India - JSA La€¦ · by the provisions of the Indian Contract Act 1881. ... The contract’s scope, clearly defined. Service and perform-ance standards should be stated. Audit rights:

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© This article was first published in the PLCCross-border Outsourcing Handbook 2011/12 and is reproduced with the permission of the publisher, Practical Law Company.

India

Sajai Singh J. Sagar Associates

www.practicallaw.com/2-501-5793

RegulAtion And ReQuiRements

1. to what extent does national law specifically regulate out-sourcing transactions?

India is a globally recognised outsourcing jurisdiction with laws that support the practice, being both:

� One of the 23 founding contracting parties to the General Agreement on Tariffs and Trade (GATT) in 1947.

� A member of the World Trade Organization (WTO) since 1995.

While there is no one “outsourcing law”, the industry itself is not unregulated. Several laws apply to the industry and outsourcing activity, as they do to any company doing business in India.

National laws that have an impact on the outsourcing industry include:

� Company law. Indian company law is based on the English Companies Act 1948. Requirements include mandatory board and shareholder meetings, shareholder approval in respect of certain matters, restrictions on loans and invest-ments, and so on.

� tax law. Any income earned by a company from its busi-ness operations is taxable under the Indian Income Tax Act 1961. A foreign company must pay income tax if its opera-tion creates a taxable presence in India.

� information technology Act 2000. This legislation deals with online transactions, data protection and cyber crimes.

� intellectual property rights (iPR) law. India has a strong Agreement on Trade-Related Aspects of Intellectual Property Rights 1994 (TRIPS) compliant IPR protection regime, which must be considered when outsourcing in India.

� exchange control and foreign direct investment (Fdi) policy. Where foreign investment is involved in setting up outsourc-ing operations, the provisions of the FDI policy must be con-sidered. The regulator is the Reserve Bank of India (RBI), and FDI policy is fairly liberal for investment in outsourcing operations. The Indian Rupee is fully convertible for current account transactions, though controls remain on capital account transactions.

� labour law. India has an extensive employment law regime that must be considered when outsourcing. The Industrial Disputes Act 1947 in particular should be noted, as it pro-vides “security” of employment to employees and outlines due process, which must be followed on termination of em-ployment. Other statutes concerning flexible working hours, overtime payments, holidays, leave and the employment of women at night must also be considered.

� Contract Act 1881. Any contract outlining private law be-tween the parties to an outsourcing transaction is governed by the provisions of the Indian Contract Act 1881.

� department of telecommunications (dot). Provides policy, guidelines, licensing and coordination of matters relating to telegraphs, telephones, wireless, data, facsimile and telematic services and other similar forms of communica-tions. DoT guidelines are particularly relevant for call centre outsourcing.

2. What additional regulations may be relevant on:

� A financial services outsourcing?

� A business process outsourcing?

� An it outsourcing?

� A telecommunications outsourcing?

� A public sector outsourcing?

� other outsourcings?

Financial services

The RBI has issued guidance by way of its circular dated 22 April 2009 (the Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services) for banks outsourcing financial services. Although Indian banks do not require prior approval from the RBI, necessary safeguards to address risks inherent in outsourcing are detailed in these guidelines. Outsourcing arrangements must neither diminish a bank’s ability to fulfil its obligations to customers and the RBI, nor impede the effective supervision of the RBI. Banks remain responsible for the actions of their supplier, and for ensuring the confidentiality of customer information. Banks are advised not to engage in outsourcing that would weaken their internal control, business conduct or reputation. The RBI has also issued instructions concerning outsourced services relating to credit cards.

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A bank that has entered into, or is planning, material outsourcing, or intends to vary any such outsourcing arrangements, must notify the RBI of these arrangements. Banks in India are not allowed to outsource core management functions, for example, corporate planning, organisation, management and control and decision-making functions, such as determining compliance with know-your-customer norms for opening deposit accounts, according sanctions for loans and the management of investment portfolios.

Business process

Internally, whether through a regulator or otherwise, there are no specific laws or regulations in respect of business process out-sourcings (BPOs). However, a BPO unit may need to be registered with the Department of Telecommunications as an Other Service Provider (OSP) before commencing operations, particularly if it is engaging in services relating to tele-banking, tele-medicine or tele-trading e-commerce.

it

Where a unit is acting as an internet service provider (ISP), then the exposure and liability of the unit may need to be verified under the Information Technology Act 2000 before operations commence. Section 70 of the Information Technology Act 2000 provides that an ISP is exempt from liability for any third-party data or information if the ISP can prove either that:

� The offence or contravention was committed without his knowledge.

� He had exercised all due diligence to prevent the commission of the offence or contravention.

telecommunications

Companies providing telecommunications outsourcing services must be registered with the DoT as an OSP. This includes call centre operators, tele-marketers, tele-banking operators, network operation centres and so on. There are some restrictions on foreign investment in the pure telecom space that must be considered.

Public sector

Public procurement guidelines apply to the procurement of out-sourced services from the private sector. Government policies dealing with public procurement include the General Financial Rules 1963 and the Delegation of Financial Powers Rules 1978 (both issued by the Ministry of Finance). Further, the Directorate General of Supplies and Disposals (DGSD) Manual on Procure-ment, and the Central Vigilance Commission (CVC) Guidelines, prescribe the procurement procedure to be followed by all federal ministries. In August 2006 the Federal Government issued three manuals governing the procurement of goods, works and services. These manuals are used as guidelines for government ministries and departments, and public sector undertakings.

other

The National Association of Software and Service Companies (NASSCOM), an industry association, plays a critical role in ensuring India’s prominence in the global outsourcing space. In addition to playing a significant leadership and lobbying role, NASSCOM also provides industry certifications, organises conferences and collates industry reports.

The Business Software Alliance (BSA) is also a critical player in the Indian market. The BSA has had some success in obtaining Anton Piller orders from Indian courts and conducting raids on distributors of pirated software.

3. Please specify any further legal or regulatory requirements (formal or informal) concerning outsourcing in any industry sector.

The following questions concerning types of risk should be considered:

� Is there a strategic risk, in that the supplier conducts busi-ness in a manner inconsistent with the overall strategic goals of the customer? Will proprietary software or IPR be shared? Is there potential for an ownership, transfer or user dispute concerning IPR?

� Is there a contractual risk in terms of enforcement of the contract?

� Is there a concentration and systemic risk, due to the cus-tomer’s lack of control over the supplier?

� Is there a compliance risk concerning data privacy, consumer confidentiality and related matters?

� Is there an operational risk from technological failure, fraud, error, or the supplier’s financial incapacity to fulfil its obligations and/or provide remedies as agreed under the outsourcing contract?

� Does the customer have an exit strategy? Is it focused only on one supplier in India? Will it be difficult to shift the work to another supplier in India, overseas or back in-house to the customer?

� Is there a reputation risk? Does the service quality of the supplier meet the overall standards of the customer?

due diligence of the supplier

It is important to thoroughly evaluate the Indian supplier’s facili-ties, credentials, information security practices and procedures. Among others, it is advisable to:

� Conduct a site visit of the facilities.

� Ensure the supplier has a plan to address any identified gaps or deficiencies.

� Obtain independent reviews and market feedback on the supplier.

� Conduct due diligence and evaluate the supplier’s:

� expertise, past experience and competence to im-plement and support the proposed activity over the contracted period;

� financial stability and ability to service commitments even under adverse conditions;

� market intelligence, reputation and culture, compli-ance, complaints and outstanding or potential litigation;

� internal policies and procedures, including security and control, audit coverage, reporting and monitoring envi-ronment and business continuity management;

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� locational factors including tax benefits, political, eco-nomic, social and legal factors;

� employees, recruitment process, benefits, attrition plans, contingency plans and sub-contractor issues.

sub-contractor issues

It is not unusual for suppliers to use sub-contractors, and it is good practice to include the following provisions in relation to sub-contracting:

� Customer’s consent must be obtained.

� Minimum qualifications, capabilities and so on of any sub-contractor should be outlined.

� Customer’s right to review any sub-contracting terms.

� Supplier’s liability for the actions of the sub-contractor.

� Sub-contractor IPR and liability issues should be outlined.

� Customer’s right to inspect a sub-contractor and his premises.

outsourcing documentation

The outsourcing agreement determines the success of the under-lying relationship. The more clear, precise, detailed and carefully drafted the document, the easier it is to allocate risks, anticipate and prevent potential problems, and set realistic expectations. Some drafting tips include:

� Take time to understand, negotiate and finalise the docu-ment, even if there is business pressure to close the deal.

� Clearly address risks and risk mitigation strategies, particu-larly those identified at the gap analysis and due diligence stages.

� Incorporate flexibility into the agreement to cater for changed circumstances.

� Clearly state the nature of the legal relationship between the parties, whether principal to principal or otherwise.

� Require that the supplier complies with laws, regulations and provisions that apply to the customer in different jurisdictions.

� Include an obligation that the supplier complies with indus-try standards.

� Clearly document the supplier’s obligations in the event of a breach, and any transition issues.

� Don’t concede an important issue just to close the deal.

Key provisions that should be addressed in the contract include:

� The contract’s scope, clearly defined. Service and perform-ance standards should be stated.

� Audit rights: the customer must be able to access all books, records and information relevant to the outsourced activity with the supplier. Audits can be conducted internally by the customer or through external auditors or agents.

� Monitoring rights: continuous monitoring and assessment by the customer is necessary to erase long-term issues and ensure that any necessary corrective measures are taken quickly.

� Termination: notices, procedures and consequences should be addressed.

� Policies and procedures for data privacy. The supplier should have adequate controls to ensure customer data confidentiality and a statement of liability in the case of a breach of security and/or any leak of confidential information.

� Business continuity.

� Sub-contractor issues: the agreement should clearly state if customer approval is required, and how a sub-contractor’s suitability is to be ascertained.

� Compliance with law: both domestic and other applicable laws should be covered.

� Confidentiality of customer information. This issue cannot be overstated, and the agreement should seek to ensure the security and confidentiality of customer information in the supplier’s custody or possession.

� Indemnities, fall-back and other remedies. The agreement should contain the customer’s specific non-compliance related remedies, fall-back and indemnities.

Business continuity and management of disaster recovery (dR) plan

The supplier should have a robust framework for documenting, maintaining and testing business continuity and recovery proce-dures. The customer must ensure that the supplier periodically tests the DR Plan. Often customers consider joint testing with the supplier.

termination and change of supplier issues

Customers tend to retain a degree of control over outsourcing to mitigate against the unexpected termination of the agreement or the supplier’s liquidation. To establish a viable contingency plan, customers should consider the availability of alternative suppli-ers or the possibility of bringing the outsourced activity back in-house in an emergency, and the costs, time and resources in-volved in those activities.

segregation of facilities

Customers should decide whether or not they are willing to allow the supplier to share its facilities with its other customers. Some level of segregation of the customer’s information, documents, records and other assets is certainly advisable, particularly to ensure that the customer can easily reclaim those items following a breach or termination of the agreement.

Audit, monitoring and control

It is wise to include robust audit rights in the agreement to en-sure that the customer can verify that the supplier is complying with the contract. The customer should continuously monitor and control its outsourced activities, either internally or using exter-nal auditors. The customer should periodically review the sup-plier’s financial and operational conditions to assess its ability to continue to meet its outsourcing obligations. Periodic audits highlight any deterioration or breach in performance standards, confidentiality and security, and in business continuity.

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4. Please specify any requirements (formal or informal) for regulatory notification or approval of outsourcing transactions in any industry sector.

While there is no specific notification required for conducting an outsourcing transaction, there can be specific requirements that must be met, including, where applicable:

� Specific set-up registrations may be required. These depend on the structure proposed (see Question 5).

� Tax benefits, where available, must be based on a registration.

� Foreign exchange regulations may become applicable if an investment is made in India. While there is no prior approval required, there can be post investment filings that must be complied with.

� An OSP licence from the DoT can be required.

legAl stRuCtuRes

5. in relation to the legal structures commonly used on an outsourcing, please briefly describe how each structure works, and its potential advantages and disadvantages.

Principally, there are two structures used on an outsourcing:

� Having an owned set-up in India.

� Outsourcing to a third party.

An owned set-up

The following points should be noted regarding establishing an owned set-up:

� It provides better control over the management, operations and the day-to-day running of the business.

� It allows for the easy implementation and monitoring of internal processes, global policies and compliance issues.

� It provides reassurance where there is sensitive and confi-dential information being processed in India.

� There is a loss of flexibility.

� There are cultural issues: the burden of compliance with local laws together with potential clashes of culture and ethics to those of the parent.

� There is delayed exit.

� There are challenges in change control and moving between suppliers.

� There are transfer pricing issues.

� There are difficulties associated with managing a remote entity, geographically far from the parent.

There are four common structures used by foreign investors establishing an owned set-up:

� Setting up a branch office.

� Setting up a wholly owned subsidiary (WoS).

� Setting up a joint venture company (JVC) with a local Indian partner.

� Acquiring an existing Indian company.

Branch office. The RBI’s permission to set up a branch office is required. Overall, setting up and shutting down a branch office is relatively straightforward. A branch office can be set up by a for-eign entity provided it is used for one of the following activities:

� Promoting technical or financial collaborations between Indian companies and parent or overseas group companies.

� Rendering professional or consultancy services.

� Representing the parent entity in India, for example, acting as buying/selling agents in India.

� Conducting research and development work that the parent company is engaged in.

� Rendering services in information technology and the devel-opment of software in India.

� Undertaking export and import trading activities.

� Rendering technical support to the products supplied by parent/group companies.

� Representing a foreign airline or shipping company.

Wholly owned subsidiary. To take advantage of tax and other locational benefits, and to have a local business presence, foreign entities can set up a WoS. The income of a WoS is taxed at a lower rate than a branch office. Companies wishing to set up a manufacturing base and access the Indian product market often choose this route. For the outsourcing industry, the Government of India offers certain locational benefits if the entity is set up in an Export Processing Zone (EPZ), Special Economic Zone (SEZ) or Electronic Hardware Technology Park (EHTP). The unit can also be set up elsewhere as a 100% Export Oriented Unit (EOU). These units must export at least 75% of their final output out of India. SEZs are designed to provide internationally competitive infrastructure facilities and a duty-free and low cost environment.

WoS are best set up as a private limited liability company. This is more flexible and less regulated than a public limited liability company. The move from a private to a public company can be made at any time, depending on business needs, including if there is a desire to list the WoS on an Indian stock exchange.

Joint venture company. Where there is a relative business advan-tage to collaborate, a joint venture can be a good option. This al-lows both parties to share their expertise to optimum advantage. Most JVCs have exit and acquisition options, where parties clearly set out their short and long-term objectives from the venture, together with options to leave or take over the venture should the need arise.

As with WoS, JVCs can also be registered as private limited liabil-ity companies. The shareholding between the domestic and the foreign investor is generally determined by the relative leverage of the parties. The government has few restrictions for foreign investment and therefore the structure is determined by business needs.

Legally, the thresholds of a 10%, 25%, 50%, 75% and 90% shareholding in a company do provide different sets of rights, and

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these may be considered before structuring the holding of the investor. India has two basic categories of shares: equity (com-mon) and preference (preferred) shares. While these are similar to those overseas, the level of flexibility in structuring the rights associated with shares that is globally available is not available in India. Other than ownership, control is maintained by board seats, veto rights and affirmative votes.

Acquiring an existing indian company. This option reduces both the time to market and the set-up time and effort. Obtaining a good business culture fit may take some time, but acquisitions are a popular choice. An acquisition can involve both the issue of fresh capital, and the transfer of existing shares. RBI approval can be required for the transfer of shares, particularly with regard to their valuation, before their transfer from a resident to a non-resident. This is governed by the Foreign Exchange Management Act (FEMA) 2000, and the RBI guidelines issued from time to time. Where the shares of the company being acquired are listed on the stock exchange, there can be additional legislation that applies.

Foreign investors usually route their investments through countries such as Mauritius, Singapore, Cyprus and so on, to take advantage of the Double Tax Avoidance Agreements these countries have with India.

outsourcing to a third party

If the foreign entity does not want to establish itself in India, it can undertake outsourcing transactions by contracting with a supplier in India. Even where the involvement of the foreign en-tity remains at the contracted level, additional care must be tak-en to ensure that this involvement does not constitute a service Permanent Establishment (PE) for the foreign entity in India. If a service PE is established, the foreign entity is liable to pay taxes in India for income that may be attributable to India. This option:

� Is the most cost-effective.

� Raises concerns regarding confidentiality, people and performance control.

� Works best where the work is of an intermittent nature, the volumes are small, and varying expertise is required for dif-ferent pieces of work.

� Provides flexibility, both in terms of the work outsourced, and allowing the work to be done by different suppliers.

The agreement plays a very critical role in this type of outsourc-ing. It should cover issues relating to data protection, security compliance, confidentiality, IPR assignment, audit rights, report-ing requirements and change control.

The outsourcing relationship between a customer and supplier can take several forms, including:

� Build operate transfer (Bot). The supplier sets up, builds and operates the outsourcing unit for the customer and ultimately transfers it to the customer at an agreed date or event. The terms of transfer are also generally agreed up-front. The advantage of this structure is that the customer becomes the owner of the outsourcing unit without having to bear the initial set-up burden.

� staff augmentation (body shopping). This structure provides specialised resources, from the supplier to the customer, on a need basis. The model allows flexibility in terms of cost and resource allocation, and allows the customer to efficiently run their outsourcing business.

� service level agreements (slA) (out-tasking). These are shorter and more specific agreements, documents and orders that flow from a main agreement requiring these spe-cific contracts to be executed for short-term business needs, to deliver work product or to fill skill gaps.

� Project-based outsourcing. Under this collaborative model, both the suppliers and their customers share risks and rewards. Industry best practices are used to evaluate work, quality and delivery issues. This model has a short-term focus.

� managed services. With a long-term focus, this model works from a main agreement covering a multi-year relationship together with SLA-based integrated solutions. The supplier is responsible for agreed strategic business results. A key term of the contract is the concept of technology refresh, or reinvestment of expertise, giving the supplier a commercial advantage. This model is becoming increasingly popular in outsourcing transactions.

� multi-sourcing. Where different suppliers perform different services, which they are adept at performing. While this allows the customer to use the best of all that is available, there can be challenges in co-ordinating the efforts of dif-ferent suppliers and moving services and IPR among them.

PRoCuRement PRoCesses

6. Please briefly describe the procurement processes that are usually used to select a supplier of outsourced services (including request for proposal, invitation to tender, due diligence and negotiation).

The procurement process should examine various matters, in-cluding supplier reputation, technical specifications, expertise, pricing, updates, after-sales support and service, SLAs, and so on. While the procurement process can vary, the following pro-vides a general outline of the process:

� tendering process. It is not common to undertake a Request for Proposals (RFPs) during every tendering process for non-government outsourcing. However, for large projects foreign companies do send out RFPs to a select group of suppliers. This effectively starts the procurement process. In the event that a formal RFP is not sent out, the shortlisted suppliers are sent a brief so that they can put forward their proposal and initiate their due diligence.

� supplier due diligence and evaluation. The suppliers due diligence and evaluation should first address their technical capabilities, knowledge levels and market share. Supplier credibility can then be checked through referral sources.

� Assessing supplier capability. Infrastructure, technical capabilities, leadership, team size, human resource management, locations, client focus, processes, tools and certifications are all relevant in assessing the supplier’s

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capabilities. India has many capable vendors, and it can be difficult to select a particular supplier. A supplier should not be selected purely because of its company name or the number of multinationals who have outsourced work to it. Evaluation of the people is as critical as evaluation of the company.

� Referral checks on supplier reputation. This can be done simply by contacting some of the supplier’s other custom-ers, or requesting that the supplier provides a capability statement based on past experience. A visit to the supplier’s facilities allows the customer to study their processes and ensure they meet the customer’s internal quality and regula-tory requirements.

� gap analysis/slA signing. Ask the supplier to do a gap analysis so that issues can be identified. An SLA should only be signed after a level of reassurance is established with the supplier. The scope of the gap analysis/SLA should be clear, concise and simple. It should contain objectives, and define the scope of work, final deliverables and any resource allocation details.

� People involved. Both the internal staff of the foreign entity planning to outsource to India and external consultants can be used, depending on a project’s requirements. When selecting external consultants care must be taken to ensure that they have adequate exposure to India and doing busi-ness in India.

� Continuous evaluation of supplier performance. Keep evaluating the supplier even after the agreement has been awarded to them. This can be based on both feedback from the people involved and active assessments. Evaluation is particularly useful where there is a subsequent engagement.

� negotiating the transaction. The team negotiating the transac-tion should be practised in negotiating with Indians. The Indian style of negotiation is quite unique, and negotiators should be sensitive to the nuances of this style of negotiation.

tRAnsFeRRing oR leAsing Assets

7. What formalities are required to transfer the following assets on an outsourcing:

� immovable property?

� iP rights and licences?

� movable property?

� Key contracts?

The Transfer of Property Act 1882 governs the transfer of prop-erty in India, including the sale, lease or rent of property, and the mortgaging, gifting and exchange of property. Additionally, with any transfer of property there are conveyancing documents, their registration and the payment of stamp duty.

immovable property

If the transfer of property needs to be absolute, then sale is the only option. On completion of the sale, the buyer takes all the

rights of ownership, possession, and so on over the property. Stamp duty must be paid and the sale should be registered with the appropriate authority, so that the seller has no claim over the sold property.

Stamp duty payment is legislated by the respective Indian state, while the provisions regarding registration are contained in the Registration Act 1908.

iP rights and licences

While care is taken to protect IPR, such as copyrights, trade secrets, inventions, ideas, formulae, source and object codes, know-how, improvements, and so on, the transfer of IP rights pro-vides challenges. Interestingly, while copyright can be transferred automatically from an employee to an employer, the same is not true for a patent right. In the case of an independent contractor, the supplier must be careful to ensure the assignment of the IPR.

Due diligence conducted on the supplier should reveal whether the supplier has contracts with its employees and consultants for the assignment of IPR developed by them. Importantly, on the creation of a specific IPR (particularly where there could be a patent right), the supplier should ensure that independent contractors and employees assign the IPR and execute all necessary documentation to validate that assignment. It is advisable to include provisions allowing the party registering the IPR in its name to seek further documents to perfect its title.

The customer should aim at obtaining an exclusive, royalty-free, irrevocable, perpetual and worldwide assignment of IPR from the supplier. Any deed of assignment should specifically state that the assignment is in perpetuity and worldwide, and that the assignment does not lapse in the event the assignee does not exercise the rights assigned within a period of one year from the date of assignment. The assignment should identify the work and clearly specify the rights being assigned.

Software tends to be the main IPR created and the subject matter of transfer, but software is not patentable in India. However, it is copyrightable under the Indian Copyright Act 1957, and sections 18 and 19 deal with the assignment of copyrights. Section 18 states that any prospective owner of a copyright, in a future work, can assign, to another person, the copyright, either wholly or par-tially, although the assignment takes effect only when the work comes into existence. Therefore, the supplier must first specifi-cally enter into a general copyright assignment agreement with each of its independent contractors. As and when a copyrighted product comes into existence, the supplier should sign a specific assignment recording the work being transferred. The supplier can then transfer all the IPR it obtains, as an assignee, to its customer.

A knowing violation of copyright in India is a criminal offence. Indian courts are reasonably quick to grant injunctive relief for IPR violation.

movable property

While the transfer procedure can vary depending on the specific property, generally the transfer of movable property follows that item’s delivery. Share transfer has a prescribed process under Indian company law. The transfer of confidential information is based on contract law.

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Key contracts

Privity of contract applies in India, and therefore a third party cannot enforce a contract. Generally, it is possible to assign rights under a contract where that is the parties’ intention, and pro-vided the law does not forbid those rights from being assigned. However, if the obligations under the contract are of a personal nature, they cannot be assigned and must be performed by the parties who have contracted to perform them.

Contracts can also be transferred by way of novation of the con-tract. Under this concept, all liabilities and obligations under a contract, including the transfer of the benefit and/or burden of a contract, are passed to a third party provided all parties consent. Effectively, the original contract is annulled and is replaced by a new contract.

Key contracts can therefore be transferred either by way of nova-tion or assignment, depending on the original contract terms and the intent of the original parties.

8. What formalities are required to lease or license the following assets on an outsourcing:

� immovable property?

� iP rights and licences?

� movable property?

� Key contracts?

See Question 7.

tRAnsFeRRing emPloyees

9. in what circumstances (if any) are employees transferred by operation of law:

� to an incoming supplier on an initial outsourcing?

� to an incoming supplier on a change of supplier?

� Back to the customer on termination of an outsourcing?

There is no law in India that requires a transfer of employees in an outsourcing transaction. There is one situation where the law effectively enforces a transfer of employees, and that is in the case of a transfer of a business undertaking. Section 25FF of the Industrial Disputes Act 1947 deals with situations where an em-ployer transfers a business undertaking, and the employees move as a consequence of that transfer.

10. if employees transfer by operation of law please describe the terms on which they do so, including any effect on pensions, employee benefits or other matters (including collective agreements) that the transfer may have.

Where employees transfer in the case of a transfer of a business undertaking (see Question 9), the employer is liable for severance compensation, unless the new employer is able to provide both:

� Continuity of employment.

� Similar or better benefits than were available with the origi-nal employer.

If the new employer provides these benefits, the new employer becomes responsible for all tax liabilities in respect of the transferred employees, including for:

� Central, state or local tax.

� Employment, withholding or reporting purposes.

� Provident fund, gratuity, bonus, workmen’s compensation, employee state insurance or other employment law deductions.

� Private insurance, social security, or central or state with-holding taxes.

� Levies, duties and so on, of any nature.

11. How is redundancy pay calculated?

Section 25F(b) of the Industrial Disputes Act 1947 provides that for retrenchments, employees with more than one year’s service, who are not temporary or casual employees, are entitled to sev-erance compensation equivalent to 15 days’ pay for each com-pleted year of service (or part of a year completed, where that is more than six months).

Under the Payment of Gratuity Act 1972, if an employee has con-tinuously been employed for five years or more, they are entitled to a gratuity payment on the termination of service, except where that termination has been as a result of their wilful omission or negligence resulting in damage or loss of the employer’s prop-erty (where the gratuity is forfeited to the extent of the damage caused). Like severance compensation, the gratuity payment is calculated at 15 days’ pay for every completed year of service (or part of a year completed, where that is more than six months).

12. to what extent can a transferee harmonise terms and conditions of transferring employees with those of its existing workforce?

It is critical to ensure that the transferred employees are given the same benefits as under the previous employment, as required by section 25FF of the Industrial Disputes Act 1947. While harmonising the terms and conditions of employment, the new employee must adhere to the provisions of section 25FF.

One interesting point is the applicability of non-compete and non-solicitation covenants to employees after the termination of their employment. In India, an agreement restraining anyone from carrying on a lawful profession, trade or business beyond the term of an agreement cannot be enforced. Therefore, a court would not generally uphold a post-termination non-compete cov-enant. There is some level of debate on a non-solicitation clause. However, it is possible to enforce a reasonable and fair confiden-tiality clause after the termination of employment.

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13. to what extent can dismissals be implemented before or after the outsourcing?

Labour laws aim to ensure security of employment. Arbitrary dis-missal is not encouraged. Specific provisions for dismissing em-ployees are provided under law. Outsourcing is not a trigger event for the dismissal of employees. The provisions of the Industrial Disputes Act 1947 with regard to process, notice and severance compensation for retrenchment must be considered where an outsourcing involves the transfer of a business undertaking and the conditions of section 25FF are not met.

14. to what extent can particular services only be performed by a local national trained in your jurisdiction?

There are no specific services where local training is mandated. However, for professionals (for example, lawyers, doctors, chartered accountants, and so on) there are local bodies governing the profession which determine whether a foreign qualified person can, or cannot, perform services in India. These bodies also determine what examinations and qualifications must be obtained to perform the services in India.

The Home Ministry has specific visa regulations which must be followed when applying for an employment visa (E visa) permitting a foreign national to work in India. All foreign nationals seeking an E visa must apply for this in their country of citizenship or domi-cile. E visas are granted for up to one year. The Indian sponsoring employer is responsible for the conduct of all E visa holders in India, and is responsible for ensuring that E visa holders depart India before the expiration of their visa. The Ministry of Labour and Employment has set a quota system for expatriate employ-ment. Indian employers can hire foreign workers as long as the total foreign workforce in the organisation does not exceed 1% of the total workforce or 20 foreign workers in total. On reaching the prescribed quota level, employers are unable to sponsor additional E visas for foreign nationals. Expatriate employment is generally:

� Focused on technical and specialised personnel.

� Not encouraged for administrative, secretarial or clerical duties.

� Not encouraged where there are large numbers of qualified Indian nationals performing the same work.

Foreign nationals must register with the concerned District Foreigners’ Registration Officer/Foreigners’ Regional Registration Officer within 14 days of their arrival in India, if they hold a visa for a period of more than 180 days.

15. in what circumstances (if any) is it possible for the parties to structure the employee arrangements of an outsourcing as a secondment?

There is no prohibition and the parties are free to structure the outsourced services as a secondment. However, care must be

taken to ensure that the terms of the secondment agreement ad-dress any application of the provisions of the Contract Labour (Regulation and Abolition) Act 1970 (Contract Labour Act). Se-condments, if not carefully structured, can invoke certain com-pliance matters under the Contract Labour Act. Where there is an engagement of 20 or more contract workers (with certain ex-clusions for managers and others), the wages and other service conditions of a contract worker must be similar to those given to other regular employees within the establishment who perform a similar function.

A secondment contract must be drafted, and practically imple-mented, so that it does not create any co-employment situation between the seconded employee and the host employer. While there is no litmus test to determine that an employment relation-ship has been created, certain factors indicate that there is an employment relationship:

� A direct contractual relationship between the employer and the employee.

� The level of supervision and control exercised by the em-ployer over the employee’s professional activities.

� Whether the activity performed is of a permanent nature.

� Whether the activity is performed continuously, and if so, for what length of time.

� Whether the employer’s regular employees are performing services similar to those being rendered by the temporary professional.

16. What information must the transferor or the transferee pro-vide to the other party in relation to any employees?

There is no law prescribing the information that must be provided by the transferor to the transferee. However, any information that is required to comply with the provisions of section 25FF of the Industrial Disputes Act 1947 must be provided. A new employer can also seek information relating to the employee’s background, skills, and so on.

17. Please describe any notice, information and consultation ob-ligations which arise for the transferor and the transferee in relation to employees or employees’ representatives.

Since there are no specific transfer provisions relating to out-sourcing, it is advisable to follow the process prescribed under section 25FF of the Industrial Disputes Act 1947 in situations where that section applies. A month’s notice and severance com-pensation as a minimum are due if the employees are not being transferred under the requirements specified in section 25FF. Where an establishment employs a large number of employees (more than 100), the process also requires government approval, in addition to giving the employees three months’ written notice.

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dAtA PRoteCtion

18. Please outline any applicable legal or regulatory require-ments and issues which may arise on an outsourcing. How are they typically dealt with in the contract documentation?

data protection and data security

India does not have strict data protection and privacy laws, which is often considered problematic when outsourcing. However, there can be advantages to this fact, as the supplier and the cus-tomer are not legally bound and do not have to share equal legal responsibilities, as is the case in other jurisdictions. The Informa-tion Technology Act 2000 governs the issue of data protection and provides penalties for failure to comply with its provisions. Section 43A provides for damages to be paid by a company for failure to adopt reasonable security practices while handling sen-sitive personal data. It is advisable for the outsourcing agreement to cover the issue of data transfer, together with the extent of protection and security expected from the supplier. Section 72A provides for punishment of a fine or up to three years’ imprison-ment for disclosing information in breach of a lawful contract.

Section 72 prescribes penalties for any person who, pursuant to the powers conferred under the Information Technology Act 2000, has secured access to any electronic record or personal data and discloses that information to a third person without con-sent for that disclosure.

NASSCOM has established the Data Security Council of India (DSCI) as a self-regulatory body.

Banking secrecy

The RBI’s know-your-customer norms require banks to ensure that information collected from customers is treated as confi-dential, and that its details are not divulged for cross-selling or similar purposes.

Confidentiality of customer data

The right to privacy falls under the ambit of the right to life pro-tected by the Indian Constitution. The Information Technology Act 2000 contains provisions concerning the privacy of customer information. India does not have a statute governing the protec-tion of confidential information and trade secrets. However, it is possible to obtain protection through a civil action under com-mon law. It is also possible to file an action for criminal breach of trust against the supplier, based on the fact that the confiden-tial information was provided by the customer to the supplier “in trust” and its misuse constitutes a breach of trust.

Given these circumstances, it is best practice to ensure that the outsourcing agreement contains clearly articulated and adequate confidentiality obligations. This has the effect of contractually binding the parties to confidentiality.

Additionally, periodic auditing and monitoring of the supplier’s facilities, and seeking reports on the implementation of data security measures, can help a customer ensure the confidentiality of its data.

seRviCe sPeCiFiCAtion And levels

19. How is the services specification typically drawn up and by whom?

The parties to the outsourcing relationship, or the consultants representing them, draw up the specifications of the service(s) to be delivered. The details of the service(s) are encapsulated in the agreement executed between the parties.

20. How are the service levels and the service credits scheme typically dealt with in the contract documentation?

The service level agreement (SLA) defines the service levels, agreed between the parties, in measurable terms. The SLA usu-ally also provides for service credits, debits and penalties in the case of failure to meet the service levels.

CHARging metHods And Key teRms

21. Please describe the charging methods that are commonly used on an outsourcing (for example, risk or reward, fixed price, cost or cost plus, pay as you go, resourced-based charges, use of minimum charges and so on).

Charging methods vary, and a contract can also provide the flex-ibility to move from one method to another, depending on the circumstances. The most common charging methods include:

� in a captive/Wos set up. A cost plus charging method is used between a parent and an Indian subsidiary, and with this method the customer pays the supplier actual costs plus a predetermined profit percentage. This method tends to lack incentive for performance improvement, cost reduc-tion and overall efficiency, and is usually used in captive setups and WoSs for this reason.

� in a non-variable situation. Fixed pricing and unit pricing charging methods are used where the relationship tends to be more static. The scope of the agreement is very clearly understood and has been in place for some time. Often there is little room to improve performance or cost-effectiveness, and this method is usually used for lower end services. The supplier is always motivated to decrease its internal costs to find ways to increase efficiency, but usually the differences are marginal.

� in a variable situation. Where the scope of the agreement is undefined, or unique, and the value proposition high, par-ties usually negotiate an incentive-based charging method. The customer incentivises the supplier to encourage optimal performance. However, the supplier can also be charged penalties for unsatisfactory service. There are various other risk/reward sharing charging methods that can be used to keep both the customer and the supplier on their toes. The aim is to make both parties act as partners, so that both gain from any additional value created as a result of their collaborative efforts.

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22. Please briefly describe any other key terms used in relation to costs, such as charge variation mechanisms and indexation.

The Indian outsourcing industry is very adaptive and usually adopts any new calculation mechanism that is globally used. There are no particularly unique features in terms of cost structures.

CustomeR Remedies And PRoteCtions

23. if the supplier fails to perform its obligations, what remedies and relief are available to the customer under general law?

The well-established legal system, based on English common law, is one of the factors that make India an attractive outsourcing destination. The legal system is robust and courts enforce the parties’ contractual rights. Contracts are enforced either:

� By filing a civil suit for damages under section 73 of the Indian Contract Act 1872.

� By filing a civil suit for specific performance under section 10 of the Specific Relief Act 1963.

Under Indian law, the party suffering a breach of contract is en-titled to receive compensation from the breaching party for any loss or damage caused to it. The twin principles of restitution and mitigation are followed when calculating damages. Compensa-tion cannot be paid for any remote and indirect loss or damage. Liquidated damages are a recognised concept in India and can be recovered against an Indian party.

It is necessary to consider the jurisdiction of the courts, under the outsourcing agreement, and the implications of obtaining a judgment from a foreign court. Concern stems from the fact that the customer is dealing with an Indian supplier with few, or no, meaningful assets in the customer’s country, against which any judgment or arbitral award would be executed.

As a starting point, it is critical for the customer to understand the supplier’s corporate structure, its assets and the location of those assets. Once this is established, the parties can structure the dispute resolution provisions to maximise the ability to re-cover against the supplier’s assets in the event a dispute arises between the parties. Customers can seek additionally measures to guarantee performance, including, among others:

� Parent or affiliate guarantees.

� Escrow accounts for payments.

� Product liens.

� Security interests.

� Insurance requirements.

� Letters of credit.

Unless India has a reciprocal arrangement for enforcement of a foreign judgment, that judgment cannot be enforced in India.

For example, a US judgment is not directly enforceable in India, though it can be enforced by filing a fresh suit in an Indian court, based on the US judgment. While the process can take time, certain grounds make the judgment unenforceable, and these include:

� The judgment was not issued by a court of competent jurisdiction.

� The judgment was not issued on the merits of the case.

� The judgment appears to be founded on an incorrect view of international law or a failure to recognise Indian law, if such law is deemed applicable.

� Principles of natural justice were ignored by the overseas court.

� The judgment was obtained by fraud.

� The judgment sustained a claim founded on a violation of any law in force in India.

A judgment can also be obtained directly from Indian courts. This allows the customer to seek attachment of the supplier’s assets in India. While a final judgment in India can take time, injunctive relief is available for pressing matters.

While Indian courts recognise private international law principles and generally enforce choice of law clauses agreed on by the parties (governed by sections 13, 15 and 44A of the Indian Civil Procedure Code 1908 and section 41 of the Indian Evidence Act 1972), there are certain circumstances when Indian law applies. Indian law is applied to adjudicate disputes in certain fields, in-cluding disputes involving IPR, real property, labour issues and insolvency. Also, Indian courts do not apply any law that violates public policy in India.

Arbitration continues to be the preferred means of dispute resolution in outsourcing transactions in India. India is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Awards 1958 (New York Convention), and therefore it is easier to enforce a foreign arbitral award rendered in a New York Convention country than from other jurisdictions. A foreign arbitral award can be challenged or refused enforcement in India on very limited grounds, including:

� Incapacity on the part of any parties to the contract.

� Invalidity of the arbitration agreement under the law govern-ing the dispute.

� Lack of due process afforded to either party.

� The award goes beyond what was provided for in the arbitra-tion clause’s scope.

� The matter is not subject to resolution by arbitration under India’s laws.

� Enforcement of the award would be contrary to public policy in India.

Once an Indian court is satisfied that the foreign arbitral award is enforceable, it is deemed to be a decree of that court and be-comes enforceable in India.

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24. What customer protections are typically included in the con-tract documentation to supplement relief available under general law?

The protections tend to follow those globally used.

WARRAnties, indemnities And insuRAnCe

25. What warranties and/or indemnities are typically included in the contract documentation?

Agreements include warranties and related indemnities, given by both the supplier and the customer. Parties negotiate the effect of warranties on the relationship, including whether “time is of the essence”. There are express warranties, particularly those that relate to equipment, IPR, software and associated professional services. Standard maintenance is also sometimes warranted, usually where supplier software (whether owned or licensed) is being used. Warranty exclusions are also negotiated, as are any limitations, exclusions and caveats relating to them.

There is usually lengthy negotiation on the scope of the services to be provided and each of the parties’ respective responsibilities under the agreement. The supplier must often provide warranties relating to personnel issues concerning:

� Compliance.

� Payments due to personnel.

� The personnel’s capabilities and expertise.

It is good practice to ensure warranties are included that person-nel will work in a professional and workmanlike manner, and that resources will be properly and appropriately allocated. Warranties regarding the use of sub-contractors can also be included, which both vouch for the quality of any sub-contractor, and accept sole responsibility for any sub-contractor engaged.

Both parties include warranties regarding compliance with all rel-evant laws, applicable guidelines and professional codes. They also indicate any possible conflicts of interest.

Customer warranties usually include provisions to provide the supplier with all assistance, materials and accurate information reasonably required to enable it to provide the services outlined in the agreement.

Generally, both parties warrant that all data, software or other information provided by them does not infringe upon any third-party IPR. The parties agree to defend and indemnify the other against losses incurred as a result of any third-party infringement of any of the IPR provided.

Indemnities can range from:

� Broad indemnities (for example, breach of a warranty or covenant).

� Middle level indemnities (for example, breach of a data protection obligation).

� Very specific indemnities (for example, employees misbe-having at customer locations or introducing a virus into the customer’s computer systems).

Limitations to the supplier’s liability are also negotiated. These can include monetary caps and a clear understanding that no consequential or indirect damage will be covered. Suppliers tend to limit protection to third-party claims and the customer’s direct losses. A supplier will also seek to defend any such third-party claim. Suppliers tend to try to resist indemnities concerning a breach of a service-related warranty or covenant.

26. What limitations are imposed by national law on fitness for purpose and quality of service warranties?

Warranties in respect of the service quality must be covered in the agreement. Suppliers can be hesitant in providing general warranties covering either fitness for purpose or the quality of the service.

27. What provisions may be included in the contractual docu-mentation to protect the customer or supplier regarding any liabilities and obligations arising in connection with outsourc-ing, including those relating to employee arrangements?

These provisions are negotiated between the parties to the agree-ment, and the matters that are included depend on the negotia-tion leverage that each of the parties have. See also Question 25.

28. What types of insurance are readily available in your jurisdic-tion, and to what extent?

Unlike other jurisdictions, insurance products are not as sophis-ticated or accessible in India. As the insurance industry matures, with increased multinational participation, more competitive products may become available. Currently, outsourcing parties usually obtain public liability insurance, professional liability in-surance, employee health insurance and property insurance.

teRm And notiCe PeRiod

29. does national law impose any maximum or minimum term on an outsourcing? if so, can the parties vary this by agreement?

There are no restrictions on the duration, and the parties are at liberty to fix the term of an outsourcing relationship.

30. does national law regulate the length of notice period re-quired (maximum or minimum)? if so, can the parties vary this by agreement?

There is no regulation governing notice periods, and the parties are free to agree this between themselves.

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teRminAtion And teRminAtion ConseQuenCes

31. What events justify termination of an outsourcing without giving rise to a claim in damages against the terminating party (for example, fundamental breach, repudiatory breach, insolvency events and so on)?

Instances that justify termination of an agreement without giving rise to damages are governed by the terms of the agreement. It is important that the parties include adequate exit strategies, ad-dress transition co-operation, and allocate adequate time for any transition within the agreement.

32. in what circumstances can the parties exclude or agree ad-ditional termination rights (for example, for breach, change of control, convenience and so on)?

This is governed entirely by the terms of the agreement between the parties. It is therefore imperative that clauses relating to ter-mination, notice, compensatory payments and so on are clearly drafted into the agreement.

33. What implied rights are there for the supplier to continue to use licensed iP rights post-termination? to what extent can these be excluded or included by contract?

Rights relating to IPR are governed by the terms of the agreement between the parties.

34. to what extent can the customer gain access to the supplier’s know-how post-termination and what use can it make of it?

This is governed entirely by the agreement between the parties.

liABility, exClusions And CAPs

35. What liability can be excluded? in particular, is it possible for the supplier to exclude liability for indirect and consequen-tial loss and also any loss of business, profit or revenue?

The supplier can exclude indirect and consequential losses. Dam-ages are compensatory for loss or damage suffered, and punitive damages are not payable.

36. Are the parties free to agree a cap on liability? if so, how is this usually fixed?

The parties are free to agree on a cap on the liability. However, liquidated damages for breach of contract are governed by the Indian Contract Act 1872 and case law under that statute. Liquidated damages agreed between the parties in the contract, which stipulate the damages to be paid in the event of a breach, irrespective of the actual damage suffered, must be a genuine “pre-estimate of damages”, which is likely to flow from a breach. Therefore, any cap on liability must be reasonable for the court to award it.

tAx

37. What are the main tax issues that arise on an outsourcing in relation to:

� transfers of assets to the supplier?

� transfers of employees to the supplier?

� value added tax (vAt) or the equivalent sales tax on the service being supplied?

� service taxes?

� stamp duty?

� Corporation tax?

� other significant tax issues?

Taxation policy has had a big effect on the growth of India as an offshore outsourcing destination, although a lot of the benefits available under the Software Technology Parks of India Scheme are no longer available to outsourcing companies being estab-lished in India. However, there are tax advantages, which should be considered before negotiating an outsourcing agreement.

Under Indian law, outsourcing companies are typically exempt (ei-ther wholly or in part) from tax on income earned from the export of software or services out of India, provided the fees are received in convertible foreign currency. Conversely, where fees are paid in Indian Rupees, costs can significantly increase, because the sup-plier would seek to recover the tax that it pays from the customer.

locational benefitsDepending on the locational benefits available to a unit, an Indi-an outsourcing entity can take advantage of both direct and indi-rect tax benefits. Certain entities in India can also import capital goods and consumables without paying customs duty, although this also involves making certain export commitments. Generally, the higher the value of the duty free imports, the higher the ex-port commitment. Certain entities can also benefit from exemp-tions on excise duty on local Indian goods purchased by them.

transfers of assets to the supplierThe transfer of assets by sale attracts capital gains tax (CGT) on the amount of profit made by the customer on selling the asset. Again, there may be some locational and other benefits that ex-empt the supplier from paying any taxes (for example, if a 100% Export Oriented Unit procures the assets sold, then that unit is exempt from paying CGT).

transfers of employees to the supplierThe transfer of employees is not a taxable event, and does not have any tax consequences.

vAt or sales taxSince VAT or sales tax is paid on the transfer of goods, the outsourcing service supplier must evaluate whether the product offered by them is a good or a service. If the product is classified as a good, then the requisite VAT or sales tax must be paid on the transfer of assets to the supplier.

service taxesService tax is payable on the gross amount the supplier charges for the supply of services. Since service tax is a consumption tax,

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it is only levied on services consumed in India. Therefore, a unit engaged in the export of services, where the payment is received in a foreign exchange, is exempt from paying service tax.

stamp duty Stamp duty is payable on a conveyance deed.

Corporation tax Corporation tax is payable by way of income tax under the Income Tax Act 1961. A foreign customer can also be subject to income tax if its presence in India is classifi ed as a “permanent estab-lishment” in India ( see below ).

Permanent establishment Under the Double Taxation Avoidance Agreements that India has signed with various countries, the term “permanent establish-ment” means a fi xed place of business through which the busi-ness of an enterprise is wholly, or in part, carried on. The term “permanent establishment” includes:

� A place of management.

� A branch.

� An offi ce.

� A factory.

� A workshop.

� A mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.

� A warehouse, in relation to a person providing storage facili-ties for others.

� A farm, plantation or other place where agriculture, forestry, plantation or related activities are carried out.

� A store or premises used as a sales outlet.

� An installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any 12-month period.

� A building site or construction, or installation, assembly project or supervisory activities in connection with those, where the site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any 12-month period.

� The furnishing of services (other than included services as defi ned in Article 12 of the Royalties and Fees for Included Services) within a contracting state by an enterprise through employees or other personnel, where:

� activities of that nature continue within that state for a period (or periods) aggregating more than 90 days within any 12-month period; or

� the services are performed within that state for a related enterprise (within the meaning of paragraph 1 of Article 9 of the Royalties and Fees for Included Services).

The term “permanent establishment” does not include any of the following:

� The use of facilities solely for the purpose of storage, dis-play or occasional delivery of goods or merchandise belong-ing to the enterprise.

� The maintenance of a stock of goods or merchandise be-longing to the enterprise solely for the purpose of storage, display, or occasional delivery.

� The maintenance of a stock of goods or merchandise be-longing to the enterprise solely for the purpose of processing by another enterprise.

� The maintenance of a fi xed place of business solely for the purpose of purchasing goods or merchandise, or of collect-ing information, for the enterprise.

� The maintenance of a fi xed base of business solely for the purpose of advertising, for the supply of information, for scientifi c research, or for other activities which have a pre-paratory or auxiliary character, for the enterprise.

transfer pricing issues

The Transfer Pricing Regulations (TP Regulations) are used to compute income from international transactions between associ-ated enterprises. Indian tax laws require that the pricing of trans-actions between associated enterprises must be conducted on an arm’s-length basis. An arm’s-length price means a price which is applied, or proposed to be applied, in a transaction between persons other than associated enterprises, in uncontrolled condi-tions. There is no prescribed formula that is used, though compa-nies tend to opt for either a cost plus method (of around 15%) or standard per diem rates.

The TP Regulations only apply if the parties are deemed to be associated enterprises. In an outsourcing situation, parties are deemed to be associated if:

� The supplier’s manufacture or processing of the goods is wholly dependent on the use of the customer’s IPR.

� One party, or any person specifi ed by it, supplies and infl u-ences the prices and other conditions concerning 90% or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by the supplier.

� The goods or articles manufactured or processed by the sup-plier are sold to the customer at prices and conditions that are infl uenced by the customer.

ContRiButoR detAils

sAJAi singH

J. Sagar Associates t +91 80 4350 3627 F +91 80 4350 3617e [email protected] www.jsalaw.com/contacts.html

Qualified. India, 1990

Areas of practice. Corporate commercial; mergers and acquisitions; private equity.

Documents

India - JSA La€¦ · by the provisions of the Indian Contract Act 1881. ... The contract’s scope, clearly defined. Service and perform-ance standards should be stated. Audit rights: