in this part 2 of the key issues in an outsourcing agreement, we discuss the intellectual property and limitation of liability issues. For an overview of the other issues in an outsourcing contract please take a look at our previous articles.

The outsourcing agreement will need to deal with the different types of intellectual property rights (such as copyright, patents and database rights) that may protect the software, equipment, data and other documentation and processes related to the services and/or developed during the life of the outsourcing arrangements. Consideration will be given at what happens at the beginning, during and upon termination of the outsourcing agreement.  At the beginning, where the customer owns or has the right to use certain intellectual property rights used to provide the services, the customer may decide to sell them or to license them to the supplier. 

During the life of the contract, consideration must be given as to how any new intellectual property rights are to be dealt with and who will own them. Much of this will depend on negotiation, the price paid for the services and the extent to which the services provide a bespoke solution for the customer. If the supplier assigns the intellectual property rights to the customer, the customer will need to grant the supplier a licence to use such rights in the performance of the services. However, the supplier will normally retain the ownership of any intellectual property in its proprietary products which have been developed independently of the project and which the supplier may utilise for the purposes of the project.

The same position is likely to arise in relation to any third party software. In such circumstances, the relevant intellectual property right will usually be licensed to the customer. However, from the customer's perspective any rights and licences received should allow the customer and/or any replacement supplier and subcontractor to use such rights to provide the services post-termination at no extra cost. In addition, the customer is likely to seek specific warranties in place of the general warranties that are implied by law.

The customer should require the supplier to warrant (i) that the services provided do not infringe the intellectual property rights of third parties; (ii) that the services will be provided with reasonable skill and care, but customers should consider whether further warranties are appropriate.  In addition, the supplier should consider what warranties it wishes to obtain from the customer. In particular, warranties should be sought by the supplier in relation to the assets, employees and third party contracts being transferred. 

The warranties may be backed up by specific indemnities the extent of which will depend on the circumstances of each case. The supplier might agree, for example, to compensate, rather than indemnify, the customer in respect of intellectual property infringements. The supplier may also try to limit the obligation to breaches of UK rights, since the supplier will not want to be liable should it turn out that any of the services provided infringe rights which exist in an overseas jurisdiction. However, where the services are provided in more than one country, the customer may want the protection to extend at least to those countries. 

Other liability and limitation of liability

In relation to the recovery of losses under the contract, both parties will need to consider the types of losses that may be recovered and which liabilities may be subject to a cap and what this cap might be. Where services are critical to the operation of the business of the customer, the losses which the customer may suffer if the supplier fails to provide the service may be significant. It is important, however, not to impose contractual liabilities that are disproportionate to the value of the contract.

As a result, consideration is often given to setting limits on the supplier’s liability that relate to payments due under the outsourcing agreement (possibly on a multiple basis) or the insurable level of loss on a project-specific basis.  It is also important to identify any areas where the supplier's liability should not be subject to a cap. For example, the supplier’s indemnity in relation to intellectual property rights or TUPE issues is often unlimited because it represents the customer's protection for unquantifiable third party liabilities which the supplier is able to prevent or control.  Customers may also want to limit their liability in damages to the supplier.

The supplier should take care that the drafting of the limitation clause does not restrict the supplier's right to recover for non-payment of charges that are properly due.  All limitation of liability clauses need to be carefully drafted so as to ensure they do not fall foul of the relevant legislation, in particular the Unfair Contracts Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999, especially if the supplier is trying to insist on its standard limitations of liability. Finally careful consideration must be given to the interdependence between liability and service levels in the contract. For example if the service level agreement refers to sole and exclusive remedies does this conflict with the liability clause? More on key issues in an outsourcing agreement in our next article.  

All articles are for general purposes and guidance only and do not constitute legal or professional advice. Copyright 2011 Anassutzi & Co Limited. All rights reserved. Information may be shared or reproduced only if accompanied by the author’s name and bio.