This event offered both a private practice and inhouse perspective on the key issues commonly encountered in global services contracts as well as a discussion on the employee transfer rules for companies seeking to move their operations out of the UK in the wake of Brexit.
Sarah Atkinson (Associate, Global Sourcing and Technology Transactions, Pillsbury) outlined the three main ways in which a global services contract can be structured, including (i) the single contract model, (ii) the individual local service contracts model and (iii) the hybrid model (master services agreement (MSA) with local services agreements (LSA)). She discussed the characteristics, advantages and disadvantages of each contract structure and explained which structure is most suitable in various scenarios.
The single contract model
As the name suggests, this contract is a single agreement between global entities with no local services agreements. The structure provides a high degree of consistency of terms and is most appropriate where the key terms of the contract, the services and the service levels are uniform and the services are centrally managed. It is therefore best if the local delivery aspect of the contract is minimal or merely incidental to the contract as this structure offers little flexibility for local variation. Moreover, it often creates privity of contract issues as the local customer entities are unable to directly enforce obligations against the supplier and therefore the customer will wish to agree supplier indemnities which also cover losses of the customer’s local entities and/or third party rights in favour of local customer entities.
The individual local services contracts model
This contract structure is comprised of a collection of agreements between local entities which may be negotiated on the basis of a pre-agreed standard form or agreed heads of terms. This structure is most appropriate where local services are unrelated or have little in common. The structure of this model gives rise to a risk of fragmentation of the global deal and it is important that there is centralised control over the concessions made during the multi-party negotiations and to ensure that the underlying commercial principles of the global deal are applied. The individual contracts should be negotiated upfront and at the same time to take advantage of bulk purchasing power rather than in a piecemeal or staggered fashion. However, in reality, this may not be practical. Furthermore, as each local agreement needs to be agreed with local entities, it can be time-consuming and costly to negotiate and administer them. To try to mitigate this inefficiency, some parties appoint a contracts manager.
Hybrid: MSA/LSA
In this contract configuration, a Master Services Agreement (MSA) sits above the Local Services Agreements (LSAs) and sets out the commercial and legal terms of the contract between the two parent companies. The LSAs incorporate the terms of the MSA and set out country-specific modifications. This contract structure is the most commonly used structure as it strikes a balance between local flexibility and centralised control. Furthermore, the customer can also take advantage of bulk-purchasing power through the terms of the MSA and local entities have direct enforcement rights as parties to the LSAs. There are two variants of this contract model:
· a thick MSA and thin LSA – where the majority of the fundamental commercial terms are set out in the MSA and the LSA contains only local variations; and
· a thin MSA and thick LSA – in which the fundamental terms vary country by country and are contained in the LSA, with the MSA providing little more than a general framework.
This latter variant runs the risk of fragmenting the global deal.
James Taylor (Legal Counsel, Fujitsu Services Limited) provided an industry supplier perspective and discussed the importance of putting in place workable and effective governance procedures and being mindful of the customer and supplier group structures, outsourcing maturity, delivery points, and transition and transformation processes when constructing the contract.
Where there is a group structure in which a parent entity wholly owns its subsidiaries then the parent can ensure the cooperation of subsidiaries, but where there is a federated group structure it may be hard to get the same level of smooth cooperation between the various entities, so it is important to tailor the structure of the contract and the cooperation provisions to the specific scenario.
From a drafting perspective it is a good idea to provide multiple transition periods in each territory. If the transition is to be carried out in stages, the contract should provide for a centralised system for managing this process effectively. Where there are many territories to transition it may be worth carrying out a due diligence exercise to decide in which order the countries should be dealt with.
Mike Pierides (Partner, Global Sourcing and Technology Transactions, Pillsbury) discussed the key issues to consider when drafting a global services agreement, including the service description and service levels, charges, liability, tax considerations and governing law and jurisdiction provisions.
Services may comprise of: global services, common services, and local services, and be described in a schedule to the MSA. Service levels are often set out at the MSA level in order to provide single performance accountability across the supplier’s enterprise and customers often prefer an aggregated ‘amount at risk’ that reflects all global charges. It is worth considering, however, whether to fragment the service levels (at a local level) since the law of averages tends to punish the customer if, for example, the service is provided in accordance with the service levels in all but one country, but that country performs extremely poorly. Moreover, if the customer global entity is in an industry in which local regulators require certain performance metrics then the LSA may need to override or supplement the MSA specified service levels.
Guarantees are an often overlooked issue. In a global services agreement, the overarching parent company may agree to a guarantee which will cover the whole agreement. However, if any of the underlying local agreements are amended this could make the guarantee unenforceable. To mitigate the risk of this it is important that whenever a new country or service is added to the agreement, the guarantee is refreshed to reflect this new obligation. The parties may also include an indemnity in case the guarantee falls away for any other reason.
Global liability caps are often used in these agreements. This may not be appropriate if the scope of the deal (in terms of which countries and services it will encompass) is not yet clear. Moreover, in a federated group structure a global cap could be unpopular, as an event in one country could deplete the liability pot for the rest of the territories. To deal with this, the parties may wish to include a liability cap replenishment clause. Parties may also consider cross-liability and cross-termination rights which allow the customer to terminate the whole agreement if a local agreement is poorly performed.
Tax considerations should be addressed upfront in order to ensure that the agreement is as tax efficient as possible and does not saddle the parties with unnecessary tax liabilities.
Finally, in the context of governing law and jurisdiction, it is important to seek local legal advice when drafting local agreements to ensure that any areas of mandatory law are covered.
Caron Gosling (Counsel, Employment, Pillsbury) discussed whether companies which decide to relocate their services in the wake of Brexit would be subject to the automatic employee transfer regimes under the Acquired Rights Directive 2001/23/EC (ARD) and TUPE.
Where companies transfer services from the UK to Europe the Acquired Rights Directive 2001/23/EC applies. This means that the employees are automatically transferred with the services, the terms and conditions of employment they had previously continue and they have enhanced employee protections. It remains unclear whether ARD and TUPE will continue to apply in the UK following Brexit and so it is advisable to make contractual provisions for the transfer of employees and the apportionment of employment liabilities to cover the possibility of a future with no TUPE. Where services are being transferred outside the EU, local advice should be obtained.
Conclusion
This event highlighted the importance of:
1. selecting the right contract structure, which is tailored to the customer, supplier and the scope of the specific deal;
2. drafting the contract meticulously to ensure the services are clearly defined leaving no service gaps, service level regimes are effective, contracts are structured in a tax efficient manner and that local law advice is obtained where appropriate; and
3. getting appropriate employment law advice if intending on transferring services abroad to ensure compliance with ARD, TUPE and any non-EU employment legislation.
Dan Coen is an Associate, Global Sourcing and Technology Transactions, Pillsbury.
