Outsourcing: Australia overview

A Q&A guide to outsourcing in Australia.

This Q&A guide gives a high level overview of legal and regulatory requirements on different types of outsourcing; commonly used legal structures; procurement processes; formalities required for transferring or leasing assets; data protection issues; customer remedies and protections; contracting parties' remedies; dispute resolution; and the tax issues arising on an outsourcing.

To compare answers across multiple jurisdictions, visit the Outsourcing Country Q&A tool.

This Q&A is part of the global guide to outsourcing. For a full list of jurisdictional Q&As, visit www.practicallaw.com/outsourcing-guide.

For the rules relating to transferring employees, visit Transferring employees on an outsourcing in Australia: overview.

Sheila McGregor and Andrew Hii, Gilbert + Tobin
Contents

Regulation and requirements

National regulations

1. To what extent does national law specifically regulate outsourcing transactions?

There are no national laws that specifically regulate outsourcing transactions. However, there are laws that apply to commercial contracts generally and any outsourcing transaction must comply with these laws.

 

Sectoral regulations

2. What additional regulations may be relevant for the following types of outsourcing?

Financial services

Any financial services institution carrying on business in Australia is subject to Australian legislation regulating the financial services industry. The Australian Prudential Regulation Authority (APRA) is the relevant government body responsible for overseeing compliance with Australian Prudential Standard CPS 231 (Outsourcing) (CPS 231). CPS 231 sets out the rules on how and when a financial services institution can outsource a "material business activity" (see below).

The financial services institutions that are subject to these outsourcing rules are:

  • Authorised deposit-taking institutions (ADIs) and non-operating holding companies authorised under the Banking Act 1959 (which includes foreign banks operating in Australia).

  • General insurers and non-operating holding companies authorised under the Insurance Act 1973.

  • Life companies, including friendly societies, and non-operating holding companies registered under the Life Insurance Act 1995.

The "material business activity" under CPS 231 applies to activities which have "the potential, if disrupted, to have a significant impact on the APRA-regulated institution's or group's business operations or its ability to manage risks effectively".

This assessment of a "material business activity" must consider the following matters:

  • The financial, operational and reputational impact on the financial services institution if the supplier fails to perform the outsourcing services.

  • The cost of the outsourcing services as a share of the financial services institution's total costs.

  • The degree of difficulty, including the time taken, in finding an alternative supplier or bringing the business activity in-house.

  • The ability of the institution or member of the group to meet regulatory requirements if there are problems with the supplier.

  • Potential losses to the institution's or group's customers and other affected parties in the event of a supplier failure.

  • Affiliation or other relationship between the institution or group and the supplier.

CPS 231 can also apply to outsourcing by a financial services institution to a related body corporate/entity.

The principal obligations of a financial services institution under CPS 231 fall into three main categories:

  • Policies and procedures. The financial services institution must have in place appropriate policies and procedures to manage the outsourcing of material business activities, including ensuring compliance with CPS 231.

  • Procurement process. CPS 231 imposes minimum requirements and standards that a financial services institution must be able to demonstrate to APRA that it has followed in appointing the supplier. This includes the requirement that the financial services institution notify APRA of the outsourcing arrangement (including a summary of key risks involved in the outsourcing arrangement) within 20 business days of execution of the relevant contract.

  • Outsourcing contract. The outsourcing arrangement must be documented in a legally binding contract that contains, at a minimum, certain matters that are set out in CPS 231. This includes requiring that the contract permits APRA to access documentation and information relating to the outsourcing services and to audit the supplier.

If the outsourcing arrangement involves delivery of any services from outside Australia, then the financial services institution must consult with APRA before entering into the relevant contract. APRA can require the financial services institution to make alternative arrangements if it is not satisfied that the risks involved in the offshoring are not/will not be managed appropriately.

There are ongoing review and reporting requirements that a financial services institution must comply with under CPS 231.

There are no regulations that apply to a non-Australian financial services institution (which is not regulated under Australian legislation) seeking to procure outsourcing services from an Australian supplier.

Business process

There are no regulations that apply to the outsourcing of business processes generally. However, see above, Financial services, and see below, Telecommunications andPublic sector for specific regulations where business process outsourcing is undertaken by companies in those industries.

IT and cloud services

There are no regulations that apply to the outsourcing of information technology (IT) or cloud services generally. However, see above, Financial services, and see below, Telecommunications and Public sector for specific regulations where IT or cloud services are outsourced by companies in those industries.

In relation to the financial services industry, APRA published an information paper, Outsourcing Involving Shared Computing Services (Including Cloud), setting out guidance for financial services institutions when outsourcing cloud services.

Telecommunications

Telecommunications providers and internet service providers are regulated by various Australian legislation. Telecommunications providers and internet service providers must notify the communications access co-ordinator of any change to its services or systems that is likely to have a material adverse effect on its ability to secure its systems (section 202B, Telecommunications (Interception and Access) Act 1979 (Cth)). Such changes include entering into an outsourcing arrangement.

There are no regulations that apply to non-Australian telecommunications providers or internet service providers (which are not regulated under Australian legislation) seeking to procure outsourcing services from an Australian service provider.

Public sector

Outsourcing by the Commonwealth public sector is governed by a legislative and administrative framework comprising:

  • The Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act).

  • The Public Governance, Performance and Accountability Rule 2014.

  • The Commonwealth Procurement Rules (CPRs).

The Department of Finance is responsible for setting and overseeing this framework.

The CPRs establish the framework for the procurement of outsourcing services. The core aim of the CPRs is to achieve value for money. Any decision to outsource must consider any associated financial and non-financial costs for the relevant public sector agency.

As well as the above framework, there are also certain mandatory requirements for outsourcing that are contained in the Australian Government Protective Security Policy Framework (PSPF). Part of this PSPF are the Protective security governance guidelines – security of outsourced services and functions. These provide government agencies with guidance for incorporating protective security requirements into contracts when outsourcing agency functions. Also part of the PSPF are the Risk management guidelines. According to these guidelines, agencies considering storing and processing Australian Government information in outsourced or offshore IT arrangements must document that they have calculated and accepted the associated security risks of the particular outsourcing arrangement.

Each Australian state has its own regulations on outsourcing by its relevant state agencies.

 
3. What further legal or regulatory requirements (formal or informal) are there concerning outsourcing in any industry sector?
 
4. What requirements (formal or informal) are there for regulatory notification or approval of outsourcing transactions in any industry sector?
 

Legal structures

5. What legal structures are commonly used in an outsourcing?

Company limited by shares

Description of structure. It is most common for suppliers to be constituted as companies limited by shares.

A direct contract between the customer and the supplier is the usual way to procure outsourcing services. Although this contract is normally between the entities that receive and provide the service, it is sometimes entered into by special purpose companies (on either or both of the customer and supplier side) who act on behalf of their respective corporate groups.

Advantages and disadvantages. The key advantage of a company limited by shares is that it is a separate legal entity from its owners. The owners' assets cannot be accessed by third parties in the event of a dispute with the company, except in extreme situations.

The key disadvantage of a company limited by shares is the cost of establishing and maintaining such a company.

Joint venture

Description of structure. Occasionally, where the outsourcing arrangement results in the supplier obtaining some collateral benefit which it can exploit for its other customers, the customer and the supplier will enter into a joint venture arrangement to allow the customer to access these collateral benefits.

Examples of this include where the outsourcing arrangement results in the development of new, commercially exploitable materials or intellectual property. Or where the customer is essentially funding the establishment of a new outsourcing service which the supplier can also deliver to third parties.

Advantages and disadvantages. The key advantage of a joint venture is that it allows for each party to share in the costs as well as the benefits (for example, revenues) of it.

The key disadvantage of a joint venture is that it is not separate from its owners, so any losses suffered by the joint venture in excess of its assets are borne by the participants in it.

Multi-sourcing arrangements

Description of structure. In the case of multi-sourcing models, it is typical to require each supplier to execute substantially similar contracts (although the service details will differ depending on each supplier's offering/capabilities). In legal terms, this is no different from the situation where companies limited by shares enter into direct contracts with one another, except that the contracts include an identical/common section outlining how governance will be dealt with.

The legal relationship is typically between the customer and each supplier. That is, the suppliers do not have any legal relationship with one another, except via the customer.

It is usual for the customer to lead the governance process (for example, resolve disputes between suppliers). However, it is not unknown for a particular supplier to be appointed to manage the governance process and resolve disputes.

Advantages and disadvantages. The key advantage is that it allows the customer to manage each supplier on a set of common terms, with the customer maintaining control over the governance of such arrangements.

 

Procurement processes

6. What procurement processes are used to select a supplier of outsourced services?

Request for proposal

A request for proposal (RFP) process is commonly used to select a supplier of outsourced services.

Under an RFP, a customer will typically set out the process by which it intends to appoint a supplier, its requirements, the legal terms and conditions under which the customer intends to contract (which can be in the form of a term sheet) and any other information needed from the prospective supplier.

A prospective supplier will typically be asked to provide a price and its proposed solution, and also to identify what other areas of the RFP they disagree with (for example, any disagreements in respect of the legal terms and conditions).

Invitation to tender

See above, Request for proposal.

Due diligence

As part of the procurement process, workshops are held so that prospective suppliers can obtain a better understanding of the customer's requirements, and for the customer to obtain a better understanding of the supplier's solution and capabilities. It is also common for the customer to require prospective suppliers to provide information about their financial status and corporate structure.

Customers also usually ask the supplier to provide references.

Others

Customers issue requests for information (RFI) or expressions of interest (EOI) when they haven't quite decided on their requirements. Under an RFI/EOI, the customer typically seeks to understand what the prospective suppliers' solutions are. This process can be followed by a design or scoping engagement, under which the customer seeks to develop its requirements with the assistance of a third party, then subsequently by an RFP.

 

Transferring or leasing assets

Formalities for transfer

7. What formalities are required to transfer assets on an outsourcing?

Immovable property

Each Australian state has specific laws on the transfer of land. In each state, any transfer of land (including granting certain leases) must be registered.

IP rights and licences

The main IP right that subsists in software is copyright. Copyright can be transferred under an outsourcing contract. However, it is not common for pre-existing copyright to be transferred. It is more common for copyright created as part of the outsourcing services to be transferred under an outsourcing contract.

The ability to transfer licences will depend on the underlying licence terms. In most cases, it will require the consent of the licensor (typically, the owner of the copyright).

It is not common for other IP rights, such as patents and trade marks, to be transferred as part of an outsourcing transaction. Unlike copyright, these other forms of IP rights are registered, so any transfer must also be registered.

Movable property

Most moveable property can be transferred by agreement, without registration. There are some exceptions to this, for example, motor vehicles.

In Australia, a person can register a security interest in respect of personal property (including IP) in the personal property securities register. A person acquiring personal property can be subject to any security interests registered in respect of that property.

Key contracts

The transfer of all of a party's rights and obligations under a contract will require consent from all the other parties to that contract.

The transfer of a party's rights (but not obligations) will not require consent from the other parties to that contract, unless the contract itself requires consent from the other parties, or the contract is personal in nature.

Data and information

Some kinds of data and information are subject to copyright (see above, IP rights and licences).

However, data and information that is not subject to copyright cannot technically be owned in the same way as other IP and therefore cannot be transferred as property. However, such data and information can be protected by general law rules on confidentiality and contractual commitments from the parties can provide something akin to the transfer of ownership in such data and information.

There are also restrictions on the transfer of data constituting personal information (see Question 10).

 

Formalities for leasing or licensing

8. What formalities are required to lease or license assets on an outsourcing?

Immovable property

Each Australian state has specific laws on the leasing of land. In each state the leasing of land must be registered in certain circumstances.

IP rights and licences

Granting a licence in respect of copyright can be done under an outsourcing contract (or otherwise in writing).

Granting licences in respect of patents and trade marks can also be done under an outsourcing contract and must be noted on the relevant government register.

Movable property

Granting leases in respect of moveable property can be done under an outsourcing contract (or otherwise in writing). It is typical for lease payments to be secured against the property being leased. As such, the lessor's security interest should be registered on the personal property securities register to prevent a third party from obtaining a superior security interest to the lessor.

Key contracts

Not applicable.

Data and information

Not applicable.

 

Transferring employees

Transfer by operation of law

9. In what circumstances (if any) are employees transferred by operation of law?

Initial outsourcing

The customer's employees do not, by operation of law, become employees of the supplier when an outsourcing occurs. Further, the law does not permit the customer to unilaterally assign the employment of its employees to the supplier.

The customer's employees will "transfer" to the supplier (that is, cease to be employed by the customer and become employees of the supplier), where:

  • The supplier makes an offer of employment to the supplier's employees who will provide the outsourced services.

  • The employees accept the supplier's offer of employment.

An employee who is not offered (or does not accept an offer of employment from the supplier) remains employed by the customer. The customer can seek to redeploy the employee to any available position or terminate his employment due to redundancy.

Change of supplier

There is no automatic transfer of employees from an outgoing supplier to an incoming supplier by operation of law on change of supplier. The process for the transfer of employees between suppliers is the same as for an initial outsourcing and employee consent is required.

Termination

When services are insourced, the transfer of employees of the supplier to the customer does not occur automatically by operation of law.

The process for the transfer of employees from the supplier to the customer is the same as for an initial outsourcing and a change of supplier and employee consent is required.

For more information on transferring employees on an outsourcing, including structuring employee arrangements (including any notice, information and consultation obligations) and calculating redundancy pay, see Transferring employees on an outsourcing in Australia: overview.

 

Data protection and secrecy

10. What legal or regulatory requirements and issues may arise on an outsourcing concerning data protection?

Data protection and data security

General requirements. Under the general law, all private sector organisations (with limited exceptions for small businesses) must comply with the Commonwealth Privacy Act 1988. The Privacy Act contains the Australian Privacy Principles (APPs) which contain rules regarding the collection, use, storage and disclosure of personal information.

Under the Privacy Act and APPs, "personal information" is any information or opinion about an individual (who is either identified or reasonably identifiable), regardless of the truth of that information/opinion or the way it is stored. The most common forms of personal information are an individual's name, address, telephone number, e-mail address, date of birth and bank/credit card details.

An individual is "reasonably identifiable" where the relevant information/opinion does not expressly identify them, but the individual can be identified from the relevant information (for example, a motor vehicle licence number).

A customer cannot avoid its obligations under the Privacy Act by outsourcing (that is, by having a third party collect, use, store or disclose personal information on its behalf).

Security requirements. Under the APPs, a customer that holds personal information must take reasonable steps to ensure the security of that information.

There is no specific standard that the customer must meet under the APPs. The test is one of reasonableness, which is assessed in the context of:

  • The individual customer.

  • The nature/sensitivity of the personal information.

  • Possible adverse consequences in the event of breach.

  • The practical implications of implementing the security measure.

Although there is no specific standard to be met under the APPs, a customer usually requires their supplier to meet both the customer's own security policies and standards as well as third party standards.

Mechanisms to ensure compliance. Audit provisions in outsourcing contracts allow a customer to ensure that a supplier is complying with the outsourcing contract. Additionally, where the outsourcing contract requires the supplier to comply with a third party standard, the supplier will be required to provide certificates and reports showing compliance with those standards.

International standards. It is common to require suppliers to comply with third party standards.

Sanctions for non-compliance. Non-compliance will constitute a breach of contract, typically entitling the customer to damages for any loss suffered. An outsourcing contact will usually provide unlimited liability for breach of privacy. From a practical perspective, a breach of privacy triggers a requirement for the supplier to remedy the default within a certain period.

Banking secrecy

General requirements. There are no specific banking secrecy laws in Australia. The Privacy Act applies to financial services institutions in Australia, as well as the Code of Banking Practice and Credit Reporting Code of Conduct (which apply to banking practice generally, and not specifically to data secrecy).

Security requirements. See above, Data protection and data security. The nature and sensitivity of personal information that financial services institutions typically deal with mean that stringent security requirements must be implemented by financial services institutions to meet their legal requirements. These stringent security requirements will be imposed on any outsourced supplier.

Mechanisms to ensure compliance. See above, Data protection and data security.

International standards. See above, Data protection and data security.

Sanctions for non-compliance. See above, Data protection and data security.

Confidentiality of customer data

General requirements. See above, Data protection and data security.

Security requirements. See above, Data protection and data security.

Mechanisms to ensure compliance. See above, Data protection and data security.

International standards. See above, Data protection and data security.

Sanctions for non-compliance. See above, Data protection and data security.

 

Service specification and levels

11. How is the service specification typically drawn up and by whom?

Generally, the customer prepares the service specifications. It is common for a customer to engage third party consultants to assist in preparing the document. As these documents form part of the outsourcing contract, it is also common for the service specifications to be reviewed by lawyers.

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

Service levels and service credits are common in outsourcing contracts. It is typical for service levels to be established by reference to existing performance. For new service levels, a period of baselining is used to establish the service level.

Most service levels are objective (for example, number of "severity 1" issues per month), although outsourcing contracts increasingly include subjective service levels (for example, customer satisfaction surveys).

In more sophisticated arrangements, performance bonuses are available for suppliers whose performance exceeds particular targets.

Service credits are calculated on a month-by-month basis by reference to the fees for that month. The way service credits are calculated will differ from contract to contract, however, service levels are usually weighted (so that some service levels attract more service credits than others) and have a cap on them (for example, no more than 15% of fees per month).

 

Flexibility in volumes purchased

13. What level of flexibility is allowed to adjust the volumes customers purchase?

The parties to an outsourcing contract have total flexibility to specify whether or not any volume commitments will apply to their arrangement and how they should operate.

 

Charging methods and key terms

14. What charging methods are commonly used on an outsourcing?

Fixed and variable charges

A charging mechanism that consists of fixed charges and variable, consumption-based charges is most common.

Pure fixed price models are rare because they do not typically allow a customer to increase or decrease the volume of services they consume.

Pure consumption-based pricing models are also infrequent as they do not typically provide a supplier with the certainty that their initial capital commitments will be recouped.

Additional resource charges and reduced resource credit are becoming less popular in Australia. However, tiered or banded pricing models are often seen, particularly in larger outsourcings.

 
15. What other key terms are used in relation to costs, including auditing and benchmarking mechanisms?

Outsourcing contracts normally include the right for a customer to audit the supplier's fees (to ensure that they have been properly calculated) and to benchmark the supplier's fees (with a price adjustment in the event that the benchmark price is lower than the supplier's fees).

Indexing the price to the Consumer Price Index (CPI) is also used, often subject to caps (for example, CPI, but no more than 5%). Depending on the pricing structure, the CPI adjustment is sometimes limited to only apply to the labour component of the price. Adjustments due to changes in foreign exchange rates are also regularly used, but will depend on how the parties have agreed to apportion foreign exchange risk.

Customers can usually withhold fees in the event of a dispute about the invoice, as long as they are acting in good faith. Sometimes there are thresholds or other conditions that apply to any fee withholding.

Except for the above, price changes will typically only occur by agreement.

All of the abovementioned items are typically heavily negotiated between customers and suppliers.

 

Customer remedies and protections

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

The remedies and relief available to a customer will depend on the nature of the supplier's breach.

If a customer has suffered loss as a result of the breach, they might be able to recover damages that put them in the same position as if the breach had not occurred and the contract had been performed.

Depending on the seriousness of the breach and the terms of the contract, the customer might also be entitled to terminate the contract.

A customer might be able to obtain an order for specific performance from a court to require the supplier to perform the contract. Specific performance is generally only available where damages would not be an adequate remedy to cover the breach.

A customer's ability to recover damages will also depend on the extent to which it contributed to the breach/loss and what steps it took after the breach occurred. Under the general law, an innocent party to a breach of contract must mitigate its loss. It cannot sit on its hands and recover damages to the extent it could itself have reduced the loss.

 
17. What customer protections are typically included in the contract documentation to supplement relief available under general law?

Audit rights allow a customer to verify that the supplier is performing the contract in accordance with its terms. It is typical for audits to only occur at set intervals (for example, once a year, unless a previous audit has identified a problem), and for the customer to pay the cost of the audit (unless the audit identifies a problem, in which case, the supplier pays).

Suppliers are often required to provide periodic reports to the customer and participate in governance forums for similar reasons.

Benchmarking is also used in outsourcing contracts, usually occurring at set intervals (for example, once a year with none in the first year). Appointing a benchmarker either happens by agreement, or one is unilaterally appointed by the customer from a pre-agreed list. The scope of the benchmarker will depend on the services under the outsourcing arrangement. Benchmarking is usually conducted at a service grouping level (as opposed to a whole of agreement level). The most common consequences of a benchmark are for:

  • An automatic price adjustment (either to the benchmark price or within a set percentage of the benchmark price).

  • The parties to agree a remediation plan to bring the pricing down to the benchmark price.

  • The customer to terminate the agreement without penalty.

Step-in rights are also typical in outsourcing contracts, allowing a customer (or nominated third party) to perform the relevant services or manage/direct the supplier to perform the relevant services. Step-in rights are usually only triggered once a breach of contract has occurred, or is imminent.

 

Warranties and indemnities

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

Warranties are included in respect of:

  • The supplier's legal capacity to enter into the outsourcing contract.

  • The supplier's ability to perform the service (for example, that they have the relevant resources and personnel).

  • The supplier having the necessary rights to provide the services (for example, intellectual property (IP) rights, other licences).

  • The quality of the supplier's work (for example, deliverables meet specifications, services performed professionally, promptly and with due care and skill).

Indemnities are provided in respect of personal injury, death, property damage, breach of confidentiality and privacy, and for third party IP claims.

 
19. What limitations are imposed by national or local law on fitness for purpose and, quality of service, or similar warranties?

The Competition and Consumer Act contains statutory guarantees that cannot be excluded under a consumer contract. These include guarantees in respect of due care and skill, fitness for purpose and reasonable time for supply. Under the Competition and Consumer Act there are a limited number of ways that a contracting party can limit its liability in respect of these non-excludable provisions.

A consumer contract is one where the relevant goods or services are of a kind ordinarily acquired for personal, domestic or household use, or where the value of the goods or services is under AU$40,000.

To determine the value of the goods or services, the price of each individual component is relevant, not necessarily the entire contract (for example, a contract for 100 notebooks worth AU$1,000 each will qualify as a consumer contract, even though the total value of the contract is AU$100,000, because each notebook is worth less than AU$40,000). So, a contract between two corporations can sometimes qualify as a consumer contract. It would be unusual for an outsourcing contract to meet these consumer contract tests.

 
20. What other provisions may be included in the contractual documentation to protect the customer or supplier regarding any liabilities and obligations arising in connection with outsourcing?

Outsourcing contracts contain detailed provisions setting out what the customer and supplier must do in respect of the arrangement.

Indemnities are included for breach of certain obligations (for example, personal injury, death, damage to property, breach of confidentiality and privacy). Indemnities will typically allow an innocent party to recover a greater amount of their loss than if they were to solely rely on their right to claim damages at general law for the same breach.

Parties usually exclude and/or limit their liability under an outsourcing contract. Exclusions of liability are typically directed at excluding liability for certain kinds of loss (for example, loss of profits), regardless of the nature of the breach. Liability is typically capped by reference to the value of the outsourcing contract. Certain kinds of obligations will be excluded from any liability cap, so that liability is unlimited in those situations (for example, breach of confidentiality and privacy).

 

Insurance

21. What types of insurance are available in your jurisdiction concerning outsourcing, and to what extent are they available?

The most common forms of insurance that a customer will require a supplier to maintain are:

  • Public liability insurance.

  • Product liability insurance.

  • Property insurance.

  • Professional indemnity insurance.

  • Employee dishonesty/computer crime insurance.

 

Term and notice period

22. Does national or local law impose any maximum or minimum term on an outsourcing? If so, can the parties vary this by agreement?

Australian law does not impose any maximum or minimum term on an outsourcing arrangement.

 
23. Does national or local law regulate the length of notice period required (maximum or minimum)? If so, can the parties vary this by agreement?

Australian law does not regulate the length of a notice period. Parties are free to agree it as they wish.

 

Termination and termination consequences

Events justifying termination

24. What events justify termination of an outsourcing without giving rise to a claim in damages against the terminating party?

At general law, the rules regarding the termination of contracts are highly technical. Basically a party can only terminate a contract where the other party has:

  • Breached a term of the contract, where the contract provides (either expressly or by implication) that a breach of that term will entitle the innocent party to terminate.

  • Breached a condition of the contract. At general law a "condition" is a term that the law regards as being critical to the agreement between the parties, so that any breach of that term (whether minor or serious) justifies termination.

  • Breached an intermediate term of a contract in a serious manner. At general law an "intermediate term" justifies termination only where the breach of it is sufficiently serious (so minor breaches of an intermediate term do not justify termination).

  • Shown a clear unwillingness or inability to perform the contract (repudiation).

A party seeking to terminate a contract in any of the situations listed above must be careful to ensure that the relevant event that they seek to rely on actually justifies termination. Purporting to terminate a contract where a valid justification does not exist exposes that party to a claim that they have repudiated the contract (which would entitle the other party to terminate and recover damages).

Material breach

Outsourcing contracts expressly provide a right for a customer to terminate following the supplier's material breach of the contract. Although these provisions are common, it is difficult to state with any certainty exactly when a breach will be "material". This will depend on the nature of the obligation breached and the nature of the loss suffered by the customer.

A contract will typically provide a period (usually 30 days) within which a supplier has the opportunity to remedy a breach before a customer can exercise any right to terminate.

It is unusual for a supplier to have the right to terminate for the customer's material breach, except where the customer fails to pay a correctly rendered invoice (usually multiple grace periods are provided for the customer to pay). This largely reflects the fact that an outsourced service will often be crucial for a customer's operations, and continuity of service is critical.

Insolvency events

Outsourcing contracts expressly provide a right for a party to terminate on the other party's insolvency. Depending on the customer and nature of the services, a supplier can be required to continue providing services if the customer experiences an insolvency event, provided that the relevant manager, administrator or liquidator agrees to pay the fees under the contract.

Termination for convenience

Typically only a customer will have the right to terminate an outsourcing contract for convenience. A lengthy notice period usually applies, and the outsourcing contract will provide that the customer must pay some form of early termination fee.

 
25. In what circumstances can the parties exclude or agree additional termination rights?

Contracting parties have the freedom to specify exclusions or additions to the rights to terminate a contract.

The most common rights (in addition to those set out in Question 24 above) are for the customer to terminate in the event of:

  • A change of control.

  • Persistent breach of service levels.

  • Damage to reputation.

  • Fraud.

Sometimes a supplier's right to terminate is excluded, except for a customer's failure to pay a correctly rendered invoice (usually multiple grace periods are given to the customer).

 
26. What remedies are available to the contracting parties?

The main remedies for breach of contract are:

  • Damages.

  • Right to terminate.

  • Specific performance (exceptionally and at the discretion of the court).

In addition to these general remedies, many outsourcing agreements contain remedies for breaches of specific obligations (for example, service credits for failure to meet service levels). See Question 24.

 

IP rights and know-how post-termination

27. What, if any, implied rights are there for the supplier to continue to use licensed IP rights post-termination? To what extent can the parties exclude or include these by agreement?

There is no general implied right at law for a supplier to continue using licensed IP rights following termination of an outsourcing agreement. However, the specific situation of a particular outsourcing arrangement can result in such an implied right. It is generally not advisable to rely on implied rights if alternatives are available (where the parties are in a position to include an express right in the contract).

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

A customer can only gain access to a supplier's know-how after termination with the agreement of the supplier. This can be agreed upfront in an outsourcing contract. The parties' agreement will determine the uses that a customer can make of such know-how.

 

Liability, exclusions and caps

29. What liability can be excluded?

Contracting parties have the freedom to exclude most liability under a contract, subject to:

  • Where legislation prohibits such an exclusion (see Question 19).

  • Where the exclusion results in a party effectively having no liability to perform the contract.

Parties usually exclude liability for indirect, special or consequential loss. This is often subject to a qualification that all direct losses are recoverable.

Liability for loss of profits, loss of revenue, loss of savings and loss of business opportunity are also often excluded. Whether or not such losses are recoverable if they constitute direct loss will be negotiated.

 
30. Are the parties free to agree a cap on liability and, if desirable, a cap on indemnities? If so, how is this usually fixed?

Parties are free to agree a cap on liability. This is often based on the value of the contract and will be subject to negotiation between the parties.

 

Dispute resolution

31. What are the main methods of dispute resolution used?

Disputes are usually referred to a dispute resolution process set out in the outsourcing contract before any recourse to litigation is made. However, it is normal to include an exception in the case of urgent interlocutory relief, for example, to prevent a breach of confidentiality or intellectual property.

A dispute resolution process sets out a path by which a dispute will be escalated. The first two or three stages involve the dispute being escalated to progressively more senior individuals within each party's organisation if it cannot be resolved.

After this, the parties refer the matter to mediation, expert determination or arbitration. The contract will provide that the referral either happens by agreement or by one party requiring the matter to be referred.

The process of mediation/expert determination/arbitration should be set out in detail in the outsourcing contract. This includes:

  • How the mediator/expert/arbitrator will be appointed.

  • The rules that will govern the mediation/expert determination/arbitration (including location and language).

  • Whether or not the mediation/expert determination/arbitration will be binding on the parties.

 

Tax

32. What are the main tax issues that arise on an outsourcing?

Transfers of assets to the supplier

Capital gains tax is payable on any capital gains made on the sale of assets.

Stamp duty can be payable on the transfer of assets depending on the Australian state that the property is located in, the nature of the property and the contracting parties.

Transfers of employees to the supplier

Employers are responsible for withholding the income taxes payable by individual employees. Employers are also responsible for paying superannuation in respect of their employees (see Question 10). The transfer of employees from a customer to a supplier will mean that the customer will no longer be required to withhold income tax or pay superannuation in respect of those employees.

Each state has its own payroll tax system. Payroll tax is payable by employers and is calculated against the total wage bill expense of the employer. The transfer of employees from a customer to a supplier will mean that the customer will no longer be required to pay payroll tax for those employees.

VAT or sales tax

Australia's consumption tax is called the Goods and Services Tax (GST). It is levied against the supply of goods and services, with limited exceptions, and remitted by suppliers of goods and services to the Australian Taxation Office. GST is usually passed on to the customer (that is, the fees will be expressed as exclusive of GST, with GST separately charged by the supplier to the consumer).

Whether or not a supplier must remit GST to the Australian Taxation Office will depend on the supplier's connection with Australia.

Service taxes

See above, VAT or sales tax.

Stamp duty

Each Australian state has its own stamp duty regime. Stamp duty is typically levied against the transfer of certain property. Stamp duty only arises as a matter to be considered where property is transferred as part of the outsourcing arrangement.

Corporation tax

The corporate tax rate is 30% and is payable by Australian corporations on their taxable income (which is net of expenses that can be tax deducted). An Australian customer's costs in respect of an outsourcing arrangement can be tax deductible.

 

Online resources

Australian government legislation

W www.comlaw.gov.au

Description. Official Commonwealth government website containing current Commonwealth legislation.

Australasian legal Information Institute

W www.austlii.edu.au

Description. Unofficial repository of Australian legislation and case law (at the Commonwealth and state level) operated by the University of Technology Sydney and University of New South Wales.

Australian Prudential Regulation Authority

W www.apra.gov.au

Description. Official website of the Australian Prudential Regulation Authority.

Office of the Australian Information Commissioner

W www.oiac.gov.au

Description. Official website of the Office of the Australian Information Commissioner.



Contributor profiles

Sheila McGregor, Partner

Gilbert + Tobin

T +61 2 9263 4152
F +61 2 9263 4111
E smcgregor@gtlaw.com.au
W www.gtlaw.com.au

Professional qualifications. BA (Hons), LLB, Sydney University; diploma from the Australian Institute of Company Directors (AICD)

Areas of practice. Information technology; telecommunications; outsourcing; procurement.

Andrew Hii, Lawyer

Gilbert + Tobin

T +61 2 9263 4046
F +61 2 9263 4111
E ahii@gtlaw.com.au
W www.gtlaw.com.au

Professional qualifications. LLM (Hons), University of Cambridge; BCom, LLB, University of NSW

Areas of practice. Information technology; telecommunications; outsourcing; procurement.


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