Sourcing Update – Quarter 1

In the latest of our series of quarterly sourcing updates, we give an overview of recent developments in the outsourcing industry in general, as well as looking at changes in financial services regulation, public sector contracts and public procurements, and considering some recent case law that could impact on the drafting of outsourcing agreements.

1. Industry Developments

1.1 The New Year has greeted the outsourcing industry with a number of positive reports. TPI, the world’s largest sourcing data and advisory firm, has released data both for Q4 of 2009, and for 2009 as a whole. These show that the sector is making a moderate but continuous recovery from the economic downturn, with Q4 2009 being the strongest performance in six quarters and total contract values up by 47%.

1.2 The National Outsourcing Association and Ovum, the analyst firm, have both predicted that public sector outsourcing is on the rise, and will continue to develop on 2010. In particular, they say that cuts in the budget will combine with an increased demand from the public for improved services, and will make call centres a highly attractive prospect. It should be noted though that offshoring of these services would likely be met with strong resistance.

Service providers

1.3 The Provision of Services Regulations (SI2009/2999) (POS Regulations) came into force on 28 December 2009, implementing the Services Directive (2006/123/EC) in the UK. The Services Directive is intended to make it easier for businesses based in an EEA state to provide services in other EEA states by removing barriers to the cross-border provision of services within the EEA, and is also intended to increase the information available to customers about using services provided by businesses based elsewhere in the EEA. The POS Regulations will apply to any individual or organisation providing a relevant service in the UK for which they normally charge and therefore will generally apply to service providers in the outsourcing industry (a short list of excluded services includes financial services, employment contracts, transport services and healthcare services). They impose obligations on service providers to make information available to customers, and to deal with customer complaints promptly. They also prohibit discrimination against individual customers on the basis of place of residence, unless such different treatment can be objectively justified. For a more detailed look at the provisions of the POS Regulations, please see our recent Law-Now article: http://www.law-now.com/law-now/2009/serviceregsjan2010.htm.

2. Financial Services

2.1 The Government is pressing ahead with plans to require banks and large financial institutions to prepare Recovery and Resolution Plans, or “living wills”. These will be used to test whether the firm could be allowed to fail without any state funded rescue, or whether it needs to restructure or refinance to achieve this. There is also a major drive to improve client asset protection in the light of the Lehmans experience.

2.2 Firms will need to produce a Recovery Plan (RCP) – a contingency plan setting out how the institution would react in times of stress to avoid failure and continue as a going concern - and a Resolution Plan (RSP) – a plan setting out what would happen if the institution were to ‘fail’, for example if it became clear that the RCP was unlikely to save the firm.

2.3 Firms’ outsourced arrangements will obviously be an important area of consideration, particularly in any RSP. The current proposals include: the maintenance of ‘business information packs’ (BIPs), enhanced regulatory business plans with an additional focus on use by administrators not familiar with the firm’s business or jargon; and recommending firms ensure continuity of service (through ‘insolvency proof’ contract terms) from key staff and infrastructure and service providers for up to 90 days from the firm’s administration.

3. Legal Update

BSkyB v EDS – Liability for misrepresentation

3.1 This long-awaited judgment has finally been handed down and is being carefully considered by IT and business process suppliers.

3.2 First, while not new law, the decision emphasises that short form entire agreement clauses which simply state that the agreement constitutes the whole agreement and supersedes earlier representations is on its own insufficient to exclude liability for misrepresentation. The clause needs, as a minimum, to include a non-reliance provision.

3.3 Second, the court held that EDS had made a fraudulent misrepresentation, therefore by-passing the caps on liability. The ramifications are likely to be that service providers in future will: tend to be a little more realistic in the bid process, and insist on greater documentation for each promise made; have a team to audit the sales process more closely; and be more honest and up-front with customers with any difficulties a project may face. For a further discussion of the judgment, please see our recent Law-Now article: http://www.law-now.com/law-now/2010/bskybvedsjan2010.htm.

Whittle Movers Ltd v Hollywood Express Ltd – Services prior to contract signing

3.4 In many outsourcing contracts, particularly the more complex deals, the full contract for the relationship may take some time to finalise. In the mean time, the parties may enter into a letter of intent, and even begin initial work. In recent years, there has been a growing trend for the courts to be more and more reluctant to find a contract has been created in situations such as this. The result of this, if the deal breaks down, is that the contractor may be able to make a restitutionary claim, rather than one for contractual damages, for work and effort it has put in to that point.

3.5 In this latest case, Hollywood was hoping to outsource distribution services to Whittle, but the commercial negotiations had not been completed by the time of the proposed start date. Whittle started performing the services, and invoicing Hollywood at a price appropriate to a long-term contract. Six months later, with the formal contract still not finalised, Hollywood’s owners put Hollywood up for sale, and gave Whittle six months’ notice of its intention to terminate any contract between the parties. The Court of Appeal held that there was no implied contract in place, and the outsourced service provider was entitled to a restitutionary claim for services.