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CONTENTS 1-2 Outsourcing – What Matters Most

Business View

2

Protecting Confidential Information

3

Recent Cases

4

Limiting your liability

4

Recent News

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

relationship.

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

Passing Off

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

Company].

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.

system.

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

Your Contacts Roy Butler Partner

email: rab@stoneking.co.uk

Caroline Leviss Associate

email: crl@stoneking.co.uk

Stone King LLP 13 Queen Square Bath BA1 2HJ Tel. 01225 337599 Fax. 01225 335437 16 St John’s Lane London EC1M 4BS Tel. 020 7796 1007 Fax. 020 7796 1017 Wellington House East Road Cambridge CB1 1BH Tel. 01223 451070 Fax. 01223 451100 New Hall Market Place Melksham Wiltshire SN12 6EX Tel: 01225 337599 Fax 01225 335437

www.stoneking.co.uk email: corporate&commercial@stoneking.co.uk

© Stone King LLP 2010

Our policy when giving commentary and summaries on a non-specific basis is that we do not assume liability for the accuracy of any particular statements. Stone King LLP - registered limited liability partnership no OC315280, registered office 13 Queen Square, Bath BA1 2HJ


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