The Issue of Disputes in International Outsourcing

contract disputes. Image source

The whole domain of International outsourcing is lucrative and one that has numerous willing participants. While it has the desirable benefits of reduced cost of operations, greater efficiencies and a greater focus on core activities, there are less than desirable challenges that also have to be faced.

The volume of outsourced activities is on a constant upward graph, owing in part to the current economic conditions. The flexibility to change with market trends and stay up-to-date with the latest business models and technology developments makes the farming out process much more appealing. The current trends also show an increase in the risk of dispute in several agreements overseas. Preparing for the eventuality of a dispute is therefore in the best interest of both the companies involved.

International commercial disputes

Despite the pros associated with outsourcing, businesses need to be aware of the risk of disputes that is very real in this domain. 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 shone light on the fact that an overwhelming one in four companies was in the midst of an international commercial dispute in the short time span of the past two years alone. The study also found that an incorrect interpretation of agreements was the leading cause of breaches in contract, the major cause of disputes.

Common reasons for disputes

The leading cause of dispute in the 20th century infrastructure, has been replaced by the technology and intellectual property (IP) rights clauses. This fact should be less than surprising as ASIS International pins the total value of stolen corporate IP to be approximately 1 trillion US dollars on a global scale.

A part of the blame can be pinned down on the different regulatory approaches to Intellectual Property laws that different countries take. This issue is relevant not only in developing countries but also in developed countries like the United States where the limits of the IP law are still settling down.

The EIU survey also showed that the 35% of companies that were currently not in the midst of any dispute anticipated IP theft disputes over the next two years in the BRIC markets.

An international trend

This trend of possible IP disputes does not bode well for new contracts which in anticipation of claims is only getting longer and more complicated. When the contracts get more and more convoluted, chances of misinterpretation increase manifold.

There are many examples of major disputes in the recent past. Some examples are the disputes between H3G and Ericsson and the infamous case between EDS/HP and BSkyB which ended in a payment of 318 million pounds in damages alone.

Building a fortress against disputes

The risk of a dispute is as good as a clause in any international agreement. When the possibility is as high, formulating a plan to mitigate the impact or avoiding impact altogether is the best plan of action for companies prior to signing contracts.

The first stop in formulating this plan of action is the court where the case will be heard. The default for this position is that the case will be heard in the host’s country. This might not be the best recourse for the companies involved. The intellectual property rights jurisdiction is fairly weak in destinations popular for outsourcing like Mexico, China and Russia. Also numerous other destinations are missing any jurisdiction in the matter and do not have mature legal systems. The legal system in India is based on the English common law and is one of the reasons why the country is an important outsourcing destination. The Indian courts however are infamous for being slow in resolving disputes.

A simple fix solution for this problem would be for the contract to specify which country’s laws and jurisdiction will be followed. The New York law and the English law are often regarded as the gold standard in global business contracts. The law advocates forum shopping or choosing one jurisdiction in the contract.

There can, however be issues with this fix. For example, if the issue does not have a strong connection with the area jurisdiction, then courts may refuse to hear the case. Courts may also not have enough expertise to consider the case from a foreign jurisdiction’s perspective.

Despite choosing a more favorable court, the changes need to be effective in the host country. Enforcing the favorable judgment therefore might prove to be difficult.

The arbitration clause

Apart from forum shopping another ally is the arbitration clause. Arbitration affords flexibility in selection of legal and non-legal standards that will be relied on for settling disputes. The final decision can therefore be swayed to a certain extent. Through this clause the judge who makes the final decision can also be chosen.

The companies can therefore rely on industry experts or retired judges with more than adequate experience in the areas of IT project development or technology. The clause is often a blessing especially when agreements involve long, convoluted technical and legal issues crowding the agreement. There is also a far greater degree of control over issues of money and time involved exercised by the companies as against when the case is submitted to any national court.

The problem of enforcement can also be resolved by the arbitration clause. The New York Convention governs over 150 jurisdictions all over the world and the convention enables effective and quick enforcement of the arbitration decisions. This network is far bigger than any arrangement or treaty that can be drawn up for the international recognition of court judgments.

Arbitration also affords an opportunity for confidentiality, something that is often very important in the business world. In sharp contrast to court hearings, arbitration allows parties to hold on to their trade secrets, commercially sensitive information and intellectual property and prevent them from entering the public domain. Sometimes the very existence of the dispute itself can be kept under wraps saving both the companies a significant amount of controversy and embarrassment.

While arbitration is all it is made out to be, there are downsides to the deal. It can be harder to enter arbitration in emerging markets where the mechanisms that allow for the clause are not in place as yet. Examples of such areas include Latin America and Africa. Despite being in such situations, parties can still submit their disputes to various arbitration organizations such as the London Court of Arbitration, or the Chamber of Commerce. However, if parallel proceedings begin in the host country and for some reason they cannot be stayed, then the arbitration claim will run into problems.

Bilateral Investment Treaties (BITs) have been on the rise in recent years. They provide an alternative mechanism for dispute resolution that can be used by parties in the contracting states.

Choosing a dispute resolution mechanism

In the current era of Intellectual property rights, companies should be aware of the risk of disputes from the very onset of agreements or from the stage of drafting contracts. Several factors determine the best resolution mechanism. The nature of the parties, the jurisdictions involved and the subject matter are all factors that will sway the route taken to dispute resolution.

If arbitration is chosen, the path must be clear, with adequate procedures for initializing the process in place. This will help the company get a stay order on court proceedings with ease instead of struggling to find answers to questions by the skin of their teeth. Companies can also make sure that the clause ensures confidentiality right down to covering up the very fact of the existence of the dispute itself.

Despite all the measures taken, the risk of a dispute cannot ever be eliminated completely. Given the global, modern market, the benefits of an international outsourcing deal cannot be ignored, nor should it be ignored simply because of the risk of a dispute. That being said it is prudent to secure one’s boundaries in case of a likely dispute scenario and minimize damages. The best way to secure boundaries is by drawing up a fool-proof mechanism for dispute resolution appropriate to the transaction in question.

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