A code of ethics for outsourcing would address the conflicts of interest, unfair or hyper-aggressive practices of certain negotiating strategies, and any deviation from an open and frank discussion between the parties of the problems that they might need to resolve jointly throughout the lifecycle of the outsourcing relationship.
At Outsourcing Law Global LLC, we have devoted some thought and time to developing a code of ethics for outsourcing practitioners, regardless of their professional code of ethics. There might, however, be some ethical principles that might apply more to one profession than to another. If you would like to offer suggestions or have any questions about an emerging code of ethics in outsourcing, please contact us.
Outsourcing contracts are designed to enable customers to receive services from independent contractors. Independent contractors are governed by a variety of laws and legal principles, including taxation, employment, tort and contract.
But one of the murkier areas is the law of conflicts of interest, fiduciary duty and ethics. We believe that both customers and service providers should seek professional advice on such issues during the design, negotiation, delivery and termination of any outsourcing services contract.
Independent Contractor.
In hiring a contractor to deliver services, an enterprise normally agrees that the contractor is “independent.” This independence is intended to avoid several unintended situations, notably having the contractor:
participate (as a partner) in the profits of the enterprise;
bind (as agent) the customer to third parties (such as subcontractors and suppliers) with whom the contractor enters into contracts, since an agent could thereby create unintended liability for payment and other consequences; and
pay (as employer) the salaries, taxes and social charges applicable to the contractor’s employees.
Enterprise customers need to understand the parameters of such independence, not only from the viewpoints of partnership, agency and tax theory, but also in relation to conflicts of interest, fiduciary duty and business ethics.
Conflicts of Interest.
A conflict of interest arises when a person owes loyalty to two persons (including oneself) who have conflicting legal or economic interests. Parties entering into services agreements should define the limits of any duties so that unwanted conflicts can be avoided.
Fiduciary Duty.
A fiduciary duty is one of “utmost loyalty”. A fiduciary must put its own personal interests behind, or secondary, to the interests and welfare of its beneficiary. The concept of fiduciary duty arose out of the concept of a trust under English common law. (Under civil law in continental Europe and other countries, a similar concept exists to a more limited extent under a fideicommissum). The nature and scope of any fiduciary duties should be carefully defined.
Business Ethics.
Ethics relate to morality of what well-behaved people do. Sometimes ethical rules are binding, as on regulated professionals such as lawyers and accountants. Ethical rules are generally not incorporated into contracts.
Disclosure of Confidential Business Information.
A well-drafted outsourcing contract will identify the procedures for proprietary confidential business information.
Case Study:
California Energy Trading Rules.
In early June 2002, Perot Systems Inc., provider of information technology solution services to the California Power Exchange and the California Independent [Electricity Transmission] System Operator, was accused by a California lawmaker of misusing knowledge about the weaknesses of the California energy pricing rules. The lawmaker, State Senator Joseph Dunn cited a 44-page Power-Point presentation that he said Perot Systems showed to energy traders. He said the presentation resulted in substantial economic loss to California consumers. Perot Systems denied that it had disclosed any confidential information. The dispute involved some vague contractual provisions and political debate.