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utsourcing aspects of a business—such as customerservice of many varieties—is standard practicenowadays because businesses do not want the direct

responsibility and expense of becoming specialists in themundane aspects of their business. They want to become thebest at the product they manufacture or the service they provide.

Take, for example, a manufacturer of tennis rackets. Themanufacturer wants to worry about making the best tennisrackets, sponsoring the top tennis players, and finding thebest distribution and sales channels. The manufacturer doesnot necessarily want to take upon itself the responsibility fortalking to the customers, filling out order requests, issuingrefunds, resolving disputes, responding to customer inquiries,and myriad other tasks that can take significant expertise,knowledge, and effort. Other common forms of internationaloutsourcing are software development, software program-ming, and similar technical activities.

Outsourcing vendors are often located in the United States,but outsourcing “internationally,” where the services are fullyprovided in a foreign jurisdiction, is also a very commonpractice. Frequent destinations include the Caribbean, LatinAmerica, and Asia.

International outsourcing contracts require innovativelegal thinking because they exist and operate, even in theirmost basic of forms, in a dual jurisdiction ecosystem wherethe laws of two countries intersect and where risks and dangerscan be massive if the crafter of the agreement is not versedin the details.

In many ways, a U.S. sourcing agreement and an interna-tional outsourcing agreement will be similar, but the inter-national nuances make a big difference. Below are some rules

of thumb to apply when crafting an international outsourcingagreement. These rules are provided from the perspective ofa U.S. company, not the vendor, and are not meant to be anexhaustive list of issues to consider.

Rule No. 1: Know your vendor. This is more of a due diligence item than a contract item.

What do you know about the vendor and people behind thevendor? Do they have a track record with other U.S. companies?Not all call centers are created equal, and the cultural and workethic divide can be very real when conducting internationalbusiness. The vendor to a U.S. company should understandthe U.S. business expectations, and this ranges from engagingin ethical practices to providing a safe and compliant workplacein the foreign jurisdiction—and everything in between.

Rule No. 2: Know your transaction. Your job as the lawyer drafting an international outsourcing

contract is going to be largely driven by an attempt to curtailexposure. What kind of exposure? It will depend on thedetails of the operation, the level of responsibility delegatedto the vendor, and other factors. As the lawyer, you mustfully grasp the business elements and identify the risk inherentto the particular transaction.

Rule No. 3: Understand the basics of employment law in thelocal jurisdiction.

Human resources are at the core of any services outsourcingtransaction and can have an enormous impact on how thetransaction is drafted. The outsourcing agreement shouldconsider items such as the local workforce’s availability to

BY GABRIELA N. SMITH

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International Services OutsourcingKey issues and clauses to consider in your next deal.

INTERNATIONAL LAW

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provide services during local holidays (which are not identicalto U.S. holidays), overtime costs, paid leave, and other localrequirements. Even though the “employer” of local personnelis the vendor, the costs of employment are generally passedon to the U.S. company.

Rule No. 4: Have appropriate measures to protect confi-dentiality of information and understand how confidentialityis treated in the local jurisdiction.

Not all jurisdictions cherish confidentiality of informationas dearly as U.S. companies, and not all outsourcing vendorsunderstand that. U.S. companies don’t want confidentialinformation becoming exposed because a vendor failed tomonitor an employee who spilled the beans online. The out-sourcing agreement must provide for appropriate measuresto ensure nondisclosure of confidential information, preventmisuse, and properly and regularly train the foreign workforceon appropriate use of confidential information. It shouldrequire the vendor to execute agreements with specificconfidentiality language with its personnel and should havean appropriate remedy to redress issues. The foreign workforcemust be constantly trained in these matters and must understandthat conversations in the hallways, the bar, and in othersettings outside of the production floor are not acceptable.

One key issue to note is the availability of emergency courtprocedures in the foreign jurisdiction to prevent irreparableharm. Not all jurisdictions have the procedural safeguards—such as injunctive relief and emergency restraining orders—that can be used in the U.S. to protect spillage of confidentialinformation, trade secrets, or other valuable assets or rights. Ifthe vendor (or its personnel) engages in egregious activity thatmust be prevented immediately but the local court systemmoves sluggishly, the U.S. company undoubtedly will face avery difficult scenario. Emergency measures issued in the U.S.against a foreign party where the wrongdoing took placeabroad may prove worthless, as the international vendor isgenerally not subject to the jurisdiction of U.S. courts.

Rule No. 5: Be smart about the law that applies to the contract. This rule and the next rule are tough and uncertain

choices. Should U.S. law, and then, a particular state law,apply to the outsourced services that will be provided inanother jurisdiction with personnel that is not subject to theU.S. courts? Should the law of the foreign jurisdiction, a lawthat is unknown to the U.S. lawyer, apply? It is helpful to workwith local counsel to understand the pros and cons of thechoice of law but that does not provide the seal of certaintythat lawyers like to have. This is why it is important tounderstand the details of the deal. For instance, if the vendorwill develop software, then the U.S. company must securethe assignment of the intellectual property to the U.S. companyand should understand how assignments work under thelocal law.

Rule No. 6: Understand the jurisdiction and venue provisions.The U.S. company will want to address any wrongdoing

by the international vendor in the most efficient way. Asdiscussed in Rule No. 4, swift resolution by a foreign tribunal

may not always be easy to obtain in emergency situations. For non-emergency disputes, U.S. tribunals would be ideal,

but they are not the perfect fit. The outsourcing vendor’sassets are in the foreign location. If the U.S. company winsthe case on U.S. soil, there will be (presumably) no assets torecover in the U.S., and recovery will have to happen in thevendor’s jurisdiction. But for that to happen, the U.S. judgmentwill have to be validated in the foreign jurisdiction in accordancewith the local procedural rules. A similar scenario wouldlikely apply for international alternative dispute resolution—not an easy task.

In most international outsourcing deals, businesspeoplecan generally resolve their problems without resorting toformal legal proceedings and end up engaging in informalmeetings and mediation to reach a resolution. If the prob-lem is serious enough, they will need the lawyers to draftmodifications to the existing agreement or memorialize theoutcome of the negotiations.

Rule No. 7: Restrictive covenants. Restrictive covenants can be another gray area where

lawyers will need to give their full attention. The first questionis, What is the exposure? Does the outsourcing vendor imposea risk to the U.S. company? The answer is not always yes, andthe U.S. client may or may not be concerned about this. Some-times, the U.S. company has such power and leverage that thisalone will act as a restrictive covenant (although I would nevercounsel a client to leave it to chance…). Other times, particu-larly where the U.S. company is a smaller player, the restrictivecovenants must be prominently stressed in the contracts. Evenif they are, however, the question remains: Where will they beenforced and under what law? Then we go back to the law,jurisdiction, and venue concepts described above.

Rule No. 8: Audit rights. A key way to keep operations in order is to maintain the right

to audit finances, books, records, compliance, and operationaldocuments of the international outsourcing vendor. This canbe as broad as the U.S. company wants to make it and canhelp curtail the risk imposed by the choice of law, jurisdiction,and venue provisions, which present the uncertaintydescribed earlier. For instance, auditing confidentiality andinformation security compliance frequently can detect andprevent headache situations before they come up.

Outsourcing deals are fun to work on. In many respects,they follow the pattern of local outsourcing deals but theybring the added complexity of dealing cross-borders. A goodTexas lawyer will ensure that he or she has competent legalcounsel in the local jurisdiction to help work through theagreement and review the transaction from both sides of theborder. TBJ

GABRIELA N. SMITHrepresents companies engaging in business transactions acrossborders, primarily in the services industry. Her office is located inthe Dallas area, and she is the 2019-2020 chair of the State Bar ofTexas International Law Section.