But arbitration, a private forum for resolving contractual disputes, is a different story. It's much less formal than a court of law and much more business-oriented in terms of procedure, says Nuara. Judgments are awarded by either a single arbitrator or a panel.

Outsourcing customers that include arbitration in their contracts should stipulate that arbitrators must have specific experience in areas such as application development outsourcing, Nuara says.

The time and cost of arbitration can vary widely. Kirchhoefer says that when parties agree to binding arbitration under their contracts, they typically include a time frame for arbitration to commence and for the decisions to be made. He added that arbitration can often take six to nine months to complete, compared with litigation, which can take years. Arbitration is generally less expensive than taking a case to court, he adds. It can start at a "relatively modest" figure of $100,000, while litigation can go into seven figures.

Although attorneys often advise U.S. outsourcing customers to use domestic arbitrators, they will occasionally agree to arbitration at neutral sites such as London or Geneva that are internationally recognized and also serve as a halfway point for their dealings with Indian providers. "It's easier to enforce an arbitration award in India than it is to enforce a court judgment made in New York," says Funk.

Rather than relying on the uncertainty of litigating disputes in India, where the courts often move slowly and are allegedly subject to manipulation by outside forces, Nuara suggests that the outsourcing parties opt to arbitrate their disputes in the U.S. That's because India is a signatory to a New York convention that provides a legal mechanism for the enforcement of U.S. arbitration in India.