In an increasingly globalised world, outsourcing
contracts often have multi-jurisdictional scope. Before putting pen to paper,
lawyers should consider with their clients the most appropriate contract
structure for the deal and due consideration should be given to areas in which
issues most commonly arise, for example, parent company guarantees, limitations
of liability, service level regimes and TUPE.
Contract
Structure
There are three main ways in which a global services
agreement can be structured: (i) the single contract model; (ii) the
individual local service contracts model; and (iii) the hybrid model (master
services agreement with local services agreements entered into pursuant to the
master services agreement).
The single contract model
This structure involves a single agreement being entered
into between global entities for multi-jurisdictional services. Given that
there is only one contract, and no individual local services agreements being
entered into (see discussion on the hybrid model below), the structure is most
appropriate where there is uniformity with respect to the key terms of the
contract, the services and the service levels, and management of the services
is carried out centrally, as this structure offers little flexibility for local
variation. It is therefore best if the local delivery aspect of the contract is
minimal or merely incidental to the contract.
Issues around privity of contract can arise when using
this structure, as local customer entities that are not party to the single
contract are unable to enforce obligations against the supplier directly. The
customer may therefore seek indemnities from the supplier in respect of losses
of both the contracting customer entity and its local affiliates. The customer
may also seek third-party rights in respect of its local entities.
The individual local services contracts model
This contract structure is comprised of individual contracts
which are entered into between the local entities in each relevant territory. This
structure is most appropriate where local services are unrelated or have little
in common.
The structure allows for local flexibility, but gives
rise to a risk of fragmentation of the global deal. To promote consistency of
terms between the individual contracts, they may be negotiated by the local
entities on the basis of a pre-agreed standard form contract or agreed heads of
terms. It is also important that there is centralised control over the
multi-party negotiations to ensure that the underlying commercial principles of
the global deal are applied and are not undermined by concessions agreed. To
take advantage of bulk purchasing power, the individual contracts should be
negotiated upfront and at the same time rather than in a piecemeal or staggered
fashion. However, in reality, this may not be practical.
Contracting using this structure can be time-consuming
and costly, given that each individual contract must be negotiated separately
with centralised oversight and administrative control. To try to mitigate this
inefficiency, the parties may wish to consider appointing a contract manager.
Hybrid: MSA / LSA
In this contract configuration, a Master Services Agreement
(‘MSA’) sits above the Local Services Agreements (‘LSAs’). Often the MSA sets
out the commercial and legal terms of the contract between the two parent
companies, whilst the LSAs incorporate the terms of the MSA and set out
country-specific modifications. However, there are two variants of this
contract structure:
· A thick
MSA and a thin LSA: The commercial and legal terms of the contract are set out
at the MSA level with the LSA containing only local variations (for example, to
pick up mandatory local law and any local variations in the service provided in
the different territories, which may include differences in service levels).
· A thin
MSA and a thick LSA: The majority of the legal and commercial terms are placed
at the LSA level, with the MSA providing only a general framework. This variant
is most appropriate where the fundamental terms vary country by country but, similarly to the issue discussed in respect of the second contract structure
(individual local services contracts model), the more terms that are pushed
down to the local level, the greater the risk of fragmenting the global deal.
This hybrid model is the most commonly used structure as
it allows for a balance to be struck between local flexibility and centralised
control. Furthermore, the customer can also take advantage of bulk purchasing
power through the terms of the MSA and local entities have direct enforcement
rights as parties to the LSAs. When drafting such contracts, consideration
should be given to mandatory local law (relevant areas potentially including IP
and data protection) and ensure that local law advice is obtained as
appropriate.
Key
Considerations
There are a number of things that should be considered
when deciding which contract structure to use and when drafting key terms of
the agreement.
From a supplier perspective it is important to put in
place workable and effective governance procedures and be mindful of the
customer and supplier group structures, outsourcing maturity, delivery points,
and transition and transformation processes when constructing the contract.
Where there is a group structure in which a parent entity
wholly owns its subsidiaries then the parent can ensure the cooperation of
subsidiaries. However, where there is a federated group structure, it may be difficult
to achieve a similar level of cooperation between the various entities. The
structure of the contract should be tailored accordingly, with appropriate
provisions included with respect to cooperation.
A staged transition may be agreed, with different
territories transitioning at different times. If the transition is to be
carried out in stages, the contract should provide for a centralised system for
managing this process effectively. Where there are many territories to
transition, it may be worth carrying out a due diligence exercise to decide
which order the countries should be transitioned in.
Services may be comprised of: global services, common
services, and local services. When using the hybrid model, service levels are
often set out at the MSA level in order to provide single performance
accountability across the supplier’s enterprise and customers often prefer an
aggregated ‘amount at risk’ that reflects all global charges. It is worth
considering, however, whether to fragment the service levels (at a local level)
since the law of averages tends to punish the customer if, for example, the
service is provided in accordance with the service levels in all but one
country, which performs extremely poorly. Moreover, if the customer global
entity is in an industry in which local regulators require certain performance
metrics then the LSA may need to override or supplement the MSA-level service
levels.
Guarantees are an often overlooked issue. In a global
services agreement the overarching parent company may agree to a guarantee that
will cover the whole agreement. However, if any of the underlying local
agreements are amended this could make the guarantee unenforceable. To mitigate
the risk of this, it is important that, whenever a new country or service is
added to the agreement, the guarantee is refreshed to reflect this new
obligation. The parties may also include an indemnity in case the guarantee
falls away for any other reason.
Global liability caps are often used in these agreements.
This may not be appropriate if the scope of the deal (in terms of which
countries and services it will encompass) is not yet clear. Moreover, in a
federated group structure a global cap could be unpopular as an event in one
country could deplete the liability pot for the rest of the territories; to
deal with this, the parties may wish to include a liability cap replenishment
clause. Parties may also consider cross-liability and cross-termination rights
which allow the customer to terminate the whole agreement if a local agreement
is poorly performed.
Tax considerations should be addressed upfront in order
to ensure that the agreement is as tax efficient as possible and does not
saddle the parties with unnecessary tax liabilities.
Finally, in the context of governing law and jurisdiction,
it is important to seek local legal advice when drafting local agreements to
ensure that any areas of mandatory law are covered.
Employment Issues
A question which has arisen since the UK’s recent
decision to leave the EU is whether companies which decide to relocate their
services in the wake of Brexit would be subject to the automatic employee
transfer regimes under the Acquired Rights Directive 2001/23/EC (ARD) and TUPE.
Currently, where companies transfer services from the UK
to Europe, the Acquired Rights Directive 2001/23/EC applies. This means that
the employees are automatically transferred with the services, the terms and
conditions of employment they had previously continue and they have enhanced
employee protections. It remains unclear whether ARD and TUPE will continue to
apply in the UK following Brexit and so it is advisable to make contractual
provisions for the transfer of employees and the apportionment of employment
liabilities to cover the possibility of a future with no TUPE. Where services
are being transferred outside the EU, local advice should be obtained.
Conclusion
In this article we have highlighted the importance of:
1.
selecting the right contract structure, which is tailored
to the customer, supplier and the scope of the specific deal;
2.
giving due consideration to issues including the group
company structure of the contracting entities, limitation of liability, governance,
ensuring that contracts are drafted in a tax efficient manner and ensuring that
local law advice is obtained where appropriate; and
3.
getting appropriate employment law advice if intending on
transferring services abroad to ensure compliance with ARD, TUPE and any non-EU
employment legislation and considering including provisions which anticipate
that TUPE will not continue to apply following Brexit.
Addressing each of these key issues
will help customers and suppliers alike avoid many of the pitfalls most
commonly encountered in global sourcing transactions, whilst putting in place a
contract structure tailored to the needs of the parties which ensures seamless
service delivery.
Mike Pierides is a Partner at Pillsbury Winthrop Shaw
Pittman LLP (www.pillsburylaw.com)
Sarah Atkinson is an associate in Pillsbury’s
Global Sourcing and Technology practice
Dan Coen is also an Associate at Pillsbury
