Businesses around the world are negotiating contracts with India’s software and BPO companies to outsource software and support related work. Though the issues in these types of contracts are largely generic, there is some value to be gained in learning from the experience of those who have negotiated these types of arrangements with Indian companies.

The customer is typically in a stronger negotiating position in this kind of business, and is able to use his or her draft agreement rather than that of the vendor. If the agreement is provided to potential vendors as part of the bid documents, it tends to reduce the negotiating power of the vendors in making too many changes, because the comments on the agreement go as part of the bid documents and could potentially have a bearing on the vendor’s selection.

Negotiating with Indian service providers can be a varied experience. Often, Indian software companies—especially the mid size and smaller companies—do not rely much on legal expertise. In some situations, that can mean that important clauses can be easily negotiated. In other cases, it can actually be more of a hindrance. If the vendor is not sufficiently confidence of tackling complicated legal issues, he is likely to ask for provisions that do not necessarily provide him with significant benefits, or will attach greater importance to certain issues than is really necessary.

A key aspect that tends to go the customer’s way is governing laws and dispute resolution. The customer would typically want the contract to be governed by the laws of his or her home country and have disputes resolved there as well. It is not often that a vendor would find the customer agreeing to have the contract governed by Indian laws and with disputes resolved in India.

However, certain things need to be kept in mind on this issue. No matter what law governs the contract or how favorable the orders are by a court or arbitral tribunal, the order would need to be enforced against the vendor in his home country. This depends on the number of countries having reciprocal relations with India in relation to direct enforcement of foreign arbitration awards and foreign court orders. Therefore, depending on the country, it may be more advantageous to have disputes resolved in the customer’s country through arbitration rather than through a court.

Further, it is important that the customer reserve the right to obtain injunctive or equitable relief before an Indian court—if there is a perceived violation of intellectual property, the best way to protect it is to obtain an order for inspection by a court commissioner or an injunction order from the court of the country where the defendant is based. Obtaining such an order in the plaintiff’s country may be meaningless when time is of essence and quick enforcement is required.

Intellectual property issues are normally quite standard, though it is important that the customer obtain legal advice on Indian law, since under conflict of law rules—regardless of the governing law of the contract—with regard to ownership of intellectual property, there is a reasonable possibility that Indian laws may still govern. In this regard, India has some unique requirements relating to assignment of intellectual property that should be considered. To effect, this means is that a typical U.S. work-for-hire clause may not always work in assignments of intellectual property under Indian law.

Limitation of liability is a hotly contested issue in most commercial contracts. While the parties would go through the same negotiation process on this issue, it is also important to remember that India does not have a strong damages culture. This means that it is unlikely that the customer would obtain the kind of damages that are typically awarded in the U.S. Further, enforcing an award for damages may involve obtaining permission under India’s exchange control laws for the Indian company to pay the damages out of India in foreign currency and this permission may not be easy to obtain.

Tax issues are more crucial to this industry in India, since these companies tend to be tax exempt, with regard to both corporate and service taxes. The issue has a direct bearing on the business models of these companies and therefore, agreeing on tax inclusive rates can be difficult. This is because the Indian government is aggressively spreading the service tax net to cover a variety of services and there is justifiable apprehension that it will soon cover exported software and BPO services.

A tax exclusive clause may not be fair to the customer. The customer has his own budgets and sudden increases in costs due to new taxes cannot easily be absorbed. Further, with India moving towards a value added tax regime, there is a possibility that the tax charged on the invoice amount would be reduced by credits of the vendor, which may not be passed on to the customer if the tax is simply slapped on to the invoice.
Given the above, one has to carefully work out a process whereby the legitimate interests of the vendor are protected but the customer is not automatically subjected to the entire tax burden. One way to do this is to have shorter periods for applicability of agreed rates or to recognize that the rates are agreed on the basis that there is no applicable tax and can be renegotiated if taxes are imposed.

Most customers like to see a cooling off period for employees after they come off a particular project. This could take the form of a non-compete—the employee cannot work for a competitor or for a similar project for a particular period. Vendors are quite wary of these types of provisions—it means that it may not be possible for valuable resources to be deployed on projects where their expertise can be best exploited.

The Indian law isn’t completely clear on the enforceability of these types of provisions. While the law, as a general rule, does not permit contractual provisions that are in restraint of trade, there is some case law to suggest that if these provisions are essential to the overall purpose of the contract—which is meant for the promotion of both party’s business interests—these types of provisions can be upheld. The key point here is for the customer to realize that these provisions may not be easily enforceable in India and enforceability would depend on the facts and circumstances.

Non-solicitation clauses would also be a bone of contention. India does not have substantial case law dealing with the enforcement of these provisions nor is there much standard practice developed, particularly with regard to situations where the vendor’s employees approach the customer or respond to recruitment advertisements, etc. From the vendor’s perspective, the issue is important given the fact that its employees may spend many months on site with the customer and there may be a familiarity that can lead to the customer hiring the employee.

While contracts of this type with Indian contractors are not unduly different from those with vendors in other countries, there may be a need to apply some local expertise, partly because of country specific laws (such as tax and intellectual property) and also because Indian service providers have developed their global service delivery model to such an extent that they may look at specific issues in a more in-depth way than is otherwise the case.

Stephen Mathias co-chairs the Technology Law Practice of Kochhar & Co, a law firm in India. He is a renowned information technology lawyer in India and cited by Global Counsel as the Leading Lawyer in India for Information Technology and E-Commerce legal work. He can be reached at stephen.mathias@bgl.kochhar.com