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Favoritism for Local Service Providers and Captives: Incentive Packages for Export of Services
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.
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
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 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:
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).
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:
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.
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