"What additional legal liabilities do companies that outsource offshore face? Do you need to hire a local law firm?"

John Brockland Partner Cooley Godward, LLP

Even if an outsourcing contract states that it is governed by U.S. law, local laws in the offshore country, tax laws, and laws that apply to transfer of data and technology can impact the costs and results of the deal. For example: Local laws may impose formal requirements for transfer to the customer of developed intellectual property.

The contract should include confidentiality and other protections for the customer’s own IP, as well as practical and auditable security requirements to bolster the effectiveness of these terms in jurisdictions where enforcement may be difficult.

Where the outsourcer will be processing protected data (e.g., financial- or health-related information or personal information of European citizens), additional regulatory requirements may apply.

Customers and suppliers must comply with export and import requirements for technology being transferred between them. Governmental registrations may be required.

Contract enforcement in the courts of the offshore country may not be practical, and U.S. court judgments may not be enforceable there. Arbitration is often the best option if the local jurisdiction has adopted the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

In addition, companies should consider ways to strengthen the contract terms to take account of distance, time-zone, and cultural differences. For example, offshore outsourcing requires a higher level of resources devoted to contract governance, and service descriptions and service levels should be detailed.

Whether or not to engage local counsel in the offshore jurisdiction usually depends on what is at stake in the deal and the complexity of the issues in a particular agreement. Customers should work with U.S. counsel, who is experienced in offshore outsourcing, who can help them spot issues for which local counsel should be involved, and who can provide intelligent selection and direction to local counsel with appropriate expertise.

Kevin C. Taylor Partner Taylor & Mrsich, LLP

Outsourcing offshore could generate greater liability than onshore outsourcing. Still “offshoring” may be attractive for financial or other business reasons.

Before deciding to outsource offshore, the company should ask itself the following questions:

Is there any provision of the local country law that limits the enforcement of the rights negotiated in the outsourcing contract? Are data and intellectual property subject to protection consistent with US law? Are cross-border flows of data, personnel, goods, or services permitted as the parties contemplate?

Will establishing this relationship make the company subject to foreign laws and courts? Are there any conditions that apply in the subject country (e.g. local control and ownership) that would impact the transaction?

As an example, U.S. law (Graham-Leach Bliley or “GLB”) provides that financial institutions must ensure that their suppliers protect customer data with the same standard of care as the U.S. financial institution. The law applies whether the outsourcer is onshore or offshore, but offshore offers more uncertainty.

Take for instance a recent case involving China. Under Chinese law, the Chinese government has the right to require companies to disclose certain information.

Yahoo was required to give the name of one of its subscribers when requested by the government of China. The subscriber was then jailed as a dissident. If this information had been protected customer information under GLB, Yahoo would have been subject to liability no matter which country’s laws it chose to follow.

Companies that outsource offshore should understand at a minimum, how their data will be protected, how and where it will be stored, and how many copies of the data exist and where they are. The country they outsource to should have a stable political system with a compatible body of law. Also, the outsourcing agreement itself should have US choice of law and venue provisions.

Should local counsel be used? During the negotiation process, the company should use an attorney with appropriate business and legal experience, preferably one with a strong understanding of technology. A law firm familiar with U.S. law would undoubtedly best represent the company.

In the event the contract needs to be enforced, local counsel will most likely be needed. It is not necessary to use the same law firm. In fact, it may even be advantageous to use a local rather than a multinational firm for this type of work.

William B. Bierce Principal Bierce & Kenerson, P.C.

Offshore outsourcing and foreign captives face a thicket of legal hurdles. Many of these hurdles are unique to offshoring. These include foreign political risk, conflicts of local and foreign laws, extraterritorial application of local laws, compliance with foreign laws and treaties, customs duties, local and international tax rules (and exemptions), foreign exchange volatility, foreign labor practices, foreign intellectual property laws and unique foreign financial, operational, infrastructure, telecom, transportation and cultural risks.

For offshoring, enterprise customers need to select appropriate dispute resolution procedures and enforcement strategies that transcend the habitual relationship governance models, including choice of law, forum, venue, jurisdiction, and alternative dispute resolution methods. Each of these issues involves substantial complexity and may change over the contract termOffshoring creates a new layer of interplay of domestic and foreign public policy. Both domestic and foreign service providers may need to comply with Sarbanes-Oxley, privacy rights, data protection, notice of security breach, taxation and consumer protection.

These risks and differences are mostly manageable by legal and technological solutions. Consulting an international business lawyer (perhaps one with foreign legal training) with experience in multiple offshore outsourcing deals can help identify, manage and mitigate risks and accelerate the benefits of a global sourcing solution.

As a best practice, your primary lawyer should collaborate with local lawyers to delineate the interplay of laws and business practices across jurisdictions. The primary lawyer should have experience in both onshoring and managing foreign lawyers to produce results for legal compliance and risk management in all affected jurisdictions.