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Outsourcing agreements – what contractual structure?


Outsourcing agreements – what contractual structure?

Outsourcing agreements often raise a crucial question, is it better to rely on a general contractor that will provide services through its sub-contractors or have direct contractual relationships with each of the providers?Both solutions have advantages and disadvantages since the identification of a general outosourcing contractor allows not only to often negotiate a better price for the service, but also to ensure that the general rules set out in the master agreement such as those on limitation of liability, penalties, forum selection and applicable laws apply to any service provided through the general contractor’s subcontractors. 

Indeed, each new service will be regulated in a schedule of the master outsourcing agreement that will provide the special terms applicable to that specific service and refer to the general rules for what not mentioned in the schedule. At the same time since the general contractor is likely to be a sound company, the recipient of the service does not risk (or has at least a lower risk) that its counterparty is not able to pay penalties and damanges or gets bankrupt and can rely on a single point of contact in order to manage all the services provided. Obviously such advantages are considerably lowered if the terms of the master agreement are not beneficial to the recipient of the service and if the general contractor is willing to renegotiate the liability cap with reference to each new service provided. 

Likewise the possibility to have a direct contractual relationship with each provider of services allows to have a direct claim towards them and directly require them to comply with the instructions of the recipient of the service. Additionally, it avoids that potential issues relating to a service might affect the provision of other services conveyed through the same general contractor since they will be regulated by different agreements. 

A possible solution might be to have – in relation to the most sensitive services – a three party agreement involving the recipient of the service, the general contractor and the provider of the new service, but with the general contractor liable up to the liability cap set out in the master agreement also for this new service, while the new provider is liable within the limits of a liability cap negotiated from time to time in the three party agreement. This might be an interesting solution subject to the peculiarities of the service involved and the availability by the general contractor to be liable for the service of the new provider within the limits of the master agreement. 

As previously discussed, liability clauses in outsourcing agreements are usually the core of negotiations in outsourcing agreements but the issue above adds a further complexity to the matter. What is your experience on this issue? Feel free to contact me Giulio Coraggio ([email protected]), to discuss. And follow me on my Facebook pageTwitter and Google+ and become one of my friends on LinkedIn. 

Image courtesy of Flikr by Steve Snodgrass

Giulio Coraggio
[email protected]

I am the head of the Italian Technology sector and the global head of the IoT and Gaming and Gambling groups at the world leading law firm DLA Piper. Top global IoT influencer and FinTech lover, finding solutions to what's next for our clients' success.