'Prenuptials' for offshoring

23.01.2006
Offshore outsourcing contracts are a lot like prenuptial agreements. If the marriage between customer and supplier heads south, it's important for clients to have predetermined how disputes will be resolved.

Unfortunately, few outsourcing customers pay sufficient heed to the "rights and remedies" clauses in contracts, including the fine print about where disagreements will be resolved. "Most customers don't read these issues; they leave them to the lawyers. But they're dead wrong," says Diana McKenzie, chairwoman of the IT group at Neal, Gerber & Eisenberg LLP in Chicago.

U.S. companies have inked hundreds of application development and software maintenance contracts with Indian firms over the past few years, so "the timing is right" for many of these contracts to run into problems, says McKenzie. "And the first place that lawyers are going to look is at this [dispute resolution] clause," she says.

IT managers need to understand that the legal rights and remedies laid out in outsourcing contracts vary depending on the legal jurisdiction agreed to by the parties involved. "Most of our clients would prefer to have their transactions governed by a law in the U.S., such as New York state law," says John Funk, chairman of the outsourcing practice at Jones Day in Dallas. That's largely because New York courts have established legal precedents concerning many outsourcing provisions, and many offshore providers are comfortable with the tenets set by the courts in New York, says Funk.

Kirkland & Ellis LLP, a law firm with 1,100 attorneys in offices worldwide, generally advises its clients to specify in their contracts which state laws they wish to apply for legal rights and remedies, says Gregg Kirchhoefer, a partner in the firm's intellectual property and technology transaction practice in Chicago. Kirchhoefer, who represented General Motors Corp. in the granddaddy of IT outsourcing agreements in its 1984 deal with Electronic Data Systems Corp., notes that some rights and remedies are unenforceable in certain countries. For example, no-compete agreements are void under Indian law.

Be aware that the cost of trying to enforce an outsourcing agreement in court will typically outstrip the value of the contract at issue, says Leonard Nuara, chairman of the technology and intellectual property practice at Thacher Proffitt & Wood LLP in New York. So if an outsourcing agreement should go sour, it's best to have a contract that's laden with multiple exit options, leaving a court of law as a last resort.