Legislation in Outsourcing
Construction Services as Protected Class of Service Provider:
Statutory Limitations on Contract Terms and Conditions of Service
When can a services company stop performance due to non-payment? In July 2002, New York’s legislature recently enacted a statute protecting construction companies as a special class: construction companies.
Special Default Provisions in Case of Customer’s Non-Payment.
On July 18, 2002, Governor George Pataki signed into law the New York Construction Contracts Act, effective January 14, 2003. Ch. 127, Laws of 2002, codified as Gen. Bus. Law, Article 35, establishes “default standards for the payment of bills on construction contracts and in those situations where payments are not made within time periods established in such contracts, authorize[s] remedies including reasonable interest payments and circumstances for stop work provisions.” This law applies to construction contracts for projects costing $250,000 or more that are entered into after January 14, 2003. It does not apply to
- projects that are part of pre-existing contracts or projects for which a permit has been issued and work begun prior to that date.
- projects awarded by a governmental entity or public corporation
- projects involving certain types of residential property.
Public Policy Prohibitions on Party Autonomy.
This particular law contains some key provisions of “public policy” affecting the rights of keen interest to building owners, construction services companies, lenders, materials suppliers and subcontractors. As a result, the contracting parties lack any autonomy to enter into any agreement that provides for terms or conditions deemed incompatible with this policy. As a result, the law prevents parties from agreeing to any contract provision that would defeat, limit or deny:
- the statutory liability of a contractor to pay interest on amounts due to a subcontractor; or
- the contractor’s statutory right to suspend performance under a construction contact; or
- the application of the laws of the state of New York to the contract (other than a contract with a supplier of materials); or
- the resolution of any dispute arising out of the construction contract within the State of New York.
Statutory Default Provisions.
The new law establishes default provisions for construction contracts. These provisions may be altered by specific terms of the contract.
Thus, unless the parties agree otherwise:
- Invoices must be approved within 12 days.
- Invoices must be paid within 30 days after approval or 7 days after a lender advances funds for payment.
- Interest on unpaid amounts, and any retained unpaid charges that are not released within 30 days after final approval of the work, must be paid by an owner to a contractor, or by a contractor to a subcontractor, at the rate of 1% per month or fraction of a month, or at a higher rate if set forth in the contract.
Significance for Other Outsourcing Industries.
This legislation highlights some of the classic deal terms that are negotiated in any services agreement involving complex services, substantial costs (over $250,000), customary reliance upon a construction lender to pay for progress payments, and long time period (for completion of construction).
Laws of the Provider’s Country: Legal Considerations
The laws of the country where services are rendered govern local issues. The “local interest” laws generally do not impose significant burdens on outsourcing, and may indeed provide benefits for export-oriented services.
Local laws pertain typically to:
- employment (conditions of employment, civil rights at all phases of the employment life cycle, safety, enforceability of employer rights in intellectual property rights and employee covenants on non-competition and non-solicitation);
- the exportation of certain data;
- the security applicable to data processing for various types of data;
- taxation; and
- the requirements for establishing and operating a business involving IT-enabled services.
Exercise of Sovereignty
The provider’s country typically does have, or seek to exercise, any right to regulate the operations of its nationals outside of its territory. Thus, if a call center in India or the Philippines is provides remote services to individuals in England that would require a banking license in England, the governments of India or the Philippines might not care because British authorities may regulate the operations to protect British nationals. India would not normally seek to apply its own banking laws where the economic impact occurs offshore. However, India could enact a law (such as the U.S. Foreign Corrupt Practices Act) that makes it a crime to bribe a foreign governmental official “corruptly” for commercial benefit. And India could make it crime to use means of Indian telecommunications to conduct a fraud anywhere.
Extraterritoriality occurs where a local government in one country seeks to regulate activities occurring outside its jurisdiction. Where local citizens or local residents engage in local conduct that has an impact abroad, local regulation is not an extraterritorial application of its laws.
Many local laws may promote foreign investment in service companies, the licensing of foreign technology for implementation and management by local enterprises and the export of services. Incentives take many forms, include tax exemptions, rebates, allowances, reduced fees and special zones with special regulatory and tax regimes.
Consequently, service providers need to be concerned about local laws so as to enjoy the benefits of the offshore outsourcing. Enterprise customers share such concerns to ensure continuity of the services under the local laws of the provider’s country.
Compliance with applicable laws should be reflected in the sourcing agreement.