Key Provisions of IT Outsourcing Contracts

We continue to see businesses outsource many of its operations in Information Technology and as a result there is an increase in the volume and number of IT Outsourcing contracts in Turkey.

As a law firm which continuously advises on IT Outsourcing Contracts, we want to point out the key provisions which both legal, sales and contracting teams of IT Outsourcing Companies should be extra careful about.

Before going into details, please be informed that we will only cover contracts where both parties are private entities because if the entity which is outsourcing a project is a government entity, provisions of Public Procurement Law and relevant regulations will be applicable.

1-    Acceptance Criteria

A well-defined and objective acceptance criteria is the key for all outsourcing contracts. Without a well-defined acceptance criteria for the deliverables that are expected from the IT Outsourcing Company, any misunderstanding on the deliverables can lead to a conflict and possible litigation. Therefore, a measurable and objective criteria is a very important component.

Also, we suggest the acceptance criteria to have an acceptance deadline where the entity that outsourced its work shall be under an obligation to review and accept the product within a certain deadline. Further, silence of the entity which outsourced the project at the end of the acceptance deadline shall result in deemed acceptance.

2-    Non-Disclosure Provision

Another important provision is the Non-Disclosure. While most entities sign a specific NDA before starting contract negotiations, a contract specific Non-Disclosure provision is still important. A specific ND provision protects the valuable know-how of the IT Outsourcing entity, therefore, shall not be overlooked.

3-    Intellectual Property Ownership

IT Outsourcing work usually ends up with a deliverable which can be protected under the Intellectual Property Laws. Therefore, it is very important to decide and agree who will be the owner of IP to avoid unnecessary conflicts.

As a rule, the IT Outsourcing company shall be the owner of the IP and continue to keep the ownership of all proprietary information which was used during providing the service/deliverables.

4-    Limitation of Liability

It is vital for IT Outsourcing companies to incorporate a LoL clause the agreements to make the contract more predictable for the IT Outsourcing company. LoL clauses are applicable in Turkey pursuant to Code of Obligations Art. 115, however, there are certain limits as to what liability can be limited. Pursuant to Art. 115, liability arising from intentional tort and gross negligence cannot be limited or waived. Therefore, it is only possible to waive or limit liability that may occur from slight negligence. Please be informed that provisions which exclude or limit liability arising from willful misconduct or gross negligence are null and void.

5-    Pricing Model

A clear and well-defined pricing model is another important provision. The model shall include invoicing method and the payment terms. Further, all other pricing elements such as cost must be clearly stipulated and agreed on.

6-    Dispute Resolution

The intention of the contracting parties is to uphold the contract and continue the business relationship however disputes may arise even in the best contracts and relationships. In order to overcome any issues that may arise, a dispute resolution provision shall be agreed on where parties will try to solve the dispute with escalation and negotiation mechanisms.

7-    Termination

While it is possible that disputes may be resolved, in some cases parties may decide to terminate the contract. Therefore, a clear termination clause where termination charges and results must be in any IT Outsourcing agreement. The key for IT Outsourcing companies is to make sure that in case of termination, IT Outsourcing company can get paid for the work that was undertaken up to the termination and all costs shall also be compensated.