, its servants and agents from all and against all actions, proceedings, claims, demands, costs and expenses (including legal costs on a lawyer/client basis) which it may incur or be subject to and against any loss or damage which it may sustain or incur as a consequence of a breach by the provider of any of the terms of this agreement or the negligent or wrongful acts or defaults of the provider.

Confidentiality - Confidential Information shall include all information which constitutes trade secrets with respect to the operation and business of the customer. Such information includes, but is not limited to, capabilities, customer information, technical data, financial information and business plans, customer data, computer programs, proprietary software et al.

Intellectual property - The provider acknowledges that all rights to patents, trademarks, designs, copyright, ideas, concepts and architecture or other intellectual property which are shared, created or developed under this agreement will be the sole property of the customer/buyer.

Other general terms are:

Amendments - It should be mentioned that any amendments to the agreement are only effective if signed by each party.

Assign ability – By assignable the clause means legally transferable to the ownership of another. No party may assign any benefit or burden in relation to this agreement.

Subcontracting – It is advised that subcontracting be avoided to the maximum extent possible. However if unavoidable or recommended by the buyer himself, then it should be explicitly mentioned that provider will only use subcontractors to the extent authorized. Service provider will not be released from any obligations or liability if any part of this agreement is subcontracted.

Waiver - Any delay or failure to exercise any rights under the agreement will not operate as a waiver of that right. A waiver is only effective if it is in writing. A waiver of any breach is not a waiver of any other breach.

Restraint of Trade - At any time whilst this agreement is in effect, or in a personal capacity, or as a representative of another company, should this contract be terminated, approach any of buyer’s clients, or engage in any business activities with buyer’s clients, in a capacity other than as a representative of the buyer. Any request for exemption to this clause will need to be made in writing by the provider and accompanied by a letter from the buyer’s client detailing the request.

Computer, Network and other resource Acceptable Use Policy - Upon the signing of the agreement, the provider agrees to act responsibly when accessing any computer or network resources of the buyer

Survival terms after the termination of the outsourcing agreement – Guarantee, support and future support can be included. This lays down the service level agreement clauses that need to be signed once the honeymoon is over.

OptiSol Business Solutions does not believe in subcontracting and does each task end to end with its proficient in-house teams spread into each of its service lines. OptiSol’s onsite-offshore contract system ensures maximum security to clients utilizing in-depth reference sessions and functions by handpicking client-friendly agreement clauses in its engagement processes, thereby ensuring complete legal binding and perfect execution of projects and beyond.

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Author: OptiSol Business Solutions

OptiSol Business Solutions (OBS) is a business and technology solutions provider specializing in services to Small and Medium Businesses (SMB’s) and Independent Software Vendors (ISV’s).

This author has published 15 articles so far.

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