Archive for the ‘Contracts’ Category

Force Majeure Provisions in Outsourcing Contracts

Tuesday, January 20th, 2009

Last week, I provided a general overview of some of the compelling reasons for outsourcing at E-Solutions Integrator.  Outsourcing contracts need to be carefully negotiated as problems can have a huge impact on the company that outsources.

Lawyers tend to use the same  boilerplate provisions despite the type of contract.  That can be a killer in an outsourcing transaction.  For example, one provision that should be carefully reviewed is the force majeure provision.

Force majeure literally means “greater force.”  Force majeure excuses a party from liability or from performing its obligation if some unforeseen event or circumstance beyond that party’s control prevents it from performing as required under the contract.  Thus, force majeure clauses commonly cover Acts of God, such as natural disasters, war, strikes or labor unrest, riots, and the failure of third parties (e.g., subcontractors, suppliers) to perform their obligations to the contracting party.

When negotiating an agreement to outsource on behalf of a client, one should read and limit the list of categories under which force majeure may be claimed.  Sometimes, the vendor’s contract provides includes an unnecessarily broad list.  Additionally, one should limit the duration of any enforced delay.  Consider how long a force majeure event lasts.  Forever?  If so, no one will provide the service.

A force majeure event for one of the vendor’s other customers should not be a force majeure event for your client.  Further, one should make a distinction between a supplier and a subcontractor, the latter typically being more easily and quickly replaced.  Depending on the type of contract, one should consider whether the failure of a supplier should be a force majeure event.

Force majeure events should not include power or equipment failures.  The vendor should have immediate backups when these events occur.  Similarly, software defects should not be force majeure events.

When a force majeure event occurs, it should not relieve the vendor from implementing its disaster recovery plan.  In fact, it must do so when such an event occurs.  The client should have its own business continuation plan as well.  The client should have insurance If the risk can’t be minimized in a particular area.

The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities and The Outsourcing Handbook: How to Implement a Successful Outsourcing Process are good places to start when considering an outsourcing arrangement.

Practical Advice About Confidentiality Carve-Outs

Thursday, August 21st, 2008

Many different types of agreements include confidentiality provisions.  These provisions define the information that is deemed to be confidential.  I recently reviewed a consulting agreement and it had a flaw common to provisions that discuss confidential information:  the lack of any specificity regarding when information might not be considered confidential.

Broad, generic drafting creates potential flash points.  Instead of protecting both parties by clarifying the details, its broadness makes a potential dispute more likely.  I don’t argue the point that, in some cases, one party purposely will leave a clarifying section (AKA a carve-out) out of the agreement because it is advantageous to do so. But often, it’s just sloppy drafting without carefully crafting what is appropriate in the circumstance.

Here are some carve-outs that I suggested be added to the consulting agreement:

1. Information that, at the time of disclosure, is generally known in the pertinent field or is in the public domain;

2. Information that, after disclosure, becomes generally known in the pertinent field or becomes part of the public domain without breach of the provisions of this Agreement by either party;

3. Information that either party can show it possessed at the time of disclosure and did not acquire, directly or indirectly, from the disclosing party;

4. Information that either party can show it independently developed after disclosure without reference to the other party’s Confidential Information;

5. Information that Contractor can show it received from a third party which did not acquire it, directly or indirectly, from Company under an obligation of confidentiality and which did not require Contractor to hold it in confidence;

6. Information that Company can show it received from a third party which did not acquire it, directly or indirectly, from Contractor under an obligation of confidentiality and which did not require Company to hold it in confidence;

7. Information that is required to be disclosed by applicable law, by rule or regulation of a court or government agency of competent jurisdiction, or pursuant to legal process; provided, however, that the party required to make such disclosure shall (a) use its best efforts to limit such disclosure, (b) use its best efforts to promptly provide the other party with advance notice of any such request for disclosure so that said other party may seek a protective order or such other appropriate remedy as said other party deems necessary, and (c) make such disclosure only to the extent so required.

Number 7 is an interesting provision, in that, without it, a party could be stuck between being in violation of the law or breaching the contract.  Let’s say Company is sued by a third party and confidential information, as defined by the Company-Contractor Agreement, is or becomes an issue in the lawsuit.  If the third party’s lawyer deposes Contractor, but the Company-Contractor Agreement doesn’t include # 7, then if Contractor testifies in the deposition, he is in breach of the Agreement – and could then be subject to suit by Company.  Yet if he does not testify, he is in violation of the law.  Clearly, it is in Contractor’s interest to include this provision in the Agreement.