Outsourcing Providers Pitching Business? Be Careful What You Wish For.

As far back as May 2005, Legal Bytes reported that Europe was becoming a major outsourcing hub for a variety of reasons (Outsourcing Statistics). Well just this week, the law started catching up.

In what is certainly a major ruling and quite possibly the beginning of emboldened plaintiff-customers seeking greater accountability from outsourcing providers, Electronic Data Systems (EDS) has lost a case initiated by British Sky Broadcasting Plc (BSkyB) back in 2004, alleging that EDS, one of the leading outsourcing providers in the world, had misled BSkyB about its capabilities and expertise. For those of you who are legal research hounds, the case is cited as HT-06-311, British Sky Broadcasting v. Electronic Data Systems, although I don’t believe it has been fully published yet. The dispute arose over a services contract that was entered into by EDS and BSkyB in 2000, well before EDS was purchased in 2008 by its current owner, Hewlett-Packard (HP), for slightly more than US$13 billion.

To give you the background, BSkyB selected EDS to develop a new customer relationship management (CRM) system for its call centers in Scotland. After almost two years and failure by EDS to deliver, by March 2002, BSkyB ended the contract and took over the project itself – the frustration and events ultimately leading to the legal proceedings filed in 2004 that alleged EDS lied about its ability to undertake and complete the project. On the other side of the case, in its own court documents, EDS alleged that BSkyB simply “did not know what it wanted,” and wanted the lowest cost possible to accomplish “it.” To highlight the disconnect further, the contract with EDS was for £48 million, but according to court documents filed in the case, with all of the delays, budget over-runs, EDS’ failure to deliver, and BSkyB taking over and completing the project itself, costs had mounted to £265 million.

Justice Ramsey, writing for the British High Court, ruled that EDS misled BSkyB in making false and fraudulent misrepresentations in pitching and marketing its capabilities to BSkyB, giving rise to a claim for damages. Further, the court concluded, to the extent these representations were fraudulent, the limitation of liability clause in the contract that would have otherwise limited EDS’ liability for damages should be set aside and does not apply. While damages have not yet been fixed, in theory, if one includes the differential in costs, lost profits and other damages that are now fair game, EDS could be liable to BSkyB for well in excess of £200 million – that’s more than US$315 million at current exchange rates.

This is a major decision not only in the UK, but also for outsourcing deals around the globe, and if the beginning of a precedential trend, it could signal a radical shift in the way outsourcing deals are bid, negotiated and consummated. There is no question that anyone involved in outsourcing knows that the customer does not always have its specifications and detailed requirements buttoned up when discussions begin. Indeed, outsourcing often presents a singularity at which time enhancements, efficiencies and improvements that might have been difficult or impossible internally, can be effected by moving the operations to a third-party provider. The provider, eager to win a lucrative bid, may over-promise or over-represent its experience and capabilities. Smart negotiators know that forcing both sides to diligently and meticulously work through the “devil in the detail,” and making sure expectations, resources and capabilities are clearly set out and unambiguous, is the single most important contribution to be made in avoiding disputes, potential litigation and problems as the work and services unfold. Those of you in marketing know all too well that there is often a fine line between an actual claim and puffery. The former represents actionable representations, the latter . . . well, “you’ve tried the rest, now try the best” on every pizza box in the world.

Are you contemplating a major outsourcing initiative? Are you considering any outsourcing project, even a small one, involving critical operations – customer services, supply chain management, operations, transaction processing? Outsourcing is complicated. Need help? We wrote the book. No really, you can see for yourself: Outsourcing Agreements Line by Line: A Detailed Look at Outsourcing Agreements & How to Change Them to Fit Your Needs, written by none other than yours truly, Joseph I. Rosenbaum. Whether you check out the book or not, if you do need help, our Advertising Technology & Media law team here at Rimon has the help you need to make sure that, even if you are right, you can avoid the costly consequences and angst inherent in any legal proceedings between customers and providers. How can we help you? Call me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work.

E-Mail. E-Sign. Egad!

The New York Appellate Division has ruled that an email exchange between two parties can amend a contract—even if the agreement specifically states amendments “must be in writing signed by both parties” (Arthur Stevens v. Publicis USA). Here, an employment agreement was the subject of emails between the parties. The court ruled that emails containing the name of the sender in a signature block are a “signed writing” sufficient to amend the contract! Ouch! It is not hard to imagine any email communication with all the elements of a meeting of the minds (“gee, that sounds perfect”), an intent to be bound (“I agree”) and authenticated as attributable to the parties—would fit the argument. Have you looked at your contracts lately? Your outgoing email messages? Our own Peter Raymond and John Webb argued and won this case for our client Publicis USA and have authored a Rimon Bulletin. Our ATM team is working with them to counsel clients on how best to protect themselves in light of this decision.

Online Contracts Are Valid (Everyone Knows That) – So Why More Litigation?

Only a few years ago, risk managers were concerned whether ‘click wrap’ or online contracts would create enforceable contracts. With laws and court cases over the years, the issue has been reasonably settled. They are. But the focus of recent cases has turned to the details—how is effective notice given online? Are there clauses or terms that require prominence to be enforceable? How can we determine if online formalities are sufficient for legal purposes? What about mandatory arbitration clauses? Are choice of law or choice of forum clauses enforceable? Are the assents necessary to waive one’s right to a jury trial or cut short the statute of limitations, the same as those prohibiting use of the website for illegal purposes? Can you bind a user browsing on the Internet to the terms of use when a website simply says “by browsing or visiting this site you must, and you agree to, comply with and be bound by our terms of use”? Do you always need the “I Agree” assent generally ascribed to contract formation. The answers are: it depends. Big surprise from a lawyer, right?

In general, common sense helps when creating online contracts (hiring a knowledgeable Rimon lawyer is good common sense). Ask some simple questions: (a) is your notice of terms reasonable and conspicuous, and can it be bypassed? (b) how do you know if a customer has agreed to your terms – by browsing, by clicking a link or by entering particular words of assent? (c) do the users have a choice if they don’t want to be bound by the terms – is it clear what they should do or not do? (d) are there laws that apply to your business, your industry or in jurisdictions you do business, that relate to online contracts? (e) is there a means to modify, terminate or otherwise alter the agreement—how will the customer know? and (f) keep records.

Some simple principles, but as you can appreciate, often easier to list in an outline than carry out in practice. And there are more. The cost of failure or noncompliance is high. Need to get it right? Call Rimon—we’ll help.

Outsourcing: NJ Governor Signs Executive Order

Outgoing New Jersey Governor James E. McGreevey signed Executive Order No. 129 requiring vendors seeking contracts with New Jersey State agencies to disclose any foreign countries in which the services are to be performed, and prohibits awarding such a contract unless there is no comparable domestic service, failing to use the vendor would cause economic hardship in New Jersey or would not be in the public interest for some reason. Excluded from the Executive Order are contracts with New Jersey’s public institutions of higher education, when the contract is for academic instruction, educational or research services.

Got Indemnification!

In a world increasingly dependent on information, technology and intellectual property rights, contract indemnities—especially if you are an innocent third party—can be critical. “Innocent” means you are a licensee or user of technology (e.g., software, database information) from a provider or licensor and a third party claims that your provider or licensor has wrongfully furnished you with intellectual property that belongs to them. While space doesn’t allow us to go into the finer points of contributory infringement, third-party claims and the distinctions between insurance, breach of representation, and warranty or contract claims and an indemnity, there is enough space to alert you to the fact that a third-party indemnity claim—even if you, the user/licensee, have not knowingly done anything wrong—is disruptive and unnerving at best and at worst can lead to damage claims. For example, the third-party, if successful, will require a new license agreement with you and new license fees (remember those license fees you already paid your current licensor/provider?). Caveat emptor (or, in this case, caveat licensor)!