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4 Tips for Drafting and Managing Outsourcing Contracts

17 September 2014
Corporate Counsel

The use of contracts to govern relationships with outside partners is an inevitable part of doing business. With all of the demands on companies to keep up with rapidly evolving technology, the need to find partners that can understand and carry out high-tech processes is especially important. As companies sign more outsourcing contracts, more potential points of disagreement—and in the worst case, litigation—can arise.
A recent webinar from law firm Mayer Brown, titled “Good Deals Gone Bad—Technology Dispute Resolution: Tips for Avoiding Disputes and Prevailing When Disputes Are Inevitable,” provided attorneys with advice on handling these contracts in a smarter way, in both the drafting and management stages. Below are four key insights that the two lawyers running the webinar—Robert Kriss, a partner in Mayer Brown’s litigation and dispute resolution practice; and Daniel Masur, a partner in the firm’s business and technology and corporate and securities practices—offered about how to do contracts right.

1. Build in Your Leverage Points
No business wants to enter into a contract with an outside provider without some leverage, which the webinar explained should be written into the documents.

One powerful tool for the customer, said Masur, is establishing the right to insource work, or use third parties for existing or new work, if the service provider isn’t performing up to par. The ability to withhold future sourcing opportunities and disputed charges also may be important to negotiate into the contract.

According to Masur, some contracts that Mayer Brown works on include provisions stating that the service provider is required to use the customer as a reference. “It not only, we think, builds the right relationship, in that the customer becomes one of the best cheerleaders for the provider, but it also means that the provider is always incentivized to keep the customer satisfied, since they’ll be acting as a reference for them,” he said.

While these leverage points are very important, he stressed, customer companies can’t get carried away and wield them as means of punishment instead of protection. ”If you use these in a way which is punitive, the impact on the relationship can be very significant,” he noted.

2. Don’t Forget: You’re Setting Precedents All the Time
“Everything that’s done in a contract has to be thought of as precedent,” said Masur. If a dispute over the contract was resolved in one way in the past, the webcast explained, whoever is called on to resolve a similar dispute in the future will look to solve it in the same way.

And when a company wants to commit to an action—but only wants to do it once—they should say so very explicitly. “Capture in the writing that ‘I am prepared to make this concession in this situation for whatever reasons, and this should not be viewed as precedent, and next time it comes up, I don’t promise you that I’m going to deal with it in the same way,’” suggested Masur.

3. Be Clear About Who and What Can Change the Contract
It’s important to make sure it’s specified, either in the contact or an accompanying document sent to the counterparty, who can legally waive rights or modify the agreement on the company’s behalf, and what formalities they need to follow to make that modification legally binding, Kriss explained. “By formalities, I mean, for example, whether an email is sufficient to modify a contract, or whether a document must be signed,” he said.

The problem of what constitutes a change to the original contract can come up with meeting minutes of governing bodies of companies involved with the contract. “These minutes often refer to agreements that are struck between the parties during these governance meetings, and sometimes the people attending the meetings include the high-level executives that you designate as being authorized to modify the contract or waive rights,” said Kriss. “So are these meeting minutes sufficient evidence of a contract modification or a waiver?”

He believes the answer should be no, but to be safe, he recommends that companies explicitly write into the contracts that meeting minutes are not sufficient in and of themselves to change the rules.

4. Know What Will Happen When a Provider Fails
Unfortunately, there may be times when—despite the best-drafted contract—a service provider doesn’t perform up to the contract’s standards. If the provider fails, the client company can choose to negotiate a new schedule for services. However, they have to make sure that permitting a change to the original contract schedule doesn’t release the service provider from adhering to other aspects of the contract.
For example, if the client company doesn’t make sure original standards are maintained despite the new schedule, they could lose important rights—like the ability to terminate the contract if the provider fails to perform a second time.

“I have seen instances where the documentation of a resetting of milestones is very informal and imprecise,” said Kriss. “Sometimes a proposal to change dates is sent in an email and a response is returned via email: ‘Okay.’ What does that mean?”

Reprinted with permission from the 17 September 2014 edition of Corporate Counsel © 2014 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.”

Related Information

  • Related People
    Robert J. Kriss
    T +1 312 701 7165
    Daniel A. Masur
    T +1 202 263 3226

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