There are several legal issues that companies need to
consider in order to get the best from their offshore outsourcing
arrangements with India and China.
India and China offer tax incentives for foreign-owned captive
outsourcing operations and joint ventures with local companies.
India also offers tax incentives for domestic suppliers of certain
services, which they can pass on to users in the form of
competitive pricing. The availability of tax incentives often
depends on where the facility is located, so it is worth
investigating the options.
Users should also carry out legal and financial checks on their
overseas partners. This is especially important in China, where the
legal systems are less developed and it is easier for companies to
come and go quickly. Chinese companies should have the appropriate
legal registrations. There may be advantages in introducing an
intermediate Hong Kong company.
Many outsourcing projects fail because each party has different
expectations about what will be provided. To reduce the risk of
this happening, users should treat their contracts with suppliers
as a tool to underpin successful service delivery and to provide
legal protection if things go wrong.
The legal systems in India and China recognise UK/US-style
contracts, and suppliers are increasingly used to negotiating
contract terms to win business. So, user companies should ensure
that their contracts with suppliers cover all their key commercial
concerns. In particular, contracts should:
l Be specific about service levels, quality criteria and
timescales. Users should not leave matters to be agreed later or
assume that the service provider will provide anything that is not
spelt out clearly in the contract.
- Clearly link payments to milestones, acceptance testing and
delivery for any software development.
- Give the user audit and inspection rights, exercisable at short
notice.
- Provide for ease of transfer to another provider. Users should
avoid long lock-in periods and should have rights to terminate on
short notice without having to prove a breach of contract.
- Neither India nor China has a strong track record in protecting
intellectual property rights (until China recently joined the World
Trade Organisation there was little protection for intellectual
property rights there). Although the position is changing in both
countries, users should take steps to safeguard their intellectual
property rights:
- Protect any pre-existing intellectual property rights - for
example, by registering them in the UK or US (where commercially
appropriate) and by making sure that rights developed by
consultants have been assigned to the relevant group company.
- Ensure the user's own licence allows it to sub-license to the
overseas supplier any intellectual property rights it does not
own.
- Include protections in the contract with the supplier for trade
secrets and confidential information (often the only means of
protecting them).
- Ensure the contract with the supplier provides for the user to
own any new intellectual property rights created. This can be a
legal minefield, especially in China, where local law sometimes
overrides contractual provisions.
The contract should contain strict requirements and procedures
to safeguard the security of personal data and other valuable
information. Some of the larger Indian suppliers offer reasonable
levels of comfort regarding security in their standard
contracts.
The position is less developed in China, so users may have to
take more of a lead in stipulating their requirements to Chinese
suppliers and smaller Indian suppliers. It is not enough to rely on
pre-contract inspections as these do not constitute a commitment
from the supplier to maintain and improve on those standards.
Where the user is outsourcing the processing of personal data,
it is normally responsible for complying with the Data Protection
Act, which only allows the transfer of personal data outside the
European Economic Area in limited circumstances. The most
straightforward way for users to transfer data abroad is on the
terms of a standard set of clauses that have been approved at EU
level for this purpose.
Users should provide for their contracts to be governed by
English law and consider including an international arbitration
clause.
India has a well developed system of commercial law and China is
catching up. However, it is likely to be much more difficult to
enforce a contract against a defaulting supplier in China or India
than it would be to enforce an English contract through the English
courts. This is where a properly structured contract will come into
its own. It will assist in managing the expectations of the parties
and reduce the risks of a dispute ending up in court.
Kiran Sandford is a partner in the IT group at law firm
Mishcon de Reya