Should You Sue Your Offshore Outsourcing Provider?
Six questions to ask before taking your offshore outsourcer to court.
CIO — Dispute resolution is always an important consideration when outsourcing IT. If that fails, however, you can always sue if your provider has breached the contract.
"Yes, you can litigate," says Edward Hansen, partner with law firm Baker & McKenzie. "But you probably shouldn't."
Outsourcing lawsuits are notoriously difficult to prosecute, can create such a distraction that it puts the organization at operational risk, and rarely benefits either party in the long term. Offshore outsourcing litigation is even more complicated.
"Sometimes, however, litigation is necessary to resolve outsourcing disputes when all other reasonable or contractually obligated means of solving the problems in the business relationship have been exhausted," says Shawn C. Helms, attorney in the technology transactions and outsourcing practice at Jones Day.
How do you know if it's time to take your offshore outsourcing provider to court? Ask these six questions first.
1. What is the nature of the dispute? "There is a huge difference between discussing litigation in the context of a vendor who is underperforming versus one who has been negligent or violated a trust," says Hansen. "For example, breaching the privacy provisions of an agreement is very different from failing to deliver on transformational savings."
A well-drafted contract will contain remedies for a privacy violation. Underperformance can be murkier. There may be something about the underlying economics of the deal that encourage bad performance, says Hansen, or you may have chosen the wrong partner. In either case, litigation is unlikely to solve your problems.
2. Do you have informal dispute resolution processes at your disposal? "A good contract will provide many alternatives to a suit," says Brad Peterson, partner in the business and technology sourcing practice of Mayer Brown. Look for dispute resolution provisions within your deal's project management or governance mechanisms.
In addition, most contracts will layout "mandatory, mandatory, detailed, multilayered and gradually escalating dispute resolution processes," says Shawn C. Helms, an associate with law firm Jones Day, starting with informal dispute resolution procedures all the way up through litigation. "Most outsourcing disputes are resolved confidentially through out-of-court settlements so that service providers can protect their business interests and customers can maintain an ongoing relationship with the service provider."
3. Can you withhold payment? Customers may seek to use financial leverage to right a wrong. Some contracts will contain a provision call "Right of Set-Off" or "Right to Withhold Disputed Payments." These allow the customer to deduct from payments otherwise owed to the service provider amounts of money representing damages that the customer claims the service provider caused as a result of failing to perform its obligations under the contract.
"If the service provider disputes the amount of the deduction, it may be required by a forum selection clause in the contract to file a lawsuit in the U.S. to have a court resolve the dispute, or it may be required by an arbitration provision to arbitrate the dispute in the U.S.," explains Robert Kriss, a partner and litigator at Mayer Brown. "In the meantime, the customer holds onto the disputed amount or deposits it in an escrow account, depending upon the terms of the contract."
