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Shaping your Agreement: Ten Steps to help you steer clear of traps and trouble

Any IT Outsourcing Agreement requires both the company requiring services (Customer) and the company offering services (Supplier) to look at a number of issues that typically arise in international agreements. Keeping in mind the following points will min

Oct 02, 2004
Any IT Outsourcing Agreement requires both the company requiring services (Customer) and the company offering services (Supplier) to consider a number of issues that typically arise in international agreements. Keeping in mind the following points will minimize the risk of unforeseen problems and / or litigation. Of course, your agreement should serve your particular project and therefore the following points cannot be conclusive. They are, however, the basics that will get you started on the road to a sound agreement.

1. Parties

Verify the power to represent of the person who will sign the agreement on behalf of the other party. If your partner is a Russian company, the power to represent is determined by Russian law independently from the place where the agreement is signed or the law applicable to the agreement. For example, a Russian limited liability company (in Russian: Obshestvo s ogranichennoj otvetstvennostju) is represented by its general director. Any other person requires a power-of-attorney in order to validly represent the company.

2. Be specific

Be specific in determining the substantive scope of your agreement.
  • Software Development Agreement (see "How good is your Software Development Agreement");

  • Service Level Agreement (see "How good is your Service Level Agreement").

3. Subcontracting

When you have found your Russian partner, you may have a particular interest in having the agreement carried out by that partner. Therefore, address the issue of subcontracting. If subcontracting is prohibited, it should be explicitly stated in the contract.

There is also the possibility of regulating the terms of subcontracting. If the agreement allows subcontracting, agree on the liability of the Supplier in the event of the subcontractor's default.

4. Confidentiality

IT Outsourcing Agreements are often confidential in character. Confidentiality can be addressed in a clause within the agreement or can be the core of a separate non-disclosure agreement.

Any confidentiality clause or non-disclosure agreement should contain a precise definition of the information to be treated confidentially. The definition should refer to the subject matter of the information, the form of the information (for example, information given to the other party in writing and clearly identified as confidential information) and the recipients of the information (for example, the specific employee of the other party i.e. the project manager). It should specify the conditions under which the disclosure of information is allowed or that exclude liability of the other party.

5. Non-competition

Address the issue as to whether and to what extent the Supplier may enter into agreements with the Customer's competitors. However, please note that non-competition clauses are not permitted in every country.

Russian competition law prohibits an agreement concluded between a Customer and a Supplier in which the Supplier holds a dominant position, and such an agreement may be held void by a Russian court if it leads or may lead to a restriction of competition in Russia.

6. Limitation of liability

Limitation of liability issues can be dealt with by agreeing upon a "cap" or maximum amount of liability arising from all breaches of the agreement and, in each single case, a "basket" or minimum amount of damages necessary to resolve a claim. Furthermore, you may want to agree on a limitation period for claims.

7. Taxes

Check the applicability of Russian VAT (currently, July 2001, 20%). Whether Russian VAT applies depends on the structure of the agreement and, among other things, the activities of the Customer in the Russian Federation. For example, Russian VAT does not apply to agreements whereby the Supplier grants a license for the use of software to the Customer if the Customer has no presence or activity in the Russian Federation. If the Customer acquires software through a sale and purchase agreement, a 0% VAT rate will apply if the software is exported in conformity with the customs regulations for the export of goods. In order to achieve a more advantageous and cost efficient structure for both parties, the tax implications of any agreement should be reviewed on a case by case basis and at an early stage.

8. Applicable law

In an international agreement, you should always determine in advance which law governs the agreement. You are free to choose the law that will determine the legal relationship between you and the other party and, therefore, you may choose the law with which you are most familiar. However, any IT Outsourcing Agreement implemented in Russia has to take into consideration Russian law. In particular, copyright law, legal provisions on the protection of software, legal provisions on export control, customs law, currency law and tax law will have an impact on the implementation of the agreement.

It is therefore important at an early stage to seek professional advice on the impact of Russian law on your agreement.

9. Competent court

Practice shows that the authority of a contract stems from its enforceability. Therefore, even if litigation is not what you have in mind, you have to make sure possible claims can be enforced in Russia. Not every court judgment is enforceable in Russia. If there is no bilateral treaty on the enforcement of judgments of state courts between your country (or the country of another intended place of jurisdiction) and Russia, two options remain: Russian commercial courts (in Russian: arbitrazhnye sudy) or commercial arbitration (in Russian: tretejskie sudy). Russia is a member of the New York Convention on the recognition and enforcement of foreign arbitral awards. If you submit your agreement to arbitration outside Russia and the place of arbitration is located in a member country of the New York Convention, the arbitral award can be enforced in Russia. However, practice shows that the enforcement of foreign arbitral awards in Russia can be difficult, time consuming and expensive. The choice of the competent court should be decided case by case depending on your interest and needs.

10. Language

The parties to an international agreement are usually more at ease with the terms of the agreement if it is drafted in their respective languages. Agree on the preemptive status of one language in bilingual contracts. As a rule, the prevailing language should be an official language of the competent court.

2001, Dr. Christian von Wistinghausen, LL.M. for BEITEN BURKHARDT. All rights reserved. Please note that the above information is intended for your information only. Where it refers to Russian law, it is based on Russian legal acts as of July 1, 2001. The above information may not be reproduced without the written consent of BEITEN BURKHARDT except for your personal, non-commercial use. It may not be regarded as legal advice provided by BEITEN BURKHARDT or the author.