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Laws Apply When Using Overseas Companies

January 2007 (reprinted from the Ventura County Star)
By Diane L. Becker

It has become common practice for United States businesses to outsource services to providers in foreign countries that can offer services at a lower cost.

This practice can be cost-effective; however, businesses often fail to realize the importance of having a contract when dealing with foreign companies. There are several essential provisions that U.S. businesses should include when drafting an outsourcing contract.

When a U.S.-based lawyer drafts a contract, it does not necessarily follow that the law will be enforceable in a foreign country. If there is a breach of contract or a dispute with an overseas business, the dispute may be resolved in the foreign country, so it is important to have a lawyer there who can review the contract before it is finalized.

American businesses are subjected to many privacy and security requirements as a matter of statute or case law, such as the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and the Financial Modernization Act of 1999. Each of these laws requires that records relating to customers, employees and patients be maintained confidentially and with computer security.

As a business associate of a U.S. company, an outsourcing company will be required to comply with U.S. privacy and security laws, and the U.S. company will be liable for the acts of its overseas associate. It is, therefore, important to include language in the contract stating that the foreign company agrees to abide by the privacy and security laws governing U.S. businesses.

Continuity of service and nonperformance are other issues to take into account when outsourcing services. Having a termination notice period will allow the U.S. firm to find a substitute if a foreign business associate is offered a more lucrative contract and cancels the agreement.

Choices of law and location for dispute resolution are other areas that are often ignored.

If there is a dispute with a foreign company, it is important to have the outsourcing contract specify that the dispute will be litigated in the United States, and will apply to the U.S., rather than foreign law.

Specification of quality standards and services to be provided by a foreign associate are integral components of a successful outsourcing contract. Acceptable standards of quality and performance may be different overseas from those in the U.S., so specific standards should be clear.

The minimum number of personnel to be provided for the project, the hours of service, and the educational and experience qualifications of the personnel also should be included.

Outsourcing has proved to be cost-effective for U.S. companies as long as quality services are rendered, and this can best be assured by having a carefully drafted outsourcing agreement.

Diane L. Becker is a partner with Nordman Cormany Hair & Compton LLP. She practices business and intellectual property law.

Copyright 2007, Ventura County Star. All Rights Reserved.