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
This was first published in November 2005