Outsourcing: Canada overview

A Q&A guide to outsourcing in Canada.

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 multi-jurisdictional guide to outsourcing. For a full list of jurisdictional Q&As, visit www.practicallaw.com/outsourcing-mjg.

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

Wesley Ng and Michael Decicco, Stikeman Elliott LLP
Contents

Regulation and requirements

National regulations

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

In Canada, no national (or provincial) laws generally regulate outsourcing transactions. However, depending on the industry sector and/or the specific details of the outsourcing transaction (transfer of employees, movement of technology, licences and so on), different aspects of the transaction may be subject to regulation as further described in this chapter.

Sectoral regulations

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

Financial services

Guideline B-10 of the Office of the Superintendent of Financial Institutions (Canada) (OSFI) governs outsourcing arrangements entered into by federally regulated entities (FREs), which include:

  • Canadian banks.

  • Canadian insurance companies.

  • Canadian fraternal benefit societies.

  • Canadian trust and loan companies.

  • Canadian co-operative credit associations.

  • Canadian branches of foreign banks and insurance companies.

Guideline B-10 broadly interprets outsourcing arrangements as any arrangement between an FRE and a service provider in which the service provider performs a business activity, function or process that is, or could be, undertaken by the FRE itself.

Guideline B-10 imposes overall accountability and control requirements on FREs. It requires an assessment of the materiality of an outsourcing arrangement and the implementation of a risk management programme (the scope and nature of which will vary depending on the materiality of the particular outsourcing arrangement). OSFI's specific expectations can vary depending on the nature of the outsourcing arrangement being contemplated and the relationship between the FRE and the service provider.

As part of an FRE's risk management programme in respect of any outsourcing, OSFI expects that an FRE will:

  • Conduct due diligence to fully assess the risks associated with the outsourcing arrangement.

  • Document the outsourcing arrangement by a written contract that addresses all elements of the arrangement, including (if applicable):

    • the nature and scope of the services to be provided;

    • performance measures;

    • reporting requirements;

    • dispute resolution procedures;

    • termination rights;

    • ownership of, and access to, assets;

    • contingency planning;

    • audit rights;

    • subcontracting;

    • confidentiality, security and separation of property; and

    • pricing and insurance.

  • Comply with all applicable record retention requirements.

  • Ensure adequate business continuity measures are in place.

  • Develop, implement and oversee procedures that actively monitor and supervise the outsourcing arrangement.

Business process

There are no regulations specific to business process outsourcing (BPO). BPOs can cover many different types of services, and there may be industry-specific rules or regulations that are applicable to a particular BPO.

IT

There are no regulations specific to outsourcings in the information technology industry.

Telecommunications

There are no telecommunications regulations specific to outsourcing. However, when structuring any outsourcing in the telecommunications sector, the parties must comply with the general telecommunications regulatory requirements. Telecommunications providers are regulated by the Canadian Radio and Telecommunications Commission (CRTC). Specific restrictions contained in the terms of any applicable CRTC licences held by the telecommunications provider and any facilities licences issued by Industry Canada can prevent or restrict all or certain aspects of an outsourcing transaction. In addition, Canadian ownership requirements contained in the Telecommunications Act can restrict non-Canadian controlled entities from performing certain services for Canadian controlled entities.

Public sector

When a provincial or federal body enters into an outsourcing, it must comply with the applicable public procurement rules (see Question 6) and its authority to outsource the particular activity must be considered. Privacy regulations must also be considered in relation to outsourcings by public sector bodies (see Question 10).

Other

The regulation of outsourcing transactions under provincial and federal law in Canada depends less on the nature of the outsourced service (for example, IT or BPO) and more on the sector in which the outsourcing takes place (for example, financial services or telecommunications) or the specific details of the outsourcing (for example, cross-border transfer of technology or transfer of employees).

 
3. What further legal or regulatory requirements (formal or informal) are there concerning outsourcing in any industry sector?

Outsourcings in any sector can be subject to sector-specific regulations. As such, it is not possible to provide a comprehensive overview of each sector's requirements. The following non-exhaustive list provides examples of sectors that are subject to sector-specific regulation (the primary regulator of each sector is provided in brackets):

  • Aviation (Transport Canada).

  • Consumer credit (Financial Consumer Agency of Canada and the Office of the Superintendent of Financial Institutions (Canada)).

  • Education and childcare (various provincial bodies).

  • Energy (National Energy Board and various provincial bodies).

  • Food (Canadian Food Inspection Agency).

  • Gambling (various provincial bodies).

  • Healthcare (various provincial bodies).

  • Pensions (Office of the Superintendent of Financial Institutions (Canada) and various provincial bodies).

  • Rail (Transport Canada).

  • Road transport (Transport Canada and various provincial bodies).

  • Water and sewage (Environment Canada).

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

Financial services

An FRE that outsources, or contemplates the outsourcing of, one or more business activities must ensure that the key stakeholders within the FRE receive sufficient information to enable the FRE to discharge its duties and obligations under OSFI's Guideline B-10. While regulatory notification or approval is not required, some FREs may ask OSFI for guidance on material outsourcing arrangements in certain circumstances.

Telecommunications

In the telecommunications sector, notification and/or approval requirements may be found in the terms of any applicable Canadian Radio and Telecommunications Commission (CRTC) licences held by the telecommunications provider, or facilities licences issued by Industry Canada. The potential consequences of failing to comply with any notification or approval requirements will be specified in the applicable licences.

 

Legal structures

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

Direct outsourcing

Description of structure. The simplest structure is a direct outsourcing, which involves a customer directly contracting with a supplier, and is typically comprised of one or more separate contracts dealing with core issues and detailed schedules that set out:

  • The services provided.

  • Payment terms.

  • Key personnel and assets.

  • Performance obligations of the supplier and the consequences of failing to meet those obligations.

The structure is more complex if the customer procures services on behalf of itself and its group companies. Typically, a customer either enters into an outsourcing contract as agent on behalf of its group companies, or includes a third party rights clause to ensure its group companies have directly enforceable rights under the agreement.

In this case, a supplier will typically request specific contractual provisions that control multiple actions by the customer and its group companies, and ensure that any clauses limiting and/or excluding the supplier's liability apply to each of the customer and its group companies.

Depending on a particular supplier's reputation and financial position, a customer may require performance guarantees by the supplier's corporate parent. In addition, if a supplier intends to use subcontractors, the customer may require:

  • That the supplier notify the customer of its choice of subcontractor.

  • That the supplier remain liable for its subcontractors' acts and omissions.

  • A right to veto particular subcontractors.

In order to preserve flexibility and mitigate risk, a customer will typically request some degree of termination transition service assistance. The duration and extent of such assistance will depend on the materiality and complexity of the particular outsourced services.

Advantages and disadvantages. Direct outsourcing arrangements allow a customer to streamline its operations and take advantage of economies of scale achieved by a large supplier. By retaining a third party to perform non-core operations, a customer is better able to focus on the core areas of its business. The potential issues associated with an outsourcing depend on the sector in which the customer operates. For example, in highly regulated sectors such as financial services, a customer needs to carefully consider that all requirements applicable to the outsourcing are fulfilled.

Multi-sourcing

Description of structure. The customer enters into contracts with different suppliers for specific services. The issues are generally similar to those in a direct outsourcing (see above, Direct outsourcing) but, in addition, the customer must ensure that interfaces between the different suppliers are carefully managed to ensure the seamless provision of the overall service. The customer may also wish to impose contractual obligations in suppliers to co-operate with each other.

Advantages and disadvantages. In addition to the advantages and disadvantages described for a direct outsourcing (see above, Direct outsourcing), the difficulty of managing multiple suppliers to perform ongoing related services that interface with each other is likely to add layers of cost, complexity and risk.

Indirect outsourcing

Description of structure. The structure of an indirect outsourcing is similar to a direct outsourcing (see above, Direct outsourcing), except that the customer appoints a supplier that immediately subcontracts to another supplier.

Advantages and disadvantages. The structure shares similar advantages and disadvantages to direct outsourcing (see above, Direct outsourcing), except that it is often more difficult for the customer to manage the activities of, and enforce its rights upon, the supplier's subcontractor.

Joint venture or partnership

Description of structure. The customer and the supplier set up a joint venture company, partnership or contractual joint venture. Each party contributes certain assets, technology and capital to the entity performing the services for the customer.

Advantages and disadvantages. Advantages of this structure include:

  • The customer having a greater degree of control than in the other structures.

  • The customer benefiting from the supplier's knowledge and expertise.

  • The customer sharing in the profits generated by any third party business the joint venture may conduct.

  • Smoother repatriation of the services or transition to a new supplier.

However, in addition to the detailed agreements required to document the outsourcing arrangement, the joint venture or partnership arrangement requires complex and comprehensive agreements that address the formation, decision-making, profit sharing and dissolution of the entity.

Captive entity

Description of structure. The customer outsources its processes to a wholly-owned subsidiary.

Advantages and disadvantages. This provides the customer with a great degree of control, allowing the services to remain within the governance and control of the customer. These arrangements may provide the customer with tax benefits. Considerations with respect to this structure include:

  • Potentially significant upfront cost, depending on whether the customer already has sufficient assets for the subsidiary.

  • The risk may not pass sufficiently to an unaffiliated third-party supplier.

  • The supplier may not have any greater experience in providing the service.

  • Any cost reduction through economies of scale is unlikely.

Build operate transfer

Description of structure. The customer contracts with a supplier to build and operate a facility. The supplier subsequently transfers the facility to the customer.

Advantages and disadvantages. This is a relatively low-risk model but involves significant costs.

Cloud computing

Description of structure. The customer acquires remote, shared information technology infrastructure and/or services on an as-needed basis.

Advantages and disadvantages. This model offers significant cost savings since the customer is not required to acquire and maintain its own localised infrastructure to support the services. In addition, because cloud computing services are available to multiple users leveraging the same infrastructure, the cloud service supplier is typically able to achieve significant economies of scale, producing additional savings for the customer. However, customers may have little control over the services, and the virtual, shared nature of the services may present issues in highly regulated sectors.

 

Procurement processes

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

Request for proposal (RFP)

In a request for proposal (RFP) process, the customer develops a business plan for the particular service to be outsourced, which includes specific objectives, milestones and performance measures. Depending on the nature of the services, the customer may issue a request for information (RFI), quotation (RFQ) or proposal (RFP). The customer should include the following in the procurement documents:

  • All information the supplier will require to make a bid.

  • A description of the procurement selection process and rules, including the contractual terms of the prospective bid.

  • A detailed description of the service requirements.

  • A draft services agreement.

A competitive procurement process creates two contracts:

  • The bidding contract, which sets out the rules that apply up until the completion of the competitive procurement process.

  • The substantive contract, entered into between the procuring authority and the successful bidders.

In the public sector, layered on top of this framework is a collection of trade agreements and government guidelines that regulate the procurement practices of government and quasi-government entities.

Invitation to tender

An invitation to tender can be used in addition to, or as an alternative to, the RFP process and to invite responses.

Due diligence

The customer assesses the responses and selects a number of possible suppliers. Each supplier's capacity and ability are likely to be assessed at this stage. Potential suppliers can carry out due diligence of the customer's business as part of the RFP process.

Negotiation

The customer will select one or more suppliers to progress past the initial RFP stage and enter into direct negotiations (or request additional bids). In certain circumstances, a customer will engage in parallel business or contractual negotiations with two or more bidders to select the successful proponent.

 

Transferring or leasing assets

Formalities for transfer

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

Immovable property

Transfer of title to immovable property must be in writing and requires registration in the appropriate land registry office. Each province may have additional requirements for transferring immovable property.

IP rights and licences

To transfer ownership rights in a patent or copyright (including computer programs), the transfer must be in writing.

Any transfer of rights in a patent must be registered with the Patent Office of Canada and may be required to meet specific formalities provided under the Bills of Exchange Act.

Moral rights (an author's rights in a copyrighted work, including rights of attribution, anonymity and integrity) can only be waived and cannot be assigned.

Other than the requirements above, there are no prohibitions on the transfer of intellectual property in an outsourcing. However, assignments of patent or copyright licences (such as a licence to use software) may be prohibited or may require consent under the terms of the commercial agreement governing the licence. The parties to an outsourcing that involves a transfer or licence of intellectual property rights should conduct adequate due diligence in advance of the transaction in order to obtain any appropriate consents and/or additional rights.

Movable property

A transfer in the ownership of chattels can generally be effected by exchanging consideration for possession. A bill of sale can be used to evidence the transfer of title. In order to ensure that title is free and clear of any liens and is properly transferred, the parties typically arrange for national and provincial lien searches to be conducted.

Each province can also have additional requirements. For example, in Ontario, the Bulk Sales Act applies to a sale of goods or inventory (referred to as stock in the legislation) in bulk outside the usual course of the seller's business or trade, and a failure to comply with the Bulk Sales Act can invalidate the sale.

Key contracts

Any contract to be transferred should be identified at an early stage and its terms reviewed to identify whether assignment is possible without notice to the counterparty or its express consent. As with the transfer of any contract or licence, consideration should be given as to whether the burden of the contract should also transfer to the supplier, either by novation or express indemnity.

Formalities for leasing or licensing

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

Immovable property

Leases or licences of immovable property must be in writing and must be signed by both parties. It is prudent, and may also be necessary in some cases, to register leases and licences in the appropriate land registry office.

IP rights and licences

Intellectual property licences should be in written form, as a matter of good practice. Licences of registered intellectual property should be recorded on the appropriate register to avoid enforcement issues.

Trade mark licences must comply with the licensing provisions of the Trademarks Act (Canada).

Movable property

There are no strict formalities required when licensing or leasing movable property. To avoid potential ambiguity and ensure that the parties are aligned on the terms of the licence or lease, it is prudent to document the terms in writing and have each party indicate their agreement to such terms through execution.

Key contracts

The formalities for leasing or licensing under key contracts are the same as those applicable to the transfer of key contracts (see Question 7, Key contracts).

 

Transferring employees

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

To properly assess any issues that may arise in an outsourcing scenario, it is important to establish whether the relevant customer and supplier are federally or provincially regulated and if provincially regulated, the province in which the outsourcing will take place. Such inquiry will determine the legislation and other laws that must be examined for the purposes of assessing labour and employment issues arising from the outsourcing.

Initial outsourcing

A customer's non-unionised employees will not transfer to the supplier by operation of law as a result of an outsourcing and the employment of those individuals will remain with the customer.

Generally, the employment of unionised employees will also not transfer to the supplier by operation of law as a result of an outsourcing. However, if an outsourcing transaction constitutes a "sale of business" under applicable labour relations legislation, a union's collective bargaining rights could extend to the supplier. In this case, applicable labour legislation and the terms of the customer's collective agreement will dictate whether the customer's employees are automatically transferred to the supplier or whether they may exercise individual rights to remain with the customer.

In Québec, an outsourcing agreement which is accompanied by the transfer of the essential elements of the business may entail a transfer of unionised employees to the sub-contractor. However, the transfer of duties which is not accompanied by a transfer of the elements which characterise the business will not result in the transfer of the employees to the sub-contractor.

Change of supplier

If there was a change of supplier only, this will not result in the transfer of employees.

Termination

There is no automatic transfer by operation of law resulting from the termination of outsourcing arrangements. In Québec, if the subcontract consisted of work only, then there will be no other transfer of employees of the supplier to the client. However, if the transfer was accompanied by the transfer of the essential elements of the business, the termination of the outsourcing agreement (and the return to the client of the essential elements of his business) may entail the return of unionised employees to the client.

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 Canada: overview ( www.practicallaw.com/0-578-5811) .

 

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. Canada's data protection legislation is comprised of a patchwork of various federal and provincial laws and specific industry regulations that can broadly be separated into two categories:

  • Public sector. Federal, provincial and municipal governmental bodies or other public sector entities (generally government ministries and agencies; boards and commissions; school, colleges and universities; libraries; hospitals and other health integration networks) are subject to specific public sector privacy legislation and regulations. The Office of the Privacy Commissioner of Canada and many of its provincial counterparts have issued guidance on compliance with the public sector legislation, including for data protection and security and responding to freedom of information requests. In addition, personal health information that originates from a health information custodian (defined as entities such as doctors, hospitals and certain quasi-private public operations such as pharmacies and assisted living facilities) can be subject to additional legislation.

  • Private sector. Generally, Canada's federal Personal Information Protection and Electronic Documents Act (PIPEDA) and its provincial counterparts in the provinces of British Columbia, Alberta and Québec provide the regulatory framework applicable to data protection and security in the private sector. Private sector service providers may be subject to public sector requirements, depending on their client and the nature of the services being provided.

Mechanisms to ensure compliance. The contract between a customer and supplier typically contains provisions addressing the applicable legal requirements. Specific rights and obligations are often specified in the contract to enable the customer and supplier to comply with their regulatory requirements. A general undertaking by the parties to comply with all applicable privacy laws and general obligations of confidentiality is usually included.

International standards. The relevant regulations do not require compliance with any particular international standard. However, the principles underlying Canada's federal and provincial privacy legislation are generally consistent with Directive 95/46/EC on data protection. The European Commission has recognised that PIPEDA provides adequate protection for personal data transferred from the EU to Canada without the need for additional safeguards, provided the data is subject to PIPEDA.

Sanctions for non-compliance. Complaints can be made to the applicable office of the privacy commissioner (each province and territory maintains an office analogous to the Office of the Privacy Commissioner of Canada) in connection with any breach of an organisation's privacy obligations, and the organisation can be subject to investigation by the applicable office. In British Columbia and Alberta, privacy commissioners have order-making power. In addition, an individual suffering damages as a result of an entity's breach of applicable privacy legislation can seek recourse in the courts.

Banking secrecy

General requirements. In addition to privacy laws, banking secrecy laws can also apply in the context of an outsourcing. However, a bank's common law duty of confidentiality to its customers is not absolute, and is subject to exceptions where:

  • The bank is compelled by law to disclose.

  • It is in the interests of the bank to disclose.

  • The customer consents.

  • There is a duty to the public to disclose.

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

International standards. No international standards are compulsory.

Sanctions for non-compliance. In addition to the sanctions for non-compliance discussed above (see above, Data protection and data security: Sanctions for non-compliance), an individual or entity suffering damages as a result of a bank's breach of its duty of confidentiality can seek recourse in the courts.

Confidentiality of customer data

General requirements. Confidentiality obligations regarding customer data can arise through privacy laws and the terms of the commercial agreements with the customers. Financial institutions are also subject to a duty of confidentiality to their customers (see above, Banking secrecy).

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

International standards. No international standards are compulsory.

Sanctions for non-compliance. See above, Banking secrecy: Sanctions for non-compliance.

 

Service specification and levels

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

The responsibility for preparing the service specifications will vary by transaction and sector. To the extent possible, a customer should describe the services in detail as part of the request for proposal (RFP) process in order to obtain realistic and comparable bids.

However, it is common for an RFP to only contain a high-level description of the services. This is typically the case where the customer is performing or obtaining the service for the first time. In complex outsourcings, a customer may engage one or more specialised third parties to assist with developing the service specifications.

Drafting complex service specifications is often an iterative and interactive process between the customer and supplier that evolves as the customer better understands its own requirements and the supplier gains additional insight into the customer's business. For simpler and more standard outsourcings, the service specifications can follow an industry standard model. There is no one-stop shop for models, as even standard or simple outsourcings will be specific to the services to be provided.

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

Service levels and service credit schemes can vary considerably depending on the industry, the level of customisation of the service and how important the services are to the customer's business.

Often, specific service levels in respect of a supplier's performance of objectively measurable services (for example, time to respond, time to notify or resolution time) are set out in detail in the agreement. For services that are not objectively measurable, more general service warranties can be included, but these can be more difficult to enforce.

In long-term outsourcings, a customer may require a supplier to improve its service levels based on the supplier's increased effectiveness and efficiency over time. The parties can also agree to assemble governance committees that will meet regularly to assess the supplier's performance against the service levels.

Service level credits are a mechanism that ensures that the service provider is incentivised to meet the customer's internal service level requirements or other expectations. While service level credits are often viewed as compensation for poor service, they are sometimes not sufficient to offset the full impact of missed service levels. Service level credits can be calculated in a number of ways, including:

  • A percentage of fees or fixed dollar amount for any service level failure.

  • Different dollar amounts or percentages depending on the criticality of the service level and/or the length of the service level breach.

  • Scorecard mechanisms.

  • Earnbacks (where a supplier can "earn back" a service level credit by achieving or surpassing service level requirements in subsequent measurement periods).

 

Flexibility in volumes purchased

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

A customer's request for an increase or decrease in the volume of services provided by the supplier will typically be addressed using the agreement's change control provisions.

In cases where a customer anticipates increased volumes, it should negotiate a commitment from the supplier to meet those increased volumes automatically. Often, prices are fixed within a given volume band and pricing can only be adjusted when volumes rise or fall outside of the pre-determined volume band.

In cases where a customer anticipates decreased volumes and a supplier has agreed to provide the services on the basis of a minimum amount of volume, the supplier is likely to resist attempts by the customer to reduce fees payable by the customer based on those decreased volumes. As noted above, volume fluctuations (including both increases and decreases of services) are often addressed by the parties through a pre-determined volume band.

 

Charging methods and key terms

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

The parties to an outsourcing can adopt different charging methods depending on:

  • The nature of the services being provided.

  • Whether the relationship is exclusive.

  • The risk allocation between the parties.

One or more of the following charging methods can be used for an outsourcing transaction:

  • Cost plus.

  • Fixed price.

  • Time and materials.

  • Resource-based charges.

Cost plus

The customer pays the supplier the actual cost of providing the services and an agreed on profit margin. Typically, provisions are included to ensure that costs are assessed on a transparent basis, and indirect costs (for example, overheads or additional investment in new assets) are included in the actual costs (often on an amortised basis).

Fixed price

A fixed price method is typically used in outsourcings with regular and predictable volumes and services, and where the customer desires cost certainty.

Time and materials

The customer pays an agreed on unit price for specific items of service (such as volumes of data processed or deliveries made). The supplier may want to stipulate a minimum fee. This arrangement is often used in situations where the level and volume of services are not predictable.

Resource-based charges

The customer pays a fixed recurring charge based on an assumed service volume. A resource-based charging mechanism is used to adjust the fixed charge depending on the actual volume of resources used.

In complex outsourcings, different portions of the outsourcing can be subject to different charging methods. In many instances, all of the charging methods above may be used to cost different elements of an outsourcing transaction.

 
15. What other key terms are used in relation to costs?

For complex outsourcings with an extended duration, the parties may wish to include in their agreement defined mechanisms to vary fees in order to maintain price competitiveness over the term. These mechanisms can include:

  • Index-linked increases to cover general increases in the cost of doing business.

  • Sharing cost savings that result from outsourcing the services.

  • Benchmarking the supplier's charges for the services against other suppliers or contracts in the market.

The customer will typically request the inclusion of a disputed fee mechanism under which the customer's payment obligations with respect to a disputed charge are suspended while the parties work together to resolve the dispute.

 

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?

When the supplier fails to perform its obligations, the remedies available to a customer can include:

  • Damages.

  • An order for specific performance or an injunction.

  • Termination of the contract.

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

Outsourcing contracts often afford a variety of protections to the customer. Typical protections include:

  • Comprehensive governance structures, which can include regular reporting, meetings and/or periodic reviews.

  • Rights for the customer to audit the supplier.

  • Service level and service level credit regimes (see Question 12).

  • Developing and implementing remedial plans applicable in situations where services are inadequate.

  • Rights for the customer or a third party to step in and perform the services.

  • Rights for the customer to terminate some or all of the services, and obligations on the supplier to perform post-termination assistance (see Questions 24 and 25).

  • Warranties and indemnities from the supplier (see Question 18).

  • Obligations on the supplier to hold insurance.

  • Using a scorecard that balances bonuses for exceptional performance against credits for poor performance.

  • Disaster recovery and business continuity measures.

  • Benchmarking performance against industry standards.

  • Other financial consequences, such as loss of exclusivity or a reduction in the minimum price payable by the supplier.

  • Guarantees from the parent company of the supplier.

 

Warranties and indemnities

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

Warranties

The warranties and indemnities included in an outsourcing agreement depend on the nature of the transaction and negotiations between the parties.

Typically, a supplier warrants that:

  • It is entitled to enter into the contract and perform its obligations.

  • It will perform the services with reasonable skill and care in accordance with good industry practice, in a timely and professional manner and in accordance with all applicable laws and regulations.

  • Any material information provided in the pre-tender and tender stages was and remains complete and accurate.

Suppliers may sometimes warrant that the services and deliverables do not infringe or violate the intellectual property rights of third parties and that the supplier has all rights necessary to provide the services. Suppliers can sometimes be reluctant to provide this warranty, as the customer is often protected through the indemnity described below (see below, Indemnities).

Depending on the nature of the services, a customer may request that a supplier give additional warranties specifically related to the services. For example, a customer can request that the supplier warrant that it has particular accreditations or operates in accordance with a particular quality assurance system.

Indemnities

Each party usually indemnifies the other party for property damage caused by the indemnifying party and damages arising from its wilful misconduct or gross negligence. The supplier usually also indemnifies the customer for damages or losses relating to:

  • Third-party claims of intellectual property infringement.

  • Claims from the supplier's employees for employment related matters, such as worker's compensation payments.

  • The supplier's breach of applicable law.

  • The supplier's breach of its confidentiality, personal information and/or security obligations.

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

The sale of goods and consumer protection legislation in each province and territory implies certain conditions and warranties. Warranties relating to services can be implied, but only where the beneficiaries of these services are consumers (that is, individuals acting for personal reasons). The warranties and conditions implied by law can be expressly excluded by contract.

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

Typically, an outsourcing contract will contemplate that, in the event of a breach by a party, remedies will include damages to compensate the innocent party and/or a right for the innocent party to terminate the contract. The amount of compensation that can be recovered is often limited by the terms of the contract (see Questions 29 and 30).

A party can also be protected through express contractual provisions (for example, indemnities, liquidated damages and/or service credits). In addition, a contract will typically set out the circumstances in which termination is permitted over and above those generally available as a matter of law (see Questions 24 and 25). For a discussion of other contractual remedies that are relevant in the event of a breach, see Question 26.

 

Insurance

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

The types of insurance that a customer may require a supplier to obtain and maintain during the duration of an outsourcing can include:

  • Employer's liability.

  • Workers' compensation coverage.

  • General commercial liability.

  • Automotive liability.

  • Property (land and buildings).

  • Directors and officers.

  • Fidelity 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?

Neither national nor provincial laws impose a maximum or minimum term on outsourcing agreements, so the parties can negotiate term limits specific to their arrangement. The term of an outsourcing will typically be informed by the amortisation term of the upfront investments and the complexity of the arrangement, and generally ranges from three to ten years. The arrangement can include provisions for automatic renewal on a rolling annual basis if a party does not give notice of termination, and a mechanism for reviewing charges prior to each renewal.

 
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?

Neither national nor provincial law regulates the notice period required to terminate an outsourcing arrangement. The parties can agree on termination rights and notice periods. Notice periods can vary depending on the grounds giving rise to a particular termination right. In the context of egregious breaches and where technically and practically possible, termination can occur without any advance notice.

Generally, a customer will require an extended notice period in order to repatriate the services or transition them to another supplier. In these cases, the contract typically contains transition assistance obligations on the supplier that continue after the termination of the agreement to ensure a smooth transition.

 

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?

Material breach

A contract can be terminated without giving rise to a claim in damages against the terminating party where:

  • The parties to the contract agree to terminate the contract at a particular time.

  • Either party has a right to terminate for convenience provided all termination for convenience requirements (such as notice or payment obligations) are adhered to (typically only the customer will have this right).

  • The contract has been frustrated (such that it has become incapable of being performed without default of the parties due to an unanticipated event).

  • The contract is void and of no force and effect due to mistake.

Insolvency events

Canadian insolvency legislation does not enable a party to an agreement to terminate an agreement on the grounds of insolvency. However, parties to an outsourcing agreement often agree that either party will have a right to terminate on the insolvency of the other party.

Federally regulated entities obtaining services that are subject to regulation by the Office of the Superintendent of Financial Institutions (Canada) (OSFI) Guideline B-10 are prohibited from permitting a supplier to terminate on either:

  • The insolvency of that regulated entity.

  • OSFI otherwise assuming control of that entity.

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

Commercial entities are generally free to agree to any additional termination rights (provided those rights are consistent with public policy) appropriate for their relationship. Typical termination rights include:

  • A right for either party to terminate for a material breach of the contract on notice to the other party where the breach is not remedied during a pre-determined cure period.

  • A right for either party to terminate for minor but consistent breaches (with the type of breach and number of breaches needed to trigger the termination right defined in the contract).

  • A right for either party to terminate for insolvency, as that term is defined in the contract (although see the exception for the financial sector in Question 24).

  • A right for the customer to terminate on a change of control of the supplier.

  • A right for the customer to terminate for convenience on prior notice.

In addition, the specified termination rights, general rules concerning frustration and mistake will also permit termination (see Question 24).

 
26. What remedies are available to the contracting parties?

The main remedies available to the parties in the event of a contractual breach are damages, termination and specific performance or injunction. However, parties often agree to modify and/or supplement these remedies with the following:

  • Liquidated damages.

  • Indemnities in respect of specific types of loss.

  • The ability for the customer to terminate certain aspects of the services.

  • If the services have not been performed in accordance with the contract, a right for the customer to require the supplier to re-perform the services.

  • Step-in rights for the customer or a third party to take over the services.

 

IP rights and know-how post-termination

27. What 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?

The licensing of IP rights both during and following the termination of an outsourcing agreement is a matter of contract. There are no implied rights to continue using licensed IP rights post-termination, although it can be argued that such an implied right exists where necessary to benefit from express rights that survive termination. For example, if there is a limited right to retain information post-termination for audit purposes, there will be a limited implied licence to use any licensed IP necessary to exercise that right.

 
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?

Generally, know-how is protected as a form of trade secret or confidential information rather than a form of IP. Therefore, it is usually protected by contractual agreement between the parties. Typically, a customer will agree to maintain know-how in confidence and use it only in connection with the agreement. If a supplier's know-how is retained by employees of the customer, it can be used post-termination, but that use may be subject to any confidentiality obligations of the customer contained in the agreement and any IP protection that exists in respect of documented know-how.

 

Liability, exclusions and caps

29. What liability can be excluded?

The parties are generally free to exclude most forms of liability, subject to the following:

  • An exclusion of liability can be interpreted as unconscionable or in violation of public policy (for example, excluding liability for fraud).

  • Explicit wording is usually required if exclusions or limitations are intended to apply to liability arising from a party's negligence or deliberate breach.

Typically, a supplier will aim to limit or exclude its liability for indirect, consequential, incidental and special damages as well as for loss of business, profit or revenue, where they constitute a direct loss. In contrast, a customer typically aims to ensure that it is able to recover all of its direct losses. In arrangements where a supplier will or may gain access to a customer's confidential information, a customer typically tries to ensure that the supplier remains liable for all damages arising from any breach of the supplier's confidentiality obligations, whether those damages are direct, indirect, consequential or incidental.

 
30. 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 liability cap subject to certain limitations (see Question 22). Factors considered by the parties when setting a cap on liability will depend on each party's assessment of the applicable risks and its options for mitigating those risks. The factors can include:

  • The term of the agreement.

  • The profit margin of the supplier.

  • The fee structure.

  • The existence of unique risks that cannot be mitigated.

 

Dispute resolution

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

Generally, parties agree to a staged dispute resolution approach, which begins with escalating communications to the senior management of both parties. If necessary and desired by the parties, this can be followed with non-binding efforts to mediate the dispute, and binding or non-binding arbitration. Otherwise, parties will have recourse to the courts.

Where the parties agree to binding arbitration, disputes arising from IP infringement are often carved out from the arbitration process in order to enable the injured party to seek injunctive relief from the courts.

 

Tax

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

Transfers of assets to the supplier

The transfer of assets to a supplier can give rise to federal and provincial taxes based on the proceeds of disposition of the assets, the nature of the assets and the cost of the transferred assets.

Transfers of employees to the supplier

If employees are transferred to a supplier, the supplier is generally responsible for withholding and paying certain payroll taxes from the compensation paid to the employees.

VAT or sales tax

Sales tax (which can be provincial (PST), federal (GST) and/or harmonised (HST)) can apply depending on the types of goods and services being supplied. Sales taxes vary by province as follows:

  • In Ontario, Prince Edward Island, Nova Scotia, New Brunswick and Newfoundland and Labrador, HST of 13% applies.

  • In British Columbia, Manitoba, Québec and Saskatchewan, GST of 5% and PST (which varies by province) applies.

  • In Alberta, the Northwest Territories, Nunavut and the Yukon, GST of 5% applies and PST does not apply.

The transfer of assets can also give rise to provincial, federal and/or harmonised sales taxes depending on the location and the nature of the assets being transferred.

Service taxes

See above, VAT or sales tax.

Stamp duty

Some provinces levy a tax or fee on the transfer of real property.

Corporation tax

Corporations are legal persons in Canada and are subject to the payment of tax based on the Income Tax Act and its regulations.

Other tax issues

Withholding tax can arise on payments to non-residents in respect of services performed in Canada and non-resident suppliers can be subject to tax if they carry on business in Canada. Tax treaties between Canada and other countries may limit applicable taxes in certain circumstances.

 

Online resources

Office of the Privacy Commissioner of Canada

W www.priv.gc.ca/index_e.asp

Description. Official website of the Office of the Privacy Commissioner of Canada, containing federal privacy law information and applicable legislation.

Office of the Superintendent of Financial Institutions (Canada)

W www.osfi-bsif.gc.ca/eng/Pages/default.aspx

Description. Official website of the Office of the Superintendent of Financial Institutions (Canada), containing information regarding outsourcing arrangements for financial institutions and Guideline B-10.



Contributor profiles

Wesley Ng, Partner

Stikeman Elliott LLP

T +416 869 5218
F +416 947 0866
E wng@stikeman.com
W www.stikeman.com

Professional qualifications. Canada (Ontario), 2000

Areas of practice. Information technology; outsourcing; privacy and data protection; licensing and commercialisation; e-commerce and internet; life sciences and healthcare; mergers and acquisitions.

Michael Decicco, Associate

Stikeman Elliott LLP

T +416 869 6863
F +416 947 0866
E mdecicco@stikeman.com
W www.stikeman.com

Professional qualifications. Canada (Ontario), 2013; New York, 2013

Areas of practice. Information technology; outsourcing; privacy and data protection; e-commerce and internet; licensing and commercialisation; mergers and acquisitions.


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