Risk management in outsourcing requires attention to identifying risks by type and insureability and implementing the risk management plan in the contract and administrative policies and procedures.
Commercial relationships involve many risks. Outsourcing has several unique risk types, for which risk management tools are available.
In seeking to manage risk for a client, the outsourcing lawyer needs to consult with the client about the nature, potential seriousness and probability of both traditional commercial risks and special risks of outsourcing for the particular class of services. Armed with this understanding, the outsourcing lawyer can propose appropriate legal risk mitigation strategies in addition to practical business and technological strategies.
The typical risks include:
- delays in, inability to complete, transitional services;
- performance not meeting the service levels;
- performance interruption or cessation;
- violation of laws (both present and future) or rights of third parties by the service provider that impact either the service provider or the enterprise customer, or both;
- intellectual property infringement or abuse;
- failure of communications between the parties.
Legal risk management tools are available to shift the loss, mitigate the consequences and limit liability. The outsourcing lawyer needs to be familiar with all these tools and provide advice and negotiating assistance that reflect the client’s appetite for risk, the contracting party’s need for assurances and protections, and the evolving legal framework.
Legal Risk Allocation
“Legal risk” refers to the risk that a business process might be subject to some new legal regulation, restriction, tax or other impediment that the parties had not anticipated at the time of the contract negotiations. Such risks need to be identified generically and allocated in accordance with classic risk allocation provisions that deal with force majeure, change in law and changes in the technology or manner of performance of the service that results in a change in regulatory or tax environment.
Sovereign Immunity
Sovereign immunity is a legal doctrine of ancient origin. Under this doctrine, a sovereign cannot be sued for its own acts or omissions, including non-payment of an outsourcing service fee.
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Waivers of Sovereign Immunity
Sovereign immunity is not absolute. It can be waived.
Statute Sovereign immunity can be waived by statute. The Federal Tort Claims Act, for example, permits certain non-contractual claims against the U.S. federal government, subject to certain administrative procedures.
Arbitration Sovereign immunity can also be waived by implication. A government’s submission to arbitrate disputes by arbitration in a foreign country constitutes a waiver that is generally recognized and enforced in foreign countries.
Non-Governmental Function Under classic public international law, sovereign immunity is honored only if the government is acting in a governmental capacity when it does the act or omission that harms the claimant. This principle was adopted in the U.S. Foreign Sovereign Immunities Act, which continues to generate litigation.
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Dealing with Government Buyers
- Providers of goods or service to governments should consult with a lawyer on the rights and remedies that may be enforceable against a governmental purchaser.