A Q&A guide to outsourcing in New Zealand.
National law does not specifically regulate outsourcing transactions.
A financial services outsourcing?
A business process outsourcing?
An IT outsourcing?
A telecommunications outsourcing?
A public sector outsourcing?
Registered banks in New Zealand (NZ) are subject to prudential supervision by the Reserve Bank of New Zealand (RBNZ) under the Reserve Bank of New Zealand Act 1989. The RBNZ considers whether a bank that seeks to be granted or maintain registered status has the ability to carry on business in a prudent manner. In determining whether a registered bank has carried on its business in a prudent manner, the RBNZ considers various factors, including arrangements for any business, or functions relating to any business, of the registered bank to be carried on by any person other than the registered bank (that is, outsourcing).
Under the RBNZ's Outsourcing Policy, banks whose NZ liabilities exceed NZ$10 billion (as at 1 February 2011, US$1 was about NZ$1.3) must usually demonstrate (as a condition of registration) that they have the legal and practical ability to control and execute any outsourced functions sufficient to enable them (under normal business conditions and in the event of stress or failure of the bank or of a service provider to the bank) to perform certain functions, including:
The identification and monitoring of financial risk positions.
Providing customers with access to payments facilities.
There are no regulations specifically relevant to business process outsourcing.
There are no regulations specifically relevant to IT outsourcing.
There are no regulations specifically relevant to telecommunications outsourcing.
The Ministry of Economic Development (MED) is the NZ government department responsible for promoting economic development in NZ.
NZ government departments, the armed forces and the police are accountable to the MED in their compliance with mandatory standards and procedural requirements for procurement (known as Rules), which are based on NZ's treaty obligations under Chapter 11 of the Trans-Pacific Strategic Economic Partnership Agreement.
The Rules are not passed under legislation or statutory regulation but compliance with the Rules is mandatory. The Rules apply to all procurement contracts for goods and services with a contract value (maximum total estimated value of the procurement over its entire duration) of NZ$100,000 or more entered into by any one of the three bodies. Compliance with the Rules is encouraged (but optional) in the wider public sector.
There are no regulations specifically relevant to outsourcing in any other industry sector.
Companies operating in a regulated industry cannot avoid their obligations under relevant regulations by outsourcing their business functions. This primarily includes providers of services in the following industries:
In the same way, NZ-based companies cannot avoid their obligations under NZ law. For example, in respect of:
The use of customer data under the Privacy Act 1993.
The company's conduct in the sale of goods and services under the Fair Trading Act 1986 by offshoring functions of their business.
A NZ-based customer who offshores its services is responsible for ensuring that their supplier's comply with NZ laws where applicable.
NZ laws, such as property, employment and intellectual property laws, apply in the context of an outsourcing, but are not specific either to outsourcing or to any industry sector.
There are no specific requirements for the notification or approval of outsourcing transactions in any industry sector on or before entering into outsourcing transactions. Registered banks may, however, be required to provide information regarding their outsourcing arrangements on application for registration (Reserve Bank of New Zealand Act 1989).
The simplest form of outsourcing is where the customer enters into an outsourcing agreement with a single supplier for the direct (and often exclusive) supply of outsourced services.
A variety of contractual structures are used. There can be more than one contract between the parties, often dealing with asset transfer and transitioning, and another with the ongoing provision of services. The contract can be structured as:
A standalone agreement.
A framework in which the supplier can "call off" services on a pay-as-you-go or project-by-project basis.
The main benefit of this model is its simplicity. There is, however, a risk that the customer becomes reliant on a single supplier.
It is also common for outsourced services to be provided by a syndicate or consortium of suppliers who bid for and provide services together.
In a syndicated or consortium outsourcing arrangement, a customer can have:
A single contractual relationship with one prime contractor, who enters into sub-contracts with the other suppliers, which can be on terms dictated by the customer.
A direct contractual relationship with all or some of the other suppliers.
In either case, the contractual arrangements must reflect the inter-relationship and dependencies between the suppliers and their services.
There is an advantage in a structure where the suppliers are to some extent interchangeable as this maintains the competitive pressure and avoids lock-in to one supplier. The customer can have greater difficulty holding a supplier or suppliers liable if things go wrong in a consortium arrangement than if it obtained services from a single supplier, although this is a risk which can be mitigated through contractual safeguards.
Customers sometimes choose to enter into a number of non-exclusive deals for the same services, creating a panel of preferred suppliers who are tied into certain terms. Suppliers may have to bid again against each other to provide services for particular projects. Non-exclusive deals enable the customer to exert competitive pressure even once deals are signed, avoiding lock-in to one supplier, which can drive pricing down. This type of arrangement is more time-consuming to administer as it requires more active ongoing management of suppliers.
A customer can choose to set up a joint venture company or partnership specifically for the purpose of providing particular services. This is a variant of insourcing (that is, where the customer sets up a subsidiary to provide particular services to the parent, wider group and, in many cases, also third parties), with the additional benefits of enabling the customer to leverage the supplier's expertise and reputation, and share the risks of the venture with them.
Under this model, the customer has a greater degree of control over the provision of services, and will share in any profits generated through the provision of services to third parties. However, the customer carries a portion of the supplier's risk as well as its own risk, because it is not able to externalise any resulting liabilities if the venture fails to deliver.
A joint venture is generally more complex and expensive to set up than an outsourcing arrangement, and can require a significant ongoing investment of time and funding from the customer.
Unless required to do so by law or regulation, customers can choose to procure outsourced services without going through any formal procurement process. This is not uncommon for low-value outsourcings or where there is only one viable provider of the outsourced services in the market.
Public sector customers, who must comply with the procurement Rules (see Question 2, Public sector), and most other customers procuring services which are of significant value, will use a competitive procurement process.
Typically, the procurement process involves:
The issue of a request for proposal (RFP) or invitation to tender (ITT) by the customer.
The submission of bidder responses.
An assessment of customer responses, to arrive at a supplier shortlist.
Dialogue and commercial negotiations between customer and shortlisted suppliers.
Negotiation of contracts.
Selection of a supplier and signature of contracts.
There can also be a pre-RFP stage to the procurement process. The customer may:
Request expressions of interest from potential suppliers.
Hold informal consultations before issuing the RFP.
Require potential bidders to sign confidentiality agreements and provide a bid bond or other form of guarantee before the RFP is disclosed.
The pre-RFP stage is uncommon, except where the outsourced services are of a particularly sensitive nature.
In the RFP, the customer sets out its objectives, requirements and expectations in relation to the outsourcing. The customer requests potential suppliers to submit certain information regarding their business, services and capabilities, often in a prescribed form. Often the RFP sets out a timetable for subsequent stages of the procurement process.
The RFP can be released publicly, or to a short-list of providers pre-selected by the supplier. The RFP and responses to it are usually subject to confidentiality agreements.
The terms of the outsourcing contract can be negotiated at any stage during the process. If a customer intends to procure outsourced services on its standard terms, it might include these terms in the RFP and ask bidders to identify any issues, or even provide a mark-up, in their RFP response. Setting out the key principles of a commercial agreement in the RFP, but not the full terms and conditions, is also common. Alternatively, contract negotiations may not even start at all until after a supplier is selected.
If the contract is introduced early in the process, the customer can enter into competitive dialogue, using simultaneous negotiation with multiple bidders to obtain the best terms and to select bidders. Where this occurs, there can be several stages of negotiation, from initial responses to the bidders' best and final offer.
A potential supplier usually carries out due diligence to:
Understand the customer's requirements.
Assess the people and systems it would acquire through the outsourcing.
The timing of due diligence varies. Early due diligence can enable the bidder to provide a better tender, but it can be expensive and time-consuming, with no reward if the bid is not successful. If contract negotiations take place after the award of the tender, suppliers usually prefer to conduct due diligence at that stage.
IP rights and licences?
Transfer of immovable property in NZ is subject to the Torrens system of title registration (that is, a system under which registration of the property with the state guarantees indefeasible title). All land transfer agreements must be:
Recorded in writing.
Executed and delivered as a deed.
Registered with Land Information New Zealand (LINZ).
Under NZ law, a deed must be either:
Witnessed, if executed by an individual.
Signed by at least two directors, if executed by a company with two or more directors.
The following formalities are required to transfer IP rights and licences on an outsourcing:
Copyright. An assignment of copyright must be in writing and signed by or on behalf of the assignor (Copyright Act 1994). There is no formal system for the registration of copyright in NZ and, therefore, no requirement to register the transfer.
Trade marks. The assignment of a registered trade mark must be registered with the Commissioner of Trade Marks for the assignee's rights in the trade mark to be legally enforceable (Trade Marks Act 2002). An application for registration is made by the assignee, along with proof of the transfer. An unregistered trade mark can be effectively transferred under contract. The transfer is outside the scope of the Trade Marks Act 2002.
Patents. A transferee of a patent must apply to the Commissioner of Patents in the prescribed manner for the registration of their title (or other interest in the patent) in the register of patents for their rights in that patent to be legally enforceable (Patents Act 1953). A patent registered in NZ only confers protection in NZ.
The transfer of movable property within NZ can be carried out under an ordinary contract (which need not be in writing).
Export permits are required to export certain types of goods outside of NZ, including goods:
Listed on the NZ Strategic Goods List.
Subject to end-use (catch-all) controls (that is, controls focused on the intended end-use of the items rather than their technical characteristics).
The electronic export of controlled software and technologies is prohibited unless an export permit has been obtained from the Ministry of Foreign Affairs and Trade.
A party to a contract can assign some or all of the benefit of the contract to an assignee who is entitled to claim performance under the contract directly from the non-assigning party unless the contract provides otherwise.
A party to a contract cannot transfer (or delegate) the burden of the contract (or novate the contract) to another person without the consent of the other parties to the contract (unless the contract provides otherwise).
IP rights and licences?
A contract for the disposition of land is not enforceable (except in equity where appropriate) unless both:
The contract is in writing or its terms are recorded in writing.
The contract or written record is signed by the party it would be enforced against.
A disposition for this purpose includes a lease but does not include a short-term lease (as defined in the Property Law Act 2007). Leases that are not short-term leases must be registered.
There are no particular formalities required to license land. However, optional registration is available, through a memorandum of transfer (Land Transfer Act 1952). Registering licences makes it easier to determine priority of interest in land.
The following formalities are required to license IP rights on an outsourcing:
Copyright. A copyright licence must be in writing and signed by or on behalf of a copyright owner to be valid.
Trade marks. A registered trade mark can be licensed, with or without conditions, to a person who is not the trade mark's owner. An authorised user of a registered trade mark can be registered as a licensee in respect of any of the goods or services for which the trade mark is registered.
The licensee must apply to the Commissioner of Trade Marks in the prescribed manner, that is:
the owner (or a person authorised to act on the owner's behalf and approved by the Commissioner) must make a statutory declaration that the person proposing to be registered as a licensee of a trade mark is entitled to be registered as a licensee;
the owner must give the Commissioner the statutory declaration to be filed for public record.
Patents. A patent can be licensed under contract, but the licensee's interest in the patent must be registered with the Intellectual Property Office of New Zealand (IPONZ) to be enforceable.
A lease over movable property within NZ can be granted under ordinary contract, which need not be in writing.
To an incoming supplier on an initial outsourcing?
To an incoming supplier on a change of supplier?
Back to the customer on termination of an outsourcing?
Part 6A of the Employment Relations Act 2000 (ERA 2000) deals with the continuity of employment for employees whose work is affected by the sale or transfer of their employer's business to a new employer. The ERA 2000 divides all employees into two categories, vulnerable workers and other employees.
Vulnerable workers. Only vulnerable workers have the right to elect to transfer with the business to a new employer. Vulnerable workers are persons who provide:
Cleaning or food catering services in any place of work.
Laundry or orderly services in specified industries.
The protection of vulnerable workers is more likely to arise in relation to a facilities management or similar outsourcing. A more traditional IT outsourcing is less likely to involve vulnerable workers.
Other employees. Other employees affected by a transfer (non-vulnerable workers) have no statutory right to transfer their employment to a new employer (supplier). The affected employees' rights in relation to possible transfers must be set out in an employee protection provision (EPP) in their employment agreements. An EPP must set out the process that the current employer (customer) will follow when a sale, transfer or outsourcing occurs in relation to consulting with the affected employees and negotiating with the prospective purchaser. The current employer's must comply with the terms of the EPPs.
Except in the case of vulnerable workers (see above, Initial outsourcing), employees do not automatically transfer from one supplier to another supplier by operation of law. A new supplier can choose to make offers of employment to the employees of a former supplier. The terms of any offer of employment are agreed between the employer and employee, subject to any specific agreement between the customer and the outgoing supplier on exit or transition-out arrangements that may be in place to ensure a smooth transfer of services.
If the outsourcing agreement is terminated, employees (with the exception of vulnerable employees) do not transfer back to the customer by operation of law. At the time of termination, the customer can choose to make offers of employment to its former employees who transferred to the supplier at the time the outsourcing was entered into. The terms of any offer of employment are agreed between the employer and employee, subject to any specific agreement between the customer and the outgoing supplier on exit or transition-out arrangements (see above, Change of supplier).
Employees (other than vulnerable workers) do not transfer automatically (see Question 9). If the supplier chooses to make offers of employment to the employees, it can decide whether it will treat the employees' entitlements as continuous for any benefits or service-related entitlements (subject to what is agreed between the customer and supplier in the transfer agreement).
Whether the new employer can offer the same pension scheme depends on the terms of the pension scheme itself (for example, whether the pension scheme allows for the new employer to become a member). Whether the new employer offers a pension scheme is a matter for negotiation between the parties as to the terms on which the employees will transfer.
Except in the case of vulnerable workers, there are no mandatory employee benefits that must be transferred from the customer to the supplier by law.
If vulnerable workers elect to transfer automatically, their services are treated as continuous and transfer on the same terms and conditions (relating to benefits) which existed under their contracts of employment with the previous employer. If vulnerable workers are beneficiaries under a pension scheme, it is important to check the trust deed that governs the scheme to ensure whether a transfer is permitted and, if so, on what terms. This will differ from case to case.
Suppliers should be aware of the KiwiSaver Act 2006. KiwiSaver is a voluntary statutory superannuation savings scheme. Employers must enrol new employees into KiwiSaver, and it is up to the employee to opt out of KiwiSaver within a specific time frame after the starting employment. There is an exception to the automatic enrolment rules where employees transfer to a new employer as part of the purchase of a business as a going concern. In this case, the new employer must notify the Inland Revenue department of the transaction and its intention not to automatically enrol the transferring employees into KiwiSaver.
There are no mandatory redundancy pay requirements in NZ. Redundancy payments are a matter of agreement between employers and employees. If an employment agreement is silent on redundancy payments, then no redundancy is payable.
Conversely, if an employer has agreed to pay an employee redundancy in their employment agreement, the components to be included in the calculation of redundancy pay are determined by the employment agreement. The specific components that make up redundancy compensation depend on what is contained in the employment agreement. However, redundancy pay is generally based on the employee's salary and duration of service. For example, four weeks' salary for the first year of service and two weeks' salary for each year of service after that. Employers sometimes impose caps on the length of service for the purpose of calculating redundancy compensation. Caps are neither mandatory nor unlawful.
Employees are taxed on any redundancy payments they receive and there is no tax-free component. If there is a contractual entitlement to pay redundancy, the employment agreement often contains a technical redundancy clause, which relieves the employer of the obligation to pay redundancy in an outsourcing if the employee is offered employment by the supplier on similar terms and conditions.
The extent to which the supplier is able to harmonise the terms and conditions of employment of transferring employees with those of its existing workforce is a matter of agreement between the employer and employee, subject to what has been agreed between the customer and supplier in the transfer agreement (see Questions 9 and 10).
Dismissals can be carried out at any time, provided they are justifiable. While there are no industry codes of practice or guidelines, case law can provide guidance on how to carry out a justified dismissal.
A dismissal is unfair if it is considered an unjustified dismissal. Under section 103A of the ERA 2000, the question of whether a dismissal or an action was justifiable must be determined, on an objective basis, by considering whether the employer's action, and how the employer acted, were what a fair and reasonable employer would have done in all the circumstances at the time the dismissal or action occurred. Therefore, an employer must have reasonable grounds to dismiss and follow a fair and reasonable process with the employee before reaching a decision to dismiss. The requirement for fair process is also consistent with an employer's statutory duty of good faith, which requires an employer to consult with an employee before reaching a decision that may have an adverse effect on the continuation of the employee's employment.
There are no nationality requirements for the performance of any services in NZ.
The parties to an outsourcing agreement can choose (and agree) to structure employment arrangements as secondments.
There are no legal restrictions on the number of employees who can be seconded. Whether the affected employees' consent is required depends on their contracts of employment. If there is specific provision on secondments in the contract, the employer must follow the contractual process. If there is no provision on secondments, the employer must follow a fair and reasonable process, which arguably would require employee consent.
The ERA 2000 provides for specific information to be provided in relation to vulnerable employees to enable parties to arrive at a commercially appropriate decision. Before an outsourcing, a party can request employee cost transfer information, which is specific information about the employment-related entitlements of the vulnerable eligible to transfer.
Following an outsourcing, the amount of information that the transferor must give to the transferee depends on whether the transferee chooses to treat the transferring employees' service as continuous. If the transferring employees' service is to be treated as continuous, the transferor must provide all information necessary for the transferee to fulfil its legal obligations, such as holiday entitlements and details of the benefits which are to be continued.
If the supplier does not treat the transferring employees' service as continuous, there are no mandatory requirements as to the information that must be provided. Each transferring employee is treated as a new employee and it is the employees' obligation to provide information to the transferee (for example, an Inland Revenue department number).
In a redundancy, the employer must follow a fair and reasonable process (see Question 13). What is fair and reasonable in respect of notice, information and consultation depends on the circumstances. In relation to notice periods, any contractual period of notice takes precedence.
For example, when considering a redundancy situation, the employer must:
Notify the employee (or the employee's representative if the employee is a member of a union which has a collective employment agreement with the employer) that their role may be made redundant and that their employment may be terminated. It must then provide the employee with an opportunity to provide feedback.
Provide sufficient information to the employee so that the employee can effectively give feedback. Redeployment opportunities must also be considered and discussed with the employee at this stage.
Consider the employee's feedback before reaching a decision whether to proceed with the proposed redundancy.
In any case involving a dismissal, an employer must generally not predetermine the outcome. An employer must provide the employee with an opportunity to comment on the employer's concerns before reaching a decision on whether to terminate the employee's employment.
There are no criminal consequences if an employer does not follow a fair and reasonable process in a redundancy, but an employee can challenge the process (see Question 13).
An employer and an employee can agree to a specific consultation process in the employee's employment agreement, however, this is not common practice.
Outsourcing agreements can be subject to the requirements of NZ privacy legislation if the outsourcing agreement involves either:
The collection, use or disclosure of personal information.
Cross-border flows of personal information.
The Privacy Act 1993 and its codes of practice implement the OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data by establishing:
Principles with respect to the collection, use, and disclosure, by public and private sector agencies, of information relating to individuals.
Principles with respect to access by each individual to information relating to the individual and held by public and private sector agencies.
A mechanism for controlling the transfer of information outside NZ where information is routed through NZ to circumvent the privacy laws of the country from which the information originated.
There are no laws or regulations in NZ dealing specifically with banking secrecy.
The Credit Reporting Privacy Code 2004 applies specific rules to agencies that carry on a business of reporting on the credit worthiness of individuals to other agencies (credit reporters) to ensure the protection of individual privacy. The code addresses the credit information which the credit reporters:
For credit reporters, the code takes the place of the information privacy principles under the Privacy Act 1993.
The treatment of bank account information is regulated in other respects under the Privacy Act 1993.
At common law, the supplier must keep customer data of a confidential nature confidential. Typically, an outsourcing contract expressly provides that customer data is the customer's "confidential information". The contract normally requires the supplier to keep customer information confidential and not disclose it except in specified circumstances. For example, disclosure is commonly permitted where it is both:
Reasonably necessary to enable the receiving party to perform its obligations under the contract.
Reasonably required by applicable laws or the authorities that enforce disclosure requirements.
The customer generally determines the scope and requirements of the services specification in the RFP. However, the services specification in the contract is often drafted jointly by the customer and the supplier during negotiations.
Service levels and service credit regimes are typically set out in the body of the agreement, with the detailed key performance indicators (KPIs) specified in a schedule. KPIs are generally quantitative, but can also include qualitative measurements. Outsourcing agreements typically specify provisions for:
Measuring, recording and reporting on KPIs.
The method in which service credits are calculated.
The outsourcing agreement often specifies whether:
The service credits are subject to a maximum cap.
The service credits are the sole remedy for breach of the service levels.
The main charging methods used on an outsourcing are:
Fixed and input-based pricing are more commonly used in NZ.
Fixed pricing (for example, a monthly service fee) is common if the volume and scope of services is stable or predictable. Fixed pricing is often subject to some kind of variation mechanism (see Question 22). It is also commonly used as a baseline over which cost-based elements and/or performance incentives may be layered.
Cost, cost-plus and resourced-based charging methods are all variants of input-based charging. They are often used if the volume and scope of services are more volatile or uncertain. The customer pays a price which tracks the costs incurred by the supplier whether through:
Accepting the direct pass-through of costs.
Paying the actual costs plus an agreed margin.
Adjusting a fixed fee by an agreed amount if the resources used by the supplier exceed or fall below certain margins.
An input-based model generally offers the customer less budgetary certainty, but a greater opportunity to share in the benefit of cost savings achieved by the supplier. The risk that the customer is exposed to costs which exceed those it has budgeted for is usually mitigated either by:
Putting a cap on the charges (either over a fixed period of time or per project).
Overlaying an incentive system, such as gain-sharing (under which the supplier shares in any financial gain which it creates for the customer), to ensure that the supplier has an incentive to keep costs down (see below, Output-based pricing).
Output-based models, such as gain-sharing or KPI-based performance pricing, where charges are calculated according to the business outcomes achieved by the outsourcing, are new to the market and less commonly used. If successful, these models should drive up the quality of services while ensuring that the customer receives value for money. The model relies on there being a close, and often long-term, relationship between supplier and customer as its success rests on an alignment of their respective interests. Output-based charging in some form (for example, performance bonuses) is often used as an overlay to fixed baseline pricing.
The pay-as-you-go charging method is less common in larger or more complex outsourcing contracts, but can be used if services (or elements of them) are commoditised or can be priced on a unit basis, for example:
Printing or payroll services.
Services highly reliant on personnel whose hours worked can be charged at agreed rates.
Pay-as-you-go gives the customer greater control and certainty in its budgeting (provided that it can choose whether or not to call off services), but is more likely to generate higher per unit prices than would be the case under other models.
If outsourced services are provided offshore, there are often provisions allocating risk for inflation in the relevant jurisdiction and fluctuations in exchange rates which would affect the cost of the services, and provisions allocating liability for taxes and charges and the risk of changes to those taxes and charges under local law.
Indexation based on the NZ consumer price index is a common mechanism for adjusting fixed or unit-based pricing over the term of an outsourcing contract.
It is also common for customers to require a benchmarking mechanism to ensure that fixed or unit-based pricing remain competitive over time.
Costs can also be managed in a less structured way through governance processes. For example, the supplier may be required to identify opportunities for savings and efficiencies as part of their obligations to achieve service improvement, in particular, in any long-term contracts. These mechanisms and processes can allow for upwards only or upwards and downwards movements in pricing, depending on the nature of the services, parties' risk allocation and other circumstances.
Damages are available to the customer if the supplier breaches the outsourcing contract. Damages are assessed as the amount that would restore the customer to the economic position the customer would have been in had the contract been performed.
The same remedies and relief options are available to customers and suppliers. Either party can cancel (or terminate) the outsourcing contract for the other party's:
Breach of the agreement.
The parties' common law and equitable rights in this respect are largely codified in the Contractual Remedies Act 1979. Termination of a contract does not prohibit recovery of damages for the breach.
The NZ courts can make an order for specific performance, which puts the parties into the position they would have been in had the contract been performed.
A customer can also seek redress for the supplier's misleading or deceptive conduct in the course of trade. The potential remedies available to the court are broad in scope. They include:
Orders to disclose information or publish advertisements.
Orders declaring a contract void.
Orders varying a contract.
Orders directing a person to:
return property; or
supply (or resupply) goods or services.
Protections typically included in an outsourcing contract to protect the customer's interests are:
Indemnities for losses suffered in specific circumstances.
Bid bonds, performance bonds and other forms of guarantees and security.
Ongoing service improvement obligations or monitoring of service quality, managed through a governance and/or audit process.
The supplier can be protected by:
Specifying the supplier's dependencies on the customer or third parties in the contract to ensure that the supplier is relieved from its obligations in certain circumstances outside of its control.
Warranties as to the accuracy of information provided by the customer during due diligence.
Typically, the supplier must give more extensive warranties and indemnities than the customer, although this can vary depending on:
The nature of the services and the relationship between the parties.
The parties' respective bargaining power.
Any agreed risk allocation.
Both parties usually warrant that they have the powers, rights and ability to:
Enter into the agreement.
Perform their obligations under the agreement.
Comply with applicable laws.
In addition, the supplier often gives warranties relating to the performance of the services. A typical warranty is that the supplier must provide services with reasonable skill and care and in accordance with good industry practice.
The customer may be required to give warranties regarding the accuracy of information provided to the supplier during due diligence (on which certain assumptions as to the scope and pricing of services are based), and relating to the assets and personnel transferred to the supplier for the purpose of providing outsourced services.
The warranties given depend very much on any particular concerns of the parties in the context of the services being provided. For example, a telecommunications or IT outsourcing contract may include warranties relating to the security and use of data, and currency of the technology used to provide the services.
The parties typically indemnify each other against:
Third-party intellectual property infringement claims.
Losses caused as a result of breaches of confidentiality.
Property damage caused by negligence.
Losses caused as a result of gross negligence or fraud.
There is a guarantee implied by law that goods supplied to a consumer are of acceptable quality (Consumer Guarantees Act 1993 (CGA 1993)). Generally, goods are of acceptable quality if they are, among other things:
Fit for all the purposes for which goods of the type in question are commonly supplied.
Fit for certain particular purposes made known by the consumer.
Fit for the particular purposes for which the supplier represents that they are or will be fit.
In relation to quality of service warranties, there are guarantees implied in law as to:
Reasonable care and skill.
Fitness for a particular purpose.
Time of completion.
The CGA 1993 does not apply to goods that are supplied by auction or competitive tender, but otherwise can only be contracted out of by a supplier if the consumer acquires the goods or services for the purposes of a business.
Under the Sale of Goods Act 1908, there are implied conditions of fitness for purpose and merchantable quality, which apply to agreements for the supply of goods in situations where the CGA 1993 does not apply here. A supplier can contract out of the implied conditions.
The Fair Trading Act 1986 provides the broadest protection for the supply of goods or services by prohibiting all persons, in trade, from engaging in conduct that is:
Likely to mislead or deceive.
The Fair Trading Act 1986 does not distinguish between innocent or fraudulent conduct, and does not require any person to have actually been misled or deceived. The courts have taken a broad interpretation of the term "conduct" for this purpose.
Other than the general warranties and indemnities (see Question 25), several specific indemnities are typically included in an outsourcing agreement to protect either the customer or supplier against certain liabilities and obligations.
If third-party contracts are assigned or novated from the customer to the supplier in an outsourcing, the customer generally seeks to be indemnified by the supplier against any liability arising out of the breach or non-performance by the supplier of the assigned or novated agreement.
If employees transfer from the customer to the supplier in an outsourcing, the customer is responsible for:
Paying all wages, salary or benefits of the transferring employees until the date of transfer.
Typically paying the transferring employees for all accrued holiday entitlement up to the date of transfer.
In these circumstances, the supplier generally seeks to be indemnified by the customer against any claim by a transferring employee that pre-dates the transfer, including a claim for:
Salary or other benefits.
Accrued holiday entitlement relating to the period the transferring employee was employed by the customer.
The supplier also often seeks to also be indemnified against any legal claim brought by an employee arising out of redundancy from the customer.
The following types of insurance are readily available in NZ:
Third-party liability, including for professional indemnity risks and fraud.
National law does not impose any maximum or minimum term on an outsourcing.
National law does not regulate the length of notice period required.
In addition to termination rights expressly set out in an outsourcing agreement, a party can terminate an outsourcing arrangement without giving rise to a claim in damages against the terminating party in various circumstances.
A party to an outsourcing contract can cancel the contract if, by words or conduct, another party repudiates the contract by making it clear that the party does not intend to perform its obligations under it or, as the case may be, to complete such performance.
A party to an outsourcing contract can cancel the contract if:
The party has been induced to enter into the contract by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to that contract.
A term in the contract is broken by another party to that contract.
It is clear that a term in the contract is broken by another party to that contract, provided that:
the parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to the party; or
the effect of the misrepresentation or breach is, or will be in the case of an anticipated breach, substantially to reduce the benefit of the contract to the cancelling party or substantially to increase the burden of the cancelling party under the contract.
Insolvency does not necessarily give rise to a right of termination, but can give rise to a right of cancellation for repudiation or an anticipated breach.
A contract can be terminated under common law if the contract has become impossible to perform or has become otherwise frustrated. If the contract is terminated, the Frustrated Contracts Act 1944 permits the courts to adjust the rights and liabilities of the parties to a frustrated contract to account for sums paid and benefits obtained by the parties to the contract.
If a contract has been entered into under duress, the effect of that duress will make the contract void under common law.
The parties to an outsourcing agreement are free to agree termination rights in addition to rights available to the parties at law.
The Contractual Remedies Act 1979 (CRA 1979) provides parties to a contract with the right to cancel a contract for breach. The CRA 1979 enables the parties to contract out of provisions, but only to a certain degree. For example, the parties cannot exclude all rights of termination. Under the CRA 1979, if a contract expressly provides for a remedy in respect of repudiation or breach or makes express provision for matters to do with cancellation and the recovery of damages, the relevant provisions of the CRA 1979 have effect subject to that contractual provision.
It is common for any IP rights granted by a customer under an outsourcing agreement to be limited under that agreement to uses by the supplier for the purpose of providing services to the customer. In these circumstances, continuation of the relevant licensed IP right beyond termination would be of no benefit to the supplier.
There are no rights implied under NZ law for a supplier to continue to use the licensed IP rights of a customer following termination of the relevant licence. However, it is possible for a supplier to use a customer's IP rights in certain circumstances where:
The outsourcing agreement expressly or impliedly permits use.
In relation to copyright works, any person is permitted to act in accordance with the fair dealing exceptions under the Copyright Act 1994.
In relation to patents that are endorsed with the words "licences of right", any person is entitled to a licence under the Patents Act 1953.
The customer's IP right expires.
The customer can gain access to the supplier's know-how post-termination by commercial agreement. Common provisions which achieve this include clauses for:
Knowledge transfer and training.
Disengagement services and transition services.
There is no general rule of law allowing courts to refuse to give effect to clauses excluding or limiting liability (exclusion clauses) on the ground that they are unreasonable. It is, therefore, possible (and standard practice) for the supplier to exclude liability under contract for:
Indirect and consequential loss.
Loss of business, profit or revenue.
Profit or revenue.
However, at common law, no exclusion clause can protect a party from the consequences of their own fraud.
Despite the lack of any general power to strike out exclusion clauses, the courts have, where appropriate, applied the following general rules of contract law to control the use of exclusion clauses:
A contracting party seeking to rely on an exclusion clause must show that it was incorporated as a term into the contract, which usually involves taking reasonable steps to bring terms in the contract to the notice of the other party.
An exclusion clause must be construed strictly against the party who introduced it and seeks to rely on it (contra proferentem rule). The basic contra proferentem rule has been qualified and extended under common law. For example, general words of exclusion are not usually construed as:
having no application to liability for negligence; or
covering serious or fundamental breaches going to the root of the contract.
There are various statutory provisions which regulate certain types of exclusion clauses, including:
The Consumer Guarantees Act 1993.
The Contractual Remedies Act 1979.
The Fair Trading Act 1986.
The Hire Purchase Act 1971.
The Door to Door Sales Act 1967.
The Layby Sales Act 1971.
The Insurance Law Reform Act 1977.
The Disputes Tribunals Act 1988.
Contracting out of mandatory statutory provisions is prohibited and, if attempted, can constitute an offence under the Fair Trading Act 1986.
Caps on liability are considered forms of exclusion clause. The parties are free to agree on a cap on liability subject to some restrictions (see Question 35).
The amount of the cap is typically calculated as a multiple of the value of the contract. It can also be calculated with reference to the insurance cover, which the relevant party is able to obtain.
Transfers of assets to the supplier?
Transfers of employees to the supplier?
Value added tax (VAT) or the equivalent sales tax on the service being supplied?
Other significant tax issues?
If assets are transferring from the customer to the supplier in an outsourcing, the parties typically work together to classify the assets as:
Depreciable capital assets (for example, plant and machinery).
Non-depreciable capital assets (for example, goodwill).
Revenue account assets (for example, trading stock).
After an asset is classified, the parties then allocate the purchase price to different asset classes.
There is a natural tension between the supplier purchasing the assets and the customer selling the assets as to how the assets are classified, as there are different tax consequences for each asset class. The purchaser will generally want to attribute more value to depreciable assets so it can benefit from the depreciation of those assets following completion, whereas the seller will generally want to attribute more value to non-depreciable assets so it can get the maximum benefit of depreciation on its assets prior to completion.
The transfer of the assets must be at market value, but how this is achieved is ultimately a commercial issue for the parties to decide on.
Where employees are transferring from the customer to the supplier in an outsourcing, the parties typically agree that the transferring employees' accrued holiday entitlements are paid by the customer transferring the employees prior to the transfer. The customer is then able to claim a tax deduction on the amount paid.
The customer will usually seek to structure the transfer of employees in a way that the deduction becomes available to the customer for its employees' accrued holiday. In the event that the customer pays for its employees' accrued holiday, the transfer agreement will make an adjustment in the price to take this into consideration.
NZ has a Goods and Services Tax (GST) regime. GST is charged at 15% on the supply of most goods and services. GST is payable by the consumer of the goods and services.
A supplier of outsourced services will charge the customer GST on any goods and services supplied in NZ. In practice, most companies register for GST. The way the GST calculations work is that a company can claim a credit for any GST they incur in conducting their business (input credits) while charging GST on their sales (output tax). If output tax exceeds input credits, the company must pay the difference to the Inland Revenue department. However, if the credit claimed on inputs exceeds the GST payable on outputs, the company can claim a refund from the Inland Revenue department for the difference.
NZ GST covers both the supply of goods and services. There are no additional service taxes in NZ.
There is no stamp duty in NZ.
A NZ-resident company is taxable on its worldwide income at the rate of 30%. The company tax rate reduces to 28% on 1 April 2011. An overseas company is taxable at the same rate but only in respect of NZ source income.
A non-resident company operating a branch in NZ is subject to tax on branch profits at 30% (reducing to 28% on 1 April 2011). A branch does not pay withholding tax on profits remitted by a branch operation to its non-resident head office or on dividends paid by that head office to the company's shareholders.
NZ has a full dividend imputation system, which means that tax paid by NZ resident companies can be allocated as imputation credits to dividends paid to shareholders.
Generally, and subject to meeting a continuity of ownership test, a company can carry forward its tax losses and set them off against future taxable income. To maintain the right to carry forward losses, the ownership test must be satisfied from the beginning of the year in which the loss was incurred to the end of the year in which the loss is offset against taxable income.
In the context of an outsourcing, the supplier must comply with its company tax obligations in relation to the revenues it receives from the customer. Suppliers using an on-shore or offshore split model must ensure an appropriate apportionment of profits and expenses to those services provided onshore.
To ensure that overseas-owned companies pay the appropriate level of tax on their NZ-sourced profits, a transfer pricing regime has been introduced. To comply with the regime, it is recommended that taxpayers maintain the appropriate transfer pricing records.
*The author wishes to acknowledge the contribution made by Ken Ginn and Zoë Aldam, Senior Solicitors at Webb Henderson, to this chapter.
Qualified. New Zealand, 1996; England and Wales, 2000; Australia (New South Wales), 2009
Areas of practice. IT; telecommunications; outsourcing; procurement; commercial.