Business View

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

and record must be carefully checked. It is common to undertake

a formal tender process with appropriate evaluation criteria. We

recommend presenting the expected form of contract at this stage

in that the headline price is not everything in an outsourcing

relationship.

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

termination (with a transfer to a new supplier or back to the

customer). How any TUPE transfer will be dealt with, up-front and

on the exit, will be a critical part of the negotiations and contract.

Similarly, exactly what services are to be provided and to what

standards matter greatly. It is common to set them out in detail in

what are called service level agreements, but they need not be

separate and can just be schedules to the outsourcing contract.

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

indexation increase. Careful assessment of what is being agreed

is essential where the amounts and periods are significant.

Outsourcing - What Matters Most

Corporate & Commercial News Autumn 2010

CONTENTS

1-2 Outsourcing – What Matters Most

2 Protecting Confidential Information

3 Recent Cases

4 Limiting your liability

4 Recent News

�

“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”.

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16 St John’s Lane London EC1M 4BS Tel. 020 7796 1007 Fax. 020 7796 1017

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The law of confidentiality is often the only form of protection for

commercial sensitive information. There are very few statutory

guidelines in relation to confidentiality and many of the laws are

contained in case law.

The key case on confidentiality is Coco-v-Clark which provides for

a three part test for bringing a claim for breach of confidentiality.

The first test is that the information must be confidential in nature,

the second is that the information must be imparted so as to

import an obligation of confidence and the third is that there must

be a misuse of such information to the detriment of the party

seeking to keep the information confidential.

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

information should be held and stored along with a clause setting

out how long the confidentiality obligation will last, which should

be a reasonable amount of time.

Suppliers will be keen to ensure that rights of termination are

limited and/or are difficult to invoke. That is understandable but in

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

aspect to provide for properly in the first place, especially where

TUPE has come into play.

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.

�

Outsourcing - What Matters Most (continued)

Protecting Confidential Information

“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.”

Reasonable EndeavoursThe judgement in the recent high-profile Chelsea Barracks case

includes a review of case law on the contractual obligation to use

a particular level of endeavours. It was confirmed that “all

reasonable endeavours” does not extend to the party having to

use them acting contrary to its commercial interest. In this case

it was all the clearer in that “but commercially prudent” had been

inserted [CPC Group Ltd –v- Qatari Diar Real Estate Investment

Company].

Subject to ContractA 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].

Salary Sacrifice VouchersAstra Zeneca UK Limited offered its employees the option of

receiving, instead of cash, part of their salary in vouchers which

were redeemable at specific retailers. In practice, the retailer issued

vouchers with a certain face value and sold them at a discounted

price to an intermediary. Astra Zeneca bought those vouchers from

the intermediary for less than face value and used them as part

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 European Court Of Justice in this case followed the arguments

of HMRC and ruled that Astra Zeneca was making a supply of

services (of the vouchers) to its employees and that it must

therefore account for VAT on the cash received (the salary sacrificed)

for those vouchers. Astra Zeneca was however entitled to reclaim

the VAT incurred on the purchase of the vouchers. [Astra Zeneca

UK Limited -v- HMRC]

Passing OffIn this case Numatic International Limited succeeded in its High

Court Claim again Qualtex UK Ltd in that a product that they were

threatening to place on the market would deceive customers as its

appearance and get up was very similar to one of Numatic’s well

known Henry vacuum cleaners. This is an interesting case as the

passing off case related to the shape of the product rather than

the packaging. These types of cases are rare and is therefore a

positive decision for brand owners. [Numatic International -v-

Qualtex UK Ltd (2010)]

Damage to Business Vehicles – Duty to MitigateThe claimant in this case was an Audi car dealership, which

allocated one of its cars for use by its service manager. The service

manager was involved in a collision with the defendant. The

claimant had a pool of cars to be used to meet business needs

which included providing courtesy cars to customers. Instead of

using a courtesy car the service manager hired a replacement car

on credit hire, this was done as he wished to test out a new referral

system.

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

as the need for a replacement vehicle is not self proving. Therefore

claims for credit hire made by businesses should be defended

robustly where the business has alternative vehicles available

without additional expense or loss of profit. The burden is upon

the claimant business to show that they needed a replacement

vehicle and that they have suffered a loss. [Beechwood Birmingham

Ltd v Hoyer Group UK Ltd (2010)]

Recent Cases

Stone King LLP13 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 particularstatements.

Stone King LLP - registered limited liability partnership no OC315280, registered office 13 Queen Square, Bath BA1 2HJ

We are pleased to welcome two new partners who joined the firm

in August. Hugo Greer-Walker joined our London office in the

commercial property team. He specialises in all aspects of

traditional commercial property including investment, landlord

and tenant, development and management. Philip Ryder heads

our Residential Property team and works from Bath and London.

He specialises in all aspects of residential property work and in

particular high value and complex London-focused transactions,

often for international clients.

Recent News

Your ContactsRoy Butler Partner email: rab@stoneking.co.uk

Caroline Leviss Associate email: crl@stoneking.co.uk

In a business-to-business contract it is worth taking care as to the

clause which deals with liability exclusions and limits. We

recommend that you consider:

� 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

Limiting Your LiabilityThe last point is important if the contract fails to make it clear

that liability for the statutory exceptions (fraud, title, death or

personal injury) are not excluded or limited.