CONTENTS 1-2 Outsourcing – What Matters Most
Protecting Confidential Information
Limiting your liability
Corporate & Commercial News Autumn 2010
Outsourcing - What Matters Most 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
“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”.
and record must be carefully checked. It is common to undertake a formal tender process with appropriate evaluation criteria. We
Similarly, exactly what services are to be provided and to what
recommend presenting the expected form of contract at this stage
standards matter greatly. It is common to set them out in detail in
in that the headline price is not everything in an outsourcing
what are called service level agreements, but they need not be
separate and can just be schedules to the outsourcing contract.
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
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
customer). How any TUPE transfer will be dealt with, up-front and
indexation increase. Careful assessment of what is being agreed
on the exit, will be a critical part of the negotiations and contract.
is essential where the amounts and periods are significant.
termination (with a transfer to a new supplier or back to the
Outsourcing - What Matters Most (continued)
Suppliers will be keen to ensure that rights of termination are
aspect to provide for properly in the first place, especially where
limited and/or are difficult to invoke. That is understandable but in
TUPE has come into play.
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
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.
Protecting Confidential Information The law of confidentiality is often the only form of protection for
import an obligation of confidence and the third is that there must
commercial sensitive information. There are very few statutory
be a misuse of such information to the detriment of the party
guidelines in relation to confidentiality and many of the laws are
seeking to keep the information confidential.
contained in case law.
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
“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 key case on confidentiality is Coco-v-Clark which provides for a three part test for bringing a claim for breach of confidentiality.
information should be held and stored along with a clause setting
The first test is that the information must be confidential in nature,
out how long the confidentiality obligation will last, which should
the second is that the information must be imparted so as to
be a reasonable amount of time.
Recent Cases Reasonable Endeavours
The judgement in the recent high-profile Chelsea Barracks case
In this case Numatic International Limited succeeded in its High
includes a review of case law on the contractual obligation to use
Court Claim again Qualtex UK Ltd in that a product that they were
a particular level of endeavours. It was confirmed that “all
threatening to place on the market would deceive customers as its
reasonable endeavours” does not extend to the party having to
appearance and get up was very similar to one of Numatic’s well
use them acting contrary to its commercial interest. In this case
known Henry vacuum cleaners. This is an interesting case as the
it was all the clearer in that “but commercially prudent” had been
passing off case related to the shape of the product rather than
inserted [CPC Group Ltd –v- Qatari Diar Real Estate Investment
the packaging. These types of cases are rare and is therefore a
positive decision for brand owners. [Numatic International -vQualtex UK Ltd (2010)]
Subject to Contract A 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].
Damage to Business Vehicles – Duty to Mitigate Salary Sacrifice Vouchers
The claimant in this case was an Audi car dealership, which
Astra Zeneca UK Limited offered its employees the option of
allocated one of its cars for use by its service manager. The service
receiving, instead of cash, part of their salary in vouchers which
manager was involved in a collision with the defendant. The
were redeemable at specific retailers. In practice, the retailer issued
claimant had a pool of cars to be used to meet business needs
vouchers with a certain face value and sold them at a discounted
which included providing courtesy cars to customers. Instead of
price to an intermediary. Astra Zeneca bought those vouchers from
using a courtesy car the service manager hired a replacement car
the intermediary for less than face value and used them as part
on credit hire, this was done as he wished to test out a new referral
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 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
The European Court Of Justice in this case followed the arguments
as the need for a replacement vehicle is not self proving. Therefore
of HMRC and ruled that Astra Zeneca was making a supply of
claims for credit hire made by businesses should be defended
services (of the vouchers) to its employees and that it must
robustly where the business has alternative vehicles available
therefore account for VAT on the cash received (the salary sacrificed)
without additional expense or loss of profit. The burden is upon
for those vouchers. Astra Zeneca was however entitled to reclaim
the claimant business to show that they needed a replacement
the VAT incurred on the purchase of the vouchers. [Astra Zeneca
vehicle and that they have suffered a loss. [Beechwood Birmingham
UK Limited -v- HMRC]
Ltd v Hoyer Group UK Ltd (2010)]
Limiting Your Liability In a business-to-business contract it is worth taking care as to the
The last point is important if the contract fails to make it clear
clause which deals with liability exclusions and limits. We
that liability for the statutory exceptions (fraud, title, death or
recommend that you consider:
personal injury) are not excluded or limited.
◆ 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
Recent News We are pleased to welcome two new partners who joined the firm
our Residential Property team and works from Bath and London.
in August. Hugo Greer-Walker joined our London office in the
He specialises in all aspects of residential property work and in
commercial property team. He specialises in all aspects of
particular high value and complex London-focused transactions,
traditional commercial property including investment, landlord
often for international clients.
and tenant, development and management. Philip Ryder heads
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