Compliance Issues
Supplier's obligation to comply with applicable laws

First and foremost, the contract should obligate the supplier to provide the services in a manner that complies with applicable laws. The customer should view the supplier's performance as activity for which the customer may be ultimately responsible, whether as a practical or actual legal reality. Failure of the supplier to perform in a manner complying with applicable laws may risk penalties and fines or even possible interruption of the services due to the noncompliance. In view of the fundamental significance of these risks, this commitment by the supplier is typically couched as a warranty commitment.

Two potential “qualifications” to this supplier warranty are sometimes raised. First, the supplier may insist that its compliance warranty be subject to some level of duty on the part of the customer to identify unique laws applicable to the customer's specific line of business—especially in the case of customers involved in regulated industries (such as healthcare or financial services). Secondly, in the event of an actual dispute between the parties respecting interpretation of a legal requirement, the supplier may seek relief from its warranty if the customer's interpretation is followed but ultimately proven inaccurate.

Customer's Commitment to Comply With Applicable Laws

The supplier sometimes request a "reciprocal" compliance with law commitment from the customer. Although not actually a reciprocal issue in this context, some level of contractual commitment is often not rejected by the customer in view of its need to comply in any event. Often the customer is willing to provide such an assurance as a negotiation trade carrying limited risk.

Supplier's Obligations With Respect to Changes in Applicable Laws

Laws change, and the contract should address the supplier's obligation to appropriately modify the services prior to applicable deadlines for new and changed laws. To the extent involving materially new services and additional resources, the required service modifications may appropriately involve additional charges and the contract should provide a mechanism for determining when this is the case.

Obligations to Identify and Interpret Applicable Laws

The contract should address the parties’ respective obligations with respect to notification and interpretation of applicable laws. Suppliers often possess (and tout— particularly during sales efforts) significant experience with particular industries and the performance of services for customers involved in those industries. Such experience may enable the supplier to accept some responsibility for identifying and interpreting laws applicable to the services within the context of the customer’s business. Such ability can be a significant value add to the service offering.

In any event, the customer will likely expect the supplier to commit to maintain at least a reasonable level of familiarity with the legal and regulatory environment applicable to the customer's business(es) and bring additional or changed requirements in the area to the customer's attention as they in fact become known to the supplier. A valuable source of such knowledge in this area is often other supplier service engagements (subject, of course, to applicable non-disclosure obligations).

Even where laws have been appropriately identified, however, questions may arise with respect to proper interpretations of such laws and the contract should address the parties’ obligations and authority to interpret applicable laws. First and foremost, the parties should commit to work together in good faith to interpret applicable laws and determine the impact of such laws on the services. While this should adequately handle most situations, the customer will almost certainly need to insist that it retain the ultimate right, in its sole discretion, to determine the impact of applicable laws on the provision (and use) of the services.

The supplier’s ability and willingness to assist the customer in identifying and interpreting applicable laws can bring unique benefit to its customers. Of course, such obligations must be appropriately tempered by limitations on the unauthorized practice of law, but opportunity clearly remains for the supplier to bring practical day-to-day value to the customer in this area that should be reflected in the contract.

Scope of the Supplier’s Responsibility for Fines, Penalties

The contract should address the possibility of fines, penalties, sanctions and other claims resulting from the supplier's failure to meet its compliance with law obligations. Often the customer will require some level of indemnity commitment from the supplier with respect to such a failure, with the indemnity excluded from general liability limitation, or subject to a specifically defined liability scope that adequately accounts for the risks and exposures. Additionally, the customer may seek an express acknowledgement in the contract that such claims constitute direct damages and are thereby not excluded by any indirect damages exclusion.

Addtional Compliance With Law Considerations

• In addition to the foregoing issues, the contract should address a number of related considerations, including:
  
• supplier support for the customer's general legal compliance efforts;
  
• specific compliance provisions addressing specifically applicable laws (for example, known privacy and data protection laws, export control laws, labor laws, tax laws and laws applicable to offshore outsourcings); and
  
• participation of supplier personnel in appropriate customer provided or facilitated compliance training programs.

Ultimately, and perhaps most critically, the contract must provide the customer with flexible rights and effective mechanisms to manage the supplier’s support in meeting the requirements of current and future laws, as and in the manner the customer deems appropriate and necessary.

Conclusion

Issues related to compliance with law are challenging and must be addressed in any outsourcing arrangement. Part of the challenge stems from the risks, and part of the challenge stems from the need to provide flexibility to address change over the life of the outsourcing. Through careful analysis and negotiation, customers and suppliers can resolve these issues in a balanced and responsible manner. Such resolution is critical to a successful outsourcing relationship.

Biography

Geof Master is a partner in the outsourcing practice of Mayer, Brown, Rowe & Maw LLP.  Geof has broad experience in outsourcing and procurement transactions, including the outsourcing and offshoring of information technology and services as well as of business processes.  His experience in the area of information technology procurement and outsourcing transactions includes transactions involving infrastructure, applications maintenance, development and support, network management, telecommunications services and help desk  functions, as well as implementation and integration of major enterprise applications and systems.  His experience in the outsourcing of business processes includes the outsourcing of human resources, finance and accounting, procurement, customer relationship management and other business functions.  He has represented clients in a wide range of industries, including the financial services, health care, insurance, consumer products, telecommunications, advertising and publishing, airline, manufacturing, chemical, energy, information technology and forestry products industries, as well as governmental entities.  Geof’s clients have ranged from start-up enterprises, to national and global firms.  Prior to joining Mayer Brown in 2001, Geof worked for over ten years for Electronic Data Systems Corporation in various senior legal capacities, including five years as International General Counsel with responsibility for all legal support requirements of EDS’ non-US business.  Geof was also previously a partner in McGinnis, Lochridge & Kilgore in Austin, Texas, an Adjunct Professor in business planning at The University of Texas School of Law and General Counsel and Secretary to The Capital Markets Company, an international consulting services firm focused on the financial services industry.  Geof received his law degree from The University of Texas School of Law (J.D. with honors, 1979) where he was a member of Texas Law Review and Order of the Coif.  He also received a master of laws degree from New York University (LL.M. (taxation), 1983), a master’s degree in public affairs from the Lyndon B. Johnson School of Public Affairs at The University of Texas (M.P.A., 1979), and his undergraduate degree in economics and government from The University of Texas (B.A. with high honors, Phi Beta Kappa, 1975).