Outsourcing relationships are long and complex–the contracts that establish them seemingly more so. Yet for all their verbosity, many outsourcing contracts are filled with generalities and open questions, which can present major problems when conflicts between outsourcer and customer inevitably arise.
“One of the goals of outsourcing contracts is to develop a smooth working relationship between customer and supplier,” says Brad Peterson, a partner in the business and technology sourcing practice of Mayer Brown. “When contract language is unclear, the parties develop different interpretations of the contract and those differences lead to disputes.”
Disputes, of course, can hurt performance, and the compromises required to resolve them can leave both parties unhappy.
Uncertainty in the contract can also lead to litigation. “Where the potential outcome is reasonably certain to both parties, they usually can reach an agreement on how to settle the matter and avoid a trial or arbitration,” says Robert Kriss, a partner and litigator at Mayer Brown. “If the potential outcome of a dispute is uncertain, the parties may evaluate their positions very differently, making it difficult to settle.”
Both sides lawyer up–digging through old emails, unearthing draft contracts, and interviewing witnesses–and that racks up billable hours for attorneys on both sides.
Outsourcing customers can mitigate the risk of costly disputes by insisting on clarity at the time the contract is executed and at the first sign of trouble, say Peterson and Kriss. Anticipating all the issues that may arise during an outsourcing relationship is difficult, but drafters of outsourcing agreements should try to address as many specific problems as possible upfront to save money and heartache later.
“You need to prove what promises the parties intended by the agreement, whether those promises were kept, and who is responsible for failures,” Peterson says. “The more you think about problems of proof as you are drafting the contract and governing the relationship, the fewer costly factual disputes will arise after the contract is executed.”
In other words, think like a litigator at the negotiating table. Here are six tips for buttoning up your outsourcing contract.
“If such a[n open-ended] provision is unavoidable, consider stating in the contract that the parties agree to an arbitrator or industry expert supplying the missing agreement after hearing the parties’ arguments and such decision will be binding and non-appealable,” Kriss says.
Alternatively, if the contract does not specify a process for supplying the missing term, it should at least state what happens to the validity of the rest of the contract if no agreement is reached.
Lay out examples of material breach in the contract–such as failure to meet a specified number of service levels or intellectual property theft–to clarify termination rights. Even if a breach does not fall within the examples, they can still be useful in assessing whether the breach in question is material, says Peterson.
“If the breach in question has the same or greater adverse monetary impact on the customer’s business as one of the breaches listed as an example, then the breach in question is probably material,” he adds.
Instead, define specific standards of performance: tasks the provider is required to perform or results the provider is expected to achieve.
“Such a provision makes it much easier to identify the cause of the problem before it develops or as it is developing,” he adds. “Otherwise, the parties may have to determine causation long after the fact by reviewing hundreds of e-mails, interviewing witnesses and hiring experts.”
If the customer really is at fault, the provision will help to alert IT leaders of the internal issue that needs to be corrected.
For example, if a customer adds personnel to mitigate damages caused by the supplier’s failure to perform but fails to provide clear written notice to the supplier before the personnel are added, it will be more difficult for the customer to prove that the personnel were added in response to the supplier’s failure to perform.