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Business View
The concept of outsourcing is familiar to most people engaged in
business. What it covers can be broad or narrow and it may be
arranged in numerous ways. Assets and employees are often
transferred, but sometimes just one or the other and occasionally
neither. There is rarely a partnership, in the legal sense of that
term, but for outsourcing to work it needs to benefit all involved.
For that to arise there has to be a clear understanding of its purpose
and the rewards. It is not like a business sale where the ongoing
relationship hardly matters and the focus is on obtaining the
highest price and having the lowest risk. This article summarises
the main things which come up and what most to bear in mind
from the standpoint of a customer which is planning to contract
with a supplier for it to provide outsourcing services.
The ongoing nature of the relationship and the critical need to
obtain good performance are such that the supplier’s competence
and record must be carefully checked. It is common to undertake
a formal tender process with appropriate evaluation criteria. We
recommend presenting the expected form of contract at this stage
in that the headline price is not everything in an outsourcing
relationship.
It should be clarified at the outset whether the TUPE regulations
will apply, which they will if one or more employees are assigned
to an organised grouping of resources or employees being
transferred. This will matter to the potential suppliers and thus
to the customer, both as to the outsourcing contract and its
termination (with a transfer to a new supplier or back to the
customer). How any TUPE transfer will be dealt with, up-front and
on the exit, will be a critical part of the negotiations and contract.
Similarly, exactly what services are to be provided and to what
standards matter greatly. It is common to set them out in detail in
what are called service level agreements, but they need not be
separate and can just be schedules to the outsourcing contract.
Given that most such arrangements need to be for several years,
primarily to allow suppliers to recoup on their investments, there
are usually lengthy change management provisions. They need
to be workable as well as equitable.
The pricing arrangements can vary from simple to complex, often
include inducements to perform well and are likely to provide for
indexation increase. Careful assessment of what is being agreed
is essential where the amounts and periods are significant.
Outsourcing - What Matters Most
Corporate & Commercial News Autumn 2010
CONTENTS
1-2 Outsourcing – What Matters Most
2 Protecting Confidential Information
3 Recent Cases
4 Limiting your liability
4 Recent News
�
“It is not like a business sale where the ongoing
relationship hardly matters and the focus is on
obtaining the highest price and having the
lowest risk”.
Stone King LLP13 Queen Square Bath BA1 2HJ Tel. 01225 337599 Fax. 01225 335437
16 St John’s Lane London EC1M 4BS Tel. 020 7796 1007 Fax. 020 7796 1017
Wellington House East Road Cambridge CB1 1BH Tel. 01223 451070 Fax. 01223 451100
New Hall Market Place Melksham Wiltshire SN12 6EX Tel: 01225 337599 Fax 01225 335437
www.stoneking.co.uk email: corporate&[email protected] © Stone King LLP 2010
The law of confidentiality is often the only form of protection for
commercial sensitive information. There are very few statutory
guidelines in relation to confidentiality and many of the laws are
contained in case law.
The key case on confidentiality is Coco-v-Clark which provides for
a three part test for bringing a claim for breach of confidentiality.
The first test is that the information must be confidential in nature,
the second is that the information must be imparted so as to
import an obligation of confidence and the third is that there must
be a misuse of such information to the detriment of the party
seeking to keep the information confidential.
Whether information falls within the definition of confidential is
a question of fact in every set of circumstances and no precise
definition can be given. The duty of confidentiality may be expressly
set out in a written agreement or may be implied.
It is preferable in all commercial relationships to deal with
confidentiality expressly in an agreement or at least to have a
statement that such information is confidential. In a contract it is
important to clearly define what the confidential information is,
it should have as a central obligation that the confidential
information must be kept confidential and may only be used for
the permitted purposes, once again permitted purposes needs to
be carefully defined. The contract should set out how the
information should be held and stored along with a clause setting
out how long the confidentiality obligation will last, which should
be a reasonable amount of time.
Suppliers will be keen to ensure that rights of termination are
limited and/or are difficult to invoke. That is understandable but in
many ways the right to terminate is the tool on which a customer
most relies in making sure it has good service. A dispute escalation
procedure is sensible and that resolution be sought by some form
of mediation is reasonable. But in the final analysis the right to
put an end to the contract and, if appropriate, bring a claim must
clearly exist.
On termination of the contract the customer may be at a serious
disadvantage if the outsourced services are critical to its ongoing
business. Specialist skills and knowledge may now lie with the
supplier, which will have little reason to assist unless there are
effective obligations under the contract. This is probably the hardest
aspect to provide for properly in the first place, especially where
TUPE has come into play.
As in any other form of supply contract, the provisions as to such
things as the ownership of intellectual property created in the
performance of the services and limitations or exclusions of liability
are important and should not be overlooked. It is also likely that
particular things will need to be covered according to the nature
of the services.
All in all, most outsourcing contracts have to be quite long and
detailed with significant negotiation. They usually require input
from most areas within a customer’s operations and are likely to
carry material risk in relation to its business such that dealing with
them seriously is very worth doing.
�
Outsourcing - What Matters Most (continued)
Protecting Confidential Information
“Whether information falls within the definition
of confidential is a question of fact in every set
of circumstances and no precise definition can
be given.”
Reasonable EndeavoursThe judgement in the recent high-profile Chelsea Barracks case
includes a review of case law on the contractual obligation to use
a particular level of endeavours. It was confirmed that “all
reasonable endeavours” does not extend to the party having to
use them acting contrary to its commercial interest. In this case
it was all the clearer in that “but commercially prudent” had been
inserted [CPC Group Ltd –v- Qatari Diar Real Estate Investment
Company].
Subject to ContractA Court of Appeal judgement has shown that the absence of a
“subject to contract” provision is not necessarily conclusive. In
this case a guarantee in favour of a bank had not been signed and
it argued that there was an enforceable oral agreement. The court
was able to uphold the defence that the parties had not intended
to be bound by an oral contract. It was assisted by there being a
term stating that the guarantors should seek legal advice in that
this was seen as showing that it was only the written guarantee
which, upon signature, was to be binding. [Investec Bank (UK) Ltd
–v- Zulman and Aur].
Salary Sacrifice VouchersAstra Zeneca UK Limited offered its employees the option of
receiving, instead of cash, part of their salary in vouchers which
were redeemable at specific retailers. In practice, the retailer issued
vouchers with a certain face value and sold them at a discounted
price to an intermediary. Astra Zeneca bought those vouchers from
the intermediary for less than face value and used them as part
payment of the salary of its employees who chose that option.
Astra Zeneca considered that it should not have to charge VAT on
the provision of vouchers to employees because the vouchers were
not given to the employee for a consideration.
The European Court Of Justice in this case followed the arguments
of HMRC and ruled that Astra Zeneca was making a supply of
services (of the vouchers) to its employees and that it must
therefore account for VAT on the cash received (the salary sacrificed)
for those vouchers. Astra Zeneca was however entitled to reclaim
the VAT incurred on the purchase of the vouchers. [Astra Zeneca
UK Limited -v- HMRC]
Passing OffIn this case Numatic International Limited succeeded in its High
Court Claim again Qualtex UK Ltd in that a product that they were
threatening to place on the market would deceive customers as its
appearance and get up was very similar to one of Numatic’s well
known Henry vacuum cleaners. This is an interesting case as the
passing off case related to the shape of the product rather than
the packaging. These types of cases are rare and is therefore a
positive decision for brand owners. [Numatic International -v-
Qualtex UK Ltd (2010)]
Damage to Business Vehicles – Duty to MitigateThe claimant in this case was an Audi car dealership, which
allocated one of its cars for use by its service manager. The service
manager was involved in a collision with the defendant. The
claimant had a pool of cars to be used to meet business needs
which included providing courtesy cars to customers. Instead of
using a courtesy car the service manager hired a replacement car
on credit hire, this was done as he wished to test out a new referral
system.
The claimant brought a claim against the defendant for damage
to the vehicle and for the credit hire charges. The Court of Appeal
in this case held that the claimant had failed to mitigate it losses
as the need for a replacement vehicle is not self proving. Therefore
claims for credit hire made by businesses should be defended
robustly where the business has alternative vehicles available
without additional expense or loss of profit. The burden is upon
the claimant business to show that they needed a replacement
vehicle and that they have suffered a loss. [Beechwood Birmingham
Ltd v Hoyer Group UK Ltd (2010)]
Recent Cases
Stone King LLP13 Queen Square Bath BA1 2HJ Tel. 01225 337599 Fax. 01225 335437
16 St John’s Lane London EC1M 4BS Tel. 020 7796 1007 Fax. 020 7796 1017
Wellington House East Road Cambridge CB1 1BH Tel. 01223 451070 Fax. 01223 451100
New Hall Market Place Melksham Wiltshire SN12 6EX Tel: 01225 337599 Fax 01225 335437
www.stoneking.co.uk email: corporate&[email protected] © Stone King LLP 2010
Our policy when giving commentary and summaries on a non-specific basis is that we do not assume liability for the accuracy of any particularstatements.
Stone King LLP - registered limited liability partnership no OC315280, registered office 13 Queen Square, Bath BA1 2HJ
We are pleased to welcome two new partners who joined the firm
in August. Hugo Greer-Walker joined our London office in the
commercial property team. He specialises in all aspects of
traditional commercial property including investment, landlord
and tenant, development and management. Philip Ryder heads
our Residential Property team and works from Bath and London.
He specialises in all aspects of residential property work and in
particular high value and complex London-focused transactions,
often for international clients.
Recent News
Your ContactsRoy Butler Partner email: [email protected]
Caroline Leviss Associate email: [email protected]
In a business-to-business contract it is worth taking care as to the
clause which deals with liability exclusions and limits. We
recommend that you consider:
� what type of loss is likely to arise
� is it appropriate to cover negligence
� should the provisions apply equally to all
� might third parties be able to make a claim
� exactly what heads of loss are excluded
� should types of recoverable loss be specified
� is the liability cap across the contract terms
� is it appropriate to have different liability caps
� could the clause be rendered invalid
Limiting Your LiabilityThe last point is important if the contract fails to make it clear
that liability for the statutory exceptions (fraud, title, death or
personal injury) are not excluded or limited.