Commercial Disputes in International Outsourcing

Disputes in International Outsourcing

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Commercial Disputes in International Outsourcing The main reasons why firms look for international outsourcing are reduced cost of operation, greater efficiency, and greater focus on core activities. The ability to stay up-to-date with the latest business models/technology and the flexibility to change with varying market trends make the outsourcing model much more appealing.

Despite the desirable benefits, there are less than desirable challenges that also have to be faced. Recently, Reed Smith, a global law firm in association with the Economist Intelligence Unit (EIU) conducted a survey of executives on a global scale.

The study found that one in four companies was involved in an international commercial dispute in the short time span of the past two years. The main reason for such a dispute is incorrect interpretation of agreements, which would eventually lead to contract breaches.

Reasons for International Commercial Disputes The prime reason for international commercial disputes are technology and intellectual property (IP) rights clauses. This fact is underlined by a recent survey conducted by ASIS International, which claims that the total value of stolen corporate IP is approximately 1 trillion US dollars on a global scale.

All at once, different countries adopt different approaches to Intellectual Property laws. This issue is applicable not only in developing countries, but also in developed countries such as the United States. Moreover, 35% of companies that was not in the midst of any dispute (according to the EIU survey report), anticipated IP theft as the most likely cause of disputes that they may face over the next two years in the BRIC markets.

When the contracts get more and more convoluted, chances of misinterpretation increase manifold. Some of the IP disputes that occurred in the recent past are the dispute between Ericsson and H3G, and the case between BSkyB and EDS/HP, which ended in a payment of 318 million pounds in damages alone.

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Mitigating the Impact of Disputes As the risk of disputes cannot be avoided, proposing ways to mitigate its impact is more important for companies (especially before signing contracts). The first step that can be taken to address this is to decide the court where the case will be heard. The host country’s court is usually where it would be heard.

But, this might not be a satisfactory solution, as IP rights jurisdiction is fairly weak in popular destinations for outsourcing such as Mexico, China, and Russia. Anyway, India still remains an important outsourcing destination as its legal system is based on the English common law.

A solution to this problem is to specify which country’s laws and jurisdiction are to be followed in the contract. New York law and English law are often regarded as standard in global business contracts. The law advocates forum shopping or specifying that the contract is governed by the law and courts of a different jurisdiction. In fact, this solution is also not free from pitfalls. If the case lacks sufficient connection to the given jurisdiction, then the court may refuse to hear it. At the same time the host country’s courts may often lack the necessary expertise to consider the dispute from the perspective of a foreign law. Choosing a forum that you feel is more adequate may not always provide the results you are looking for because implementing the judgment in the host country may prove difficult.

Arbitration—an Effective Alternative Apart from the alternatives mentioned above, another possible option to fix outsourcing disputes is arbitration. Here parties have the flexibility to select the legal or non-legal standards in settling disputes. In arbitration, the case may be heard by an industry expert or a retired judge with sufficient experience in handling such issues. This is a beneficial alternative as it ensures considerable savings in terms of time and money. Here are two other advantages offered by this alternative.

•

The details of the case can be kept confidential, which is not possible in the case of court hearings. The involved parties can maintain the confidentiality of their sensitive information. Most importantly, the dispute itself can be kept secretive.

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•

The problem of enforcement can also be solved via arbitration. Today, the New York Convention governs over 150 jurisdictions across the world, which enables quick and effective enforcement of the arbitration decisions.

However, this alternative

is not without

its own disadvantages.

The main

disadvantage of arbitration is that it is harder to implement in areas where the mechanisms allowing arbitration do not exist. Examples of such areas include Latin America and Africa. Despite the situation, parties try to settle their disputes through organizations, such as the Chamber of Commerce or the London Court of International Arbitration. Anyway, the growth of bilateral investment treaties (BITs) has saved the situation to a great extent, as it acts as an alternative mechanism for dispute resolution.

How to Choose a Dispute Resolution Mechanism In this era of IP rights, companies must be aware of the risk of disputes, when signing agreements or drafting contracts. Certain factors as well as guidelines should be followed for selecting the best resolution mechanism. The nature of the parties, the jurisdictions involved and the subject matter must be considered while selecting the dispute resolution mechanism.

If arbitration is chosen as the dispute resolution mechanism, it should be backed by adequate procedures for initiating the process. This will help the company get a stay order on court proceedings with ease and ensure confidentiality to cover up the very fact of the existence of the dispute.

These measures cannot ensure complete elimination of the risk of outsourcing disputes. Nevertheless, in this modern global market, you cannot ignore the services of BPO companies, simply because of the risk of a dispute. Take care to minimize the risk associated with disputes, by setting up a dispute resolution mechanism appropriate to the particular transaction.

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