Business Process Outsourcing- Third Party Agreement and Legal Issues

January 30, 2012

The process of outsourcing known for the advantages of cost and time effectiveness can be performed in various ways. Various legal structures can be used to give effect to outsourcing arrangement. One such structure is business process outsourcing through agreement with a third party.

In third party agreement, the outsourcer enters into a contract with a third party service provider to get a specific services. Typically its back end office work that is outsourced. For the service recipient such work does not come within the ambit of core area of work, hence not much attention is paid to it, however, for the service provider it comprises its core competency which ensures that the work outsourced is done in a more efficient manner

In such agreement, it is important to clearly outline the terms of contract. The following points should be taken note of in case of third party agreement:-

The agreement should be unequivocal about the service to be provided, service level, pricing, intellectual property protection, warranty, consequences of breach of contract.

The contract should explicitly provide the service and related activities, liability of the service provider that is within the ambit of the agreement and the services that are excluded from such contract.

Quality of service
Generally, in an outsourcing arrangement, service provider needs to fulfill certain criteria regarding performance standard and service level. Such standard could be subjective such as standards related to reasonable efforts, maintenance of work ethics by the service provider or objective which could be in form of conformity with bench marked specific operational standards and metrics.

Such objective and subjective standards should be clearly mentioned in the agreement.

Protection of Intellectual Property
In the process of outsourcing, service recipient and service providers share many resources, protection of intellectual property (IP) such as trade secret in this regard becomes important.

Secondly, in the process of providing service, many new or improved goods or services are produced, the issue of vesting of ownership of such newly produced should be dealt in detail in the contract.

Damages, Disputes and Remedies
The remedy that is available to the parties in case of breach of conditions given in the contract such as those related to quality of service, payment and pricing and the liquidated damages that is payable should be also clearly carved out in the contract.

Process of resolution of dispute needs to be given in an elaborate manner in the contract; whether the party will refer the dispute to the arbitration or the dispute would be resolved by negotiation, the terms of settlement that would govern resolution of such dispute should be discussed in detail to avoid any sort of legal complication.

Also, the liability of both the parties to the contract, issue of risk allocation should have an account in the business process outsourcing agreement.

Provision regarding the termination of contract in case of breach or violation of service level should also find a mention in the contract.

Last but not the least, saving clause should be given in the contract keeping into account the temporal and spatial change that might occur with regard to service condition.

The post provides a brief idea regarding the legal issues that needs to be taken care of while entering into a business process agreement. Hope it was useful for you.


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