This chapter was first published on International Comparative Legal Guides website and it was written by our associate Marco Blei and Luca Zoani (Spada Partners)
1 – Regulatory Framework
1.1 Are there any national laws that specifically regulate outsourcing transactions?
Under Italian law, outsourcing agreements are not specifically regulated. Therefore, the rules applicable to such agreements are included in the Italian Civil Code, and in particular: (a) the general provisions concerning contracts (e.g. contracts’ requisites, effects, interpretation, assignment – see Articles 1321 et seq. of the Civil Code); and (b) the provisions concerning supply contracts (see Articles 1559 et seq. of the Civil Code) and works and service contracts (see Articles 1655 et seq. of the Civil Code).
Rules relating to specific industry sectors may also apply to outsourcing agreements.
1.2 Are there any additional legal or regulatory requirements for certain types of outsourcing transactions, for example: a) public sector transactions; b) business process transactions; c) financial services transactions; d) IT transactions; and e) telecommunications transactions?
Public sector transactions
Outsourcing contracts in the public sector are regulated by the Code on public contracts (Legislative Decree No. 50 of 2016).
Providers of outsourcing services to the public administration must comply with specific rules governing the public connectivity system (the Digital Administration Code – Legislative Decree No. 82 of 2005, and the related technical rules issued by the Agency for the Digital Italy (Agenzia per l’Italia Digitale – AGID)).
Financial services transactions
The outsourcing of financial services is subject to specific legislation, both the general EU legislative framework and specific guidelines issued by the Bank of Italy (Banca d’Italia) and the National Commission for Companies and Securities Exchange (Commissione Nazionale per le Società e la Borsa – CONSOB) apply. The most relevant regulations regulating this type of outsourcing are:
(a) Circular of the Bank of Italy No. 263 of 27 December 2006, governing, inter alia, the outsourcing of services by banks, to allow them to increase their management flexibility and achieve a significant cost reduction; and
(b) Regulation dated 29 October 2007 jointly issued by the Bank of Italy and CONSOB, regulating, inter alia, the outsourcing of essential or important operative functions, services or activities.
Specific provisions governing IT and cloud services are contained in the Italian Data Protection Code (Legislative Decree No. 196 of 2003).
In addition, the Italian Data Protection Authority (Garante per la protezione dei dati personali) has issued several resolutions on data protection impacting also on outsourcing services.
Telecommunication services are regulated by the Electronic Communications Code (Legislative Decree No. 259 of 2003) and by the resolutions issued the Italian Communications Authority (Autorità per le Garanzie nelle Comunicazioni – AGCOM) and the Ministry for Economic Development (Ministero dello Sviluppo Economico – MISE).
1.3 Are there any further legal or regulatory requirements for outsourcing transactions in any particular industry sector?
Specific legal and regulatory requirements are relevant in relation to the outsourcing of financial services.
Bank of Italy Circular No. 285 of 19 December 2013 provides for:
(a) very strict requirements to be met by banks in connection with the outsourcing of internal functions, e.g. in outsourcing internal functions, banks shall (1) protect from the possible risks arising from external choices, (2) retain control on the outsourced activities, (3) retain liabilities in connection with such outsourced activities, and (4) retain the essential competences and re-internalise them if and when necessary;
(b) a list of minimum information to be provided in a bank’s policies relating to outsourcing (e.g. the decisional process for the outsourcing of internal functions; outsourcing agreements’ content; monitoring activity); and
(c) strict requirements in connection with the relationship between the bank and the supplier (e.g. respective rights and obligations; service levels; supplier’s competences), as well as the outsourcing of controlling functions (e.g. minimum content of the agreement with the supplier; minimum requirement for the bank to be allowed to the outsourcing).
Article 19 of the Joint Regulation provides that in case of outsourcing of essential or important operative functions or investment services or activity, intermediaries must:
(i) take reasonable steps to mitigate the related risks; and
(ii) not reduce the effectiveness of the control system or prevent the supervisory authorities from checking that intermediaries fulfil all of their obligations.
Article 21 of the Joint Regulation provides that in case of outsourcing of essential or important operative functions or investment services or activities, certain conditions must be met: e.g. written form of the agreement; clear indication of the parties’ rights and obligations; intermediary’s termination rights.
The principle and requirement applicable in case of delegation of specific tasks by alternative investments funds managers (e.g. those provided by EU Regulation No. 231/2013) are also applicable.
The main rules on outsourcing by insurance companies are provided for by IVASS Regulation No. 20 of 26 March 2008 concerning internal controls, risk management, compliance and the outsourcing of activities of insurance undertakings.
The Regulation basically aims at strengthening the qualitative and quantitative requirements of outsourcing services for insurance companies, as to protect their stability.
The outsourcing of insurance risk undertaking by insurance companies is forbidden.
Further, adequate policies (e.g. the parameters according to which the supplier and the activity to be outsourced shall be selected; supplier’s notification duties; supplier’s obligation in connection with data protection; details on the activity to be outsourced; the insurance company’s termination rights; the insurance company’s right to withdraw from the agreement or amend it upon IVASS’ request) must be implemented by insurance companies in case of outsourcing.
1.4 Is there a requirement for an outsourcing transaction to be governed by local law? If it is not to be local law, is there any generally accepted norm relating to the choice of governing law?
There is no requirement for an outsourcing agreement to be governed by Italian law; therefore, the choice of the law governing the agreement is a matter of negotiation.
There is no generally accepted norm relating to the choice of law governing the agreement. However, it is obviously advisable that the governing law and the jurisdiction are coherent, and therefore that the law governing the agreement is that of the country where contractual disputes would be potentially litigated.
2 – Legal Structure
2.1 What are the most common types of legal structure used for an outsourcing transaction?
The most common outsourcing structures are the following:
Multi-sourcing, whereby a customer enters into contracts with different suppliers for the provision of different services. The customer can take advantage of each supplier’s specialisation but shall also coordinate and ensure interfaces between the different suppliers.
Joint Venture or partnership, whereby the customer and the supplier set up either a contractual or a corporate joint venture.
Transfer outsourcing arrangement, whereby, to ensure business continuity, the customer transfers certain assets and/or personnel to the supplier.
Simple outsourcing arrangement, whereby the relationship between the customer and the supplier is regulated by a simple services agreement.
Captive entity, whereby the customer sets up a wholly owned subsidiary and outsources several business processes and activities to this subsidiary.
3 – Procurement Process
3.1 What is the most common type of procurement process that is used to select a supplier?
In case of outsourcing between private parties, the procurement process generally consists of the following steps which may slightly vary depending on the value and complexity of the outsourcing:
- Request for Information (“RFI”): the customer requests information from several potential suppliers with the aim to evaluate the market options for the outsourcing, understand the capabilities of each supplier and short-list them, etc.
- Request for Proposal (“RFP”): based on the information received during the RFI phase, the customer sends a formal request outlining the services to a selected list of providers. In most of the cases, a draft outsourcing agreement is attached to the RFP. Within the deadline set forth in the RFP, the prospective providers provide the customer with their commercial and technical offers, including their comments to the draft outsourcing agreement.
- Due Diligence: the customer selects one or more suppliers based on their offers and comments on the draft outsourcing agreement. Due diligence is conducted on the selected suppliers, as well as site visits and management and employee interviews, in order to better define the scope of the outsourcing services and their capability levels. In a transfer outsourcing, the due diligence is also aimed at identifying the assets and employees to be transferred.
- Negotiation: the customer conducts negotiation with the selected supplier. Sometimes, in order to reduce the costs, speed-up the finalisation of the procurement process and increase competition among the suppliers, the negotiation is carried out with several short-listed suppliers.
The above-mentioned procurement process is generally adopted by medium-large companies and in relation to at least medium-sized deals.
In the public sector, the procurement process is subject to a strict regulation set forth in the Code on public contracts (Legislative Decree No. 50 of 2016).
4 – Term of an Outsourcing Agreement
4.1 Does national or local law impose any maximum or minimum term for an outsourcing contract?
Italian law does not provide for any minimum or maximum term for outsourcing agreements. Therefore, the term of the agreement is freely determined by the parties.
4.2 Does national or local law regulate the length of the notice period that is required to terminate an outsourcing contract?
Italian law does not regulate the length of the notice period for terminating the contract at will.
If, notwithstanding the parties’ right to terminate the contract at will, no notice period is indicated in the agreement, it must be reasonable with respect to the features and the scope of the outsourced services.
5 – Charging
5.1 What are the most common charging methods used in outsourcing transactions?
Charging methods are usually heavily negotiated and depend on several factors, e.g. the term of the agreement and the scope of services to be provided.
Fixed price schemes are generally used in relation to relatively simple outsourcing transactions, whereby significant variations of the level and complexity of the services are not expected throughout the term of the agreement.
When a fixed price is provided in the agreement, the parties may include a price adjustment mechanism addressing potential variations where the level of the services has an impact on the price.
The cost plus charging method entails that the price paid by the customer consists in the cost of the services plus a certain margin, which is usually determined through a mechanism that is aimed at sharing the risks and rewards connected with the provision of the services between the customer and the service provider.
Resource-based charging methods are used for outsourcing transactions relating to complex services, because they allow the smooth management of significant variations in the volumes or level of the services without the need to renegotiate the price each time. Under these methods:
- the reduction of the volume or level of the services initially foreseen leads to a credit in favour of the customer; and
- the increase of the volume or level of the services initially foreseen leads to a corresponding increase of the prices.
Increases and decreases of the services may be subject to periodical review and to corresponding price balances, so that possible increases in the prices occurring in a given period may be set-off against possible credits matured by the customer in subsequent periods, and vice versa.
5.2 What other key terms are used in relation to costs in outsourcing transactions?
Outsourcing agreements frequently include a clause providing for adjustment of the price in relation to the inflation rate. In Italian deals, the most commonly used inflation index is that published by the Italian Institute for Statistics (Istituto Nazionale di Statistica – Istat).
The agreements relating to complex outsourcing transactions generally provide the establishment of specific steering committees composed by business and technical representatives of both parties and entrusted with the task of dealing with, and agreeing on, changes to the scope and level of the services.
To prevent disputes and litigation, possible disagreements are generally subject to escalation procedures, providing that before bringing the case to court the parties’ respective managing directors or CEOs must try to reach an amicable solution of the dispute.
Agreements relating to the outsourcing of regulated services (e.g. financial, insurance and healthcare services) may include clauses providing for the automatic amendment of the services (and the corresponding price adjustments) in the event of regulatory changes, as to ensure that the services are always in compliance with the relevant applicable laws and regulations.
6 – Transfer of Assets
6.1 What formalities are required to transfer, lease or license assets on an outsourcing transaction?
IP rights and licences
Evidence of any agreement transferring IP rights and software licences shall be provided in writing (Section 110, Law No. 633 of 22 April 1941). Therefore, the transfer of IP rights/software licences by means of an oral agreement is possible, but has a limited degree of enforceability in case of court disputes.
Agreements concerning the transfer/licence of IP rights (e.g. patents, trademarks) can be subject to registration before the Italian Patents and Trademarks Office (Ufficio Italiano Brevetti e Marchi – UIBM).
Agreements contemplating the transfer of movable property generally do not require special formalities and may be oral. However, the transfer of movable property needs to be in writing when it concerns registered property (such as, cars, boats and aeroplanes). In this case, the agreement shall be recorded in the relevant public register.
The lease or license of movable property does not require any specific formality, nor is it subject to registration (however, in this latter regard, special rules apply to registered properties).
Assignment of contracts to third parties (as the outsourcers may be) requires the formal acceptance of the assigned party, unless the agreement already allows the possibility of assignment.
No prior consent by the assigned party is needed for the transfer of the agreements included in a business that is transferred to third parties, exception being made only in relation to certain categories of agreements (e.g. agreements that are qualified as intuitu personae).
However, a right of withdrawal for just cause is granted to the assigned party by law during a period of time of three months starting from notice of the assignment.
Some formalities may apply according to specific features of the lease or licence as well as of the asset concerned.
Generally speaking, the sublease of immovable business premises in the absence of the landlord’s consent in principle is allowed, provided that (i) the business which the property is part of is leased or transferred as well (see Law No. 392 of 27 July 1978, Article 36), and (ii) proper notification is provided by the tenant to the landlord, who may object to the sublease within 30 days for just cause.
Data and information
When the transfer entails a change in the controllership of personal data, consent of the data subject that the data refers to is required. Such consent is not required in the case that the change in controllership is a consequence of the sale of a business division/going concern. The data subject shall be in any case notified of the new data controller.
Lease agreements of immovable property having a term exceeding nine years must be executed in writing before the notary public.
In the event that the landlord is also the customer in the context of the outsourcing relationship, a temporary and free-of-charge right to occupy and use its premises (in whole or in part) during the performance of the outsourcing services may be granted by the customer to the supplier.
The formalities required for the transfer of immovable property are explained below.
6.2 What are the formalities for the transfer of land?
Agreements providing for the transfer of immovable property shall be executed in writing and before a notary public, as the signatures of the signatories must at least be authenticated.
6.3 What post-completion matters must be attended to?
After the execution of an agreement transferring an immovable property, the transfer must be registered with the relevant tax authority and land register. The latter is necessary for the purposes of legal publicity of the transfer.
6.4 How is the transfer registered?
The transfer is registered through the filing of suitable applications with the relevant tax authority and land register. These tasks are managed by the notary public who took care of the execution of the transfer agreement.
7 – Employment Law
7.1 When are employees transferred by operation of law?
In the case of a transfer of a business as a going concern or a part thereof, the employees are transferred by operation of law. According to Article 2112 of the Italian Civil Code, the employment relationships of the transferred employees continues, automatically and seamlessly, with the transferee, without the need to obtain their consent. On the contrary, the consent of the employees to be transferred is always required in relation to all the transactions that do not fall within the definition of transfer of a business as a going concern.
Under Article 2555 of the Civil Code, “going concern” means “all the assets organized by an entrepreneur for the purpose of carrying out the business”; therefore, it may include licences and any contract to run the business (including employment contracts), machinery, real properties, intangibles, etc.
The Civil Code defines also “a part of going concern” as an organised operative entity within a going concern, that is identified by the transferor and the transferee at the moment of the transfer (Article 2112 of the Civil Code). However, the transferor and transferee are not free to determine the part of the going concern to be transferred at their sole discretion: according to a settled case law of the Italian Supreme Court, the “part of a going concern” is an organised business unit, comprising assets and any other resource to autonomously run a certain business, that must be already existing and operative at the time of the transfer.
The transfer of employees following a change of supplier constitutes a transfer of going concern unless the new supplier has its own organisation and production structure and a specific business identity. Some collective bargaining agreements contain further provision to be complied with in the case of a change of supplier.
7.2 On what terms would a transfer by operation of law take place?
The rights of the employees in the case of a transfer of business as a going concern are regulated as follows by Article 2112 of the Civil Code:
1. The employment relationships of the transferred employees continue seamlessly with the transferee.
2. Following the transfer of business, the employment relationships of the transferred employees continue to be regulated by the collective labour agreements (CAs) applied by the transferor. The transferee may elect to apply to transferred employees the CAs regulating the employment relationship of all its other employees, thus replacing those of the transferor, provided that the substituting and the substituted CAs are of the same territorial level (e.g. national collective agreements or company collective agreements).
3. If the condition under point 2 is not met (and therefore the CAs of the transferor and the transferee are not of the same territorial level), the CAs applied by the transferor shall continue to govern the employment relationship with the transferred employees until their expiration.
4. The employees shall maintain all the acquired rights, arising from the employment relationship, and the transferor and the transferee shall be jointly liable for all the credits of the transferred employees accrued until the transfer date.
5. The transfer of the business cannot represent a fair ground to dismiss the employees.
6. Within three months from the transfer, the transferred employees may resign with immediate effect in the case as a consequence of the transfer they are subject to substantial and detrimental changes of the working terms and conditions. In addition, they are entitled to an indemnity equal to the monthly salaries that they would have received during the contractual notice period.
The transferee may introduce some changes to the employee benefits of the transferred employees, provided that, considered as a whole, the new economic treatment is equivalent to the previous one. Any other change to the terms and conditions applicable to the transferred employees is subject to their consent.
7.3 What employee information should the parties provide to each other?
As a general practice, during the negotiations, the transferor shall communicate to the transferee the information related to the main terms and conditions applied to its employees involved in the transaction. There is no specific obligation provided by law in this respect.
Provided that the transferor’s business has more than 15 employees (regardless that the transfer involves only a part of its business, with less than 16 employees) and at least one of them is going to be transferred, the parties of a transfer must comply with a consultation procedure with the trade unions, i.e. the work councils of the transferor and the transferee (Rappresentanze sindacali aziendali and Rappresentanze unitarie aziendali), and the trade unions that signed the CAs applied to them. If there is no work council, the transferor and the transferee are required to inform the local bodies of the most representative unions in the relevant industry.
In general, the labour consultation procedure includes the following phases:
- Phase one – at least 25 days before the execution of the transfer agreement, the transferor and the transferee shall send a joint notice letter to the trade unions, informing them about:
a. the expected date of the proposed transfer of the going concern;
b. the reasons of such transfer;
c. the economic, legal and social consequences of the transaction on the employees (e.g. potential changes of place of works, changes on the CAs applicable to them); and
d. the expected changes/measures to be adopted towards the employees.
- Phase two – within seven days from the receipt of the notice letter, the trade unions may send to the transferor and transferee a written request of consultation about the proposed transaction. In this case, the transferor and the transferee shall arrange a meeting with the trade unions within the subsequent seven days from the receipt of their written request.
- Phase three – the consultation procedure is considered as completed in the following events: (a) the transferor and the transferee reach an agreement with the trade unions; or (b) no agreement is reached within 10 days from the starting of the consultation procedure.
Failure to comply with the aforementioned procedure, entitles the trade union to request the labour court (Tribunale del Lavoro) the issue of an injunction against the transferor and the transferee. In this case, the court may either:
a. order that the parties comply with the above described procedure;
b. declare that all the measures adopted in relation to the transferred employees are suspended; and
c. apply to the parties a criminal fine raging from EUR 154 to EUR 1,549.
Within five days of the transfer, all the transferred employers shall notify thereof the relevant labour office (Centro per l’Impiego).
7.4 Is a customer/supplier allowed to dismiss an employee for a reason connected to the outsourcing?
In case the outsourcing qualifies as a transfer of a business as a going concern, the employer cannot on that ground dismiss the employees.
However, the employer is allowed to dismiss its employees on different grounds (e.g. business reorganisation) in compliance with the relevant applicable procedures.
In the case as a consequence of the transfer the transferee intends to proceed with a business reorganisation leading to possible individual or collective redundancies, this information must be disclosed in the notice letter to be sent to the trade union within the consultation procedure described in question 7.3.
7.5 Is a supplier allowed to harmonise the employment terms of a transferring employee with those of its existing workforce?
If the transferee decides to apply its CAs, thus replacing the ones applied by the transferor, the transferee should proceed with the harmonisation of the terms and conditions of the transferred employees with those of its existing workforce, through a negotiation with the trade union representatives.
Further changes to the terms and conditions of the employment contract (not due to the application of new CAs) need to be negotiated with and agreed by the employees.
7.6 Are there any pensions considerations?
Following the transfer of business, the obligation to pay social security contributions is transferred to the transferee automatically and by operation of law.
No further impact on the accruals of public pension contributions are registered in connection with the transfer of business.
On the contrary, the transfer of business may entail the termination of the private pensions or healthcare schemes granted to the transferred employees by the transferor.
7.7 Are there any offshore outsourcing considerations?
Specific restrictions as to offshore outsourcing are provided by the regulations governing certain sectors, which specify the requirements for carrying out determined services, e.g. journalism and press, banking and insurance sectors, etc.
8 – Data Protection Issues
8.1 What are the most material legal or regulatory requirements and issues concerning data security and data protection that may arise on an outsourcing transaction?
Data protection and data security
General requirements. The Data Protection Code (Legislative Decree No. 196 of 30 June 2003), as implemented and specified over the years by the Italian Data Protection Authority (Garante per la protezione dei dati personali), sets forth the applicable rules to the processing of personal data.
Typically, outsourcing transactions are characterised by the following roles of the involved parties:
- The customer remains the data controller (i.e. the person that determines the purposes and the modalities of the data processing).
- The supplier, on the other hand, usually acts as data processor appointed by the customer (i.e. the person processing personal data on behalf of the data controller).
The customer, as data controller, shall give the supplier detailed instructions regarding the modalities of the processing, including the security measures to be adopted, and shall ensure that the processor complies with such instructions.
- The data controller has the following specific obligations towards the data subjects (i.e. the individuals that the data refers to):
- The data controller shall inform the data subjects regarding the purposes and modalities of the processing, whether the provision of data is mandatory or voluntary, the consequences of refusal to provide the data, the persons or entities to whom or which the data may be communicated, the rights granted to data subjects under Article 7 of the Data Protection Code (for example, updating, rectification, blocking, and so on) and the identity of the data controller and the data processor.
- The data controller shall obtain the free, specific and expressed consent of the data subjects involved in the processing (unless one of the alternative legal grounds listed under Article 24 of the Data Protection Code applies).
Appropriate technical and organisational measures to safeguard the personal data against unauthorised or unlawful processing and against accidental loss, destruction or damage, and, in any case, the minimum security measures listed under Annex B to the Data Protection Code (Technical Specifications Concerning Minimum Security Measures) must be always adopted.
Security requirements. The outsourcing agreement provides for rules governing the security requirements in relation to the processing of a customer’s data.
Mechanisms to ensure compliance. Confidentiality of customers’ data is specifically addressed by outsourcing contracts. Therefore, compliance is usually ensured through contractual monitoring and audit procedures.
Sanctions for non-compliance. Given the contractual nature of confidentiality obligations, non-compliance is generally regarded as a breach of contract. In the most serious cases, the breach may allow the customer to terminate the agreement.
Banking secrecy is generally recognised as a practice adopted by banks, but under Italian law there is no statutory definition or a specific regulation thereon. In any case, sectoral provisions of law set out many exceptions to the application of banking secrecy practices (e.g. provisions on anti-money laundering, anti-mafia provisions, etc.).
9 – Tax Issues
9.1 What are the tax issues on transferring the outsourced business – either on entering into or terminating the contract?
Under the Italian Tax Law regime, it depends on the legal qualification of the transfers.
In case the outsourcing does not qualify as a transfer of a business as a going concern, VAT applies (at the standard rate of 22%).
In case the outsourcing qualifies as transfer of business going concern, the following taxes apply:
(i) Direct tax
Seller. Capital gain on disposal of a going concern is subject to IRES at a standard rate of 24%; however, if the business has been carried on by the seller for over three years prior to the transfer, the seller (if a joint stock company or a limited liability company) may opt to tax the capital gain by five equal yearly instalments. Such transfer is not relevant for IRAP purposes.
Capital loss can reduce taxable income.
Buyer. The buyer is not taxable in connection with the purchase of a going concern.
(ii) Indirect tax
The transaction of a transfer of a going concern is out of the scope of VAT.
The sale of a going concern is subject to: (i) registration tax; (ii) mortgage and cadastral taxes (only if going concern includes real estate); and (iii) stamp duties.
Registration tax applies on a proportional basis on the purchase price of a going concern (represented by the market value of the assets net of the transferred liabilities resulting from the seller’s statutory accounts). The applicable rate differs depending upon the group of assets transferred: (i) real estate properties (land and building 9%); and (ii) other assets (e.g. goodwill, plant and machinery 3%).
The seller and the buyer are jointly liable for the payment of registration tax.
Cadastral and mortgage taxes and stamp duties are applied for a fixed amount.
9.2 Is there any VAT leakage on the supply of services under the outsourcing contract?
Generally, outsourced services are subject to VAT, currently at a standard rate of 22%. VAT leakage may emerge if the recipient of the service carried out a business activity exempt from VAT, in which case VAT charged by provider is not deductible. Such amount could be a significant cost for the recipient.
9.3 What other tax issues may arise?
Transfer pricing. In case of agreement between related parties, Italian transfer pricing rules apply for corporate tax. Moreover, in the case the outsourcing qualifies as a transfer abroad of a business as a going concern, it is advisable to verify that this does not imply a goodwill, which is taxable in Italy.
Permanent establishment. In the case of cross-border transactions, it is advisable to verify potential issue of permanent establishment.
Withholding tax. Payment to a supplier could be subject to withholding tax (e.g. licence).
10 – Service Levels
10.1 What is the usual approach with regard to service levels and service credits?
The service specification is usually read in combination with the service level agreement. Both documents are the outcome of the negotiation of the parties.
The level of detail of the service level agreement and of the specification can vary depending on the applicable pricing scheme and other factors.
It is generally advisable that the activities to be performed by a customer are detailed and, more generally, that no grey areas are left in the agreement as to the parties’ responsibilities and tasks.
The outsourcing agreement should also include a mechanism for possible revisions of the specifications throughout the term.
11 – Customer Remedies
11.1 What remedies are available to the customer under general law if the supplier breaches the contract?
In the case the supplier fails to perform its obligations under the agreement, the customer has the right to seek for the performance or, depending upon the materiality of the breach and the possibility to fix it in a given timeframe, the termination of the agreement and compensation for damages.
Pursuant to the Civil Code, only damages that are the direct and immediate consequence of the contractual breach can be compensated. These include: (i) the costs and expenses that are the immediate consequence of the breach and, absent any fraud/wilful misconduct, were foreseeable as possible losses when the agreement was entered into (consequential or incidental damages are not awarded); and (ii) loss of profits.
Obviously, the contractual remedies agreed by the parties in the context of the agreement apply in addition to those provided for by law, outlined above.
11.2 What additional protections could be included in the contract documentation to protect the customer?
The provisions that are frequently included in the agreement to protect the customer are the following:
(i) Auditing. The customer has the right to review the performance by the supplier. Such mechanism allows the customer to identify breaches in their early stages and, therefore, minimise their consequences. The agreement should detail, to the extent possible, the timings and the modalities of the audits, such as the documentation that the supplier is required to provide, the activities that can be done by the customer as part of an audit, the supplier’s duty of cooperation, the customer’s confidentiality obligations, etc.
(ii) Disaster recovery and business continuity. Outsourcing agreements require contractual clauses aimed at guaranteeing that the operations of the customer are not interrupted also in the case of issues that may affect the outsourcer (or, if applicable, the customer).
(iii) Step-in rights. These mechanisms are aimed at ensuring that the customer may take over or outsource to a third party certain operations of the supplier in the event of the supplier’s failure.
(iv) Benchmarking. Such mechanisms, which are common in outsourcing agreements with a long duration, compare the service levels performed by the supplier against other providers in the market. Usually, they operate only in case of failure of price review mechanisms. Benchmarking is generally in favour of the client only, and it very infrequently leads to price increases.
11.3 What are the typical warranties and/or indemnities that are included in an outsourcing contract?
The outsourcing agreement usually provides for proper representation and warranties rendered by the supplier, both in connection with general aspects (e.g. legal capacity to enter into the agreement; compliance with applicable law and regulation; non-infringement of third party rights) and with the performance of the agreed services (e.g. to carry out such services with all reasonable care; to meet the agreed specification; to comply with the Service Level Agreements; to ensure that the services will be free from errors and/or defects).
Additional and specific representations and warranties may apply in relation to specific aspects of the transaction concerned (e.g. in the case of a sale of assets or of business division).
The contractual indemnities are tailored on the representations and warranties given by the parties and on the specific features of the transaction (e.g. the outsourced service, the parties, the value of the agreement).
12 – Insurance
12.1 What types of insurance should be considered in order to cover the risks involved in an outsourcing transaction?
The parties may decide to include in the outsourcing agreement a clause on insurance specifying, inter alia, the kind of coverage (e.g. property damages, professional liability, employees’ liability, injuries or death of the parties’ personnel), the type of insurer, and the insured amount.
13 – Termination
13.1 How can a party to an outsourcing agreement terminate the agreement without giving rise to a claim for damages from the terminated party?
Pursuant to Articles 1454 to 1456 of the Civil Code:
(i) the non-breaching party may terminate the agreement in case of material breach of the other party, provided that the non-breaching party formally notifies this to the other party and the latter does not remedy the breach within a term specified in the notice. Such term cannot be shorter than 15 days; and
(ii) the non-breaching party may immediately terminate the agreement for breaches of the other party which are not capable of being remedied and breaches which were identified as giving right to termination.
Pursuant to Italian bankruptcy law, contractual clauses providing for termination of the agreement in case of bankruptcy are not effective. Indeed, only the receiver in bankruptcy may decide whether to terminate the agreement.
However, the contract may be terminated in case the customer shows that the outsourcer’s specific qualities and skills were a deciding factor for the execution of the agreement.
The parties are free to agree one or either party’s right to withdraw from the agreement at any time and without any reason. In this regard, the parties can include into the agreement a clause providing that the withdrawing party shall pay to the other party a sum and can also decide to regulate post-withdrawal services.
13.2 Can the parties exclude or agree additional termination rights?
As mentioned above, personal skills and characteristics of the supplier are often of essential importance in outsourcing contracts. Therefore, outsourcing contracts usually provide for additional termination rights in favour of the customer (but sometimes also in favour of the supplier, depending upon the specific circumstances of the case), and the most common is the right of termination in case of change of control and transfer of business of a branch thereof.
13.3 Are there any mandatory local laws that might override the termination rights that one might expect to see in an outsourcing contract?
Generally speaking, there are no mandatory local laws that may have this effect. However, under Italian law, in performing the agreement (and therefore also when enforcing termination rights), the parties must always behave correctly and in good faith. Moreover, so-called “omnibus” termination clauses (i.e. providing a party’s termination right in case of any breach of a party) are not enforceable.
14 – Intellectual Property
14.1 How are the intellectual property rights of each party protected in an outsourcing transaction?
Intellectual property rights are mainly protected by operation of law, and this means that any party’s right that is not expressly transferred or licensed to another party of the agreement shall remain the full property and ownership of said party.
Clauses providing for the specific regulation of certain intellectual properties (e.g. background, foreground, and sideground intellectual property rights of the parties) are frequently included, as to prevent litigation post-termination in relation to the ownership of the intellectual property rights that are used or created by the parties during or as a consequence of the performance of the agreement.
14.2 Are know-how, trade secrets and other business critical confidential information protected by local law?
Under Italian law, protection is granted to business information and technical-industrial experience, including commercial information and experience, subject to the legitimate control of the owner, as long as that information:
a) is confidential, in the sense that as a whole or in its precise configuration and combination of its elements it is not generally known or easily accessible for experts and operators in the field;
b) has an economic value inasmuch as it is confidential; and
c) is subject, by the persons to who have legitimate control over it, to measures which are considered reasonably adequate to keep it confidential.
Protection is also granted to data relating to tests or other confidential data, the processing of which entails a considerable effort and the presentation of which is conditional upon the marketing authorisation of chemical, pharmaceutical or agricultural products implying the use of new chemical substances.
The legitimate owner of the confidential information has the right to prohibit third parties, subject to his consent, from acquiring, disclosing to other third parties or using that information and experience in an unauthorised manner, except for cases in which the third party has obtained it in an independent manner by another third party.
14.3 Are there any implied rights for the supplier to continue to use licensed IP rights post-termination and can these be excluded from the agreement?
As a general rule, the licences of IP rights owned by the customer usually expire when the outsourcing agreement is terminated.
The agreement generally provides for specific provisions concerning the management of:
1) the materials (e.g. documentation, data and information, including confidential information) provided by the customer to the supplier for the execution of the outsourcing agreement (e.g. clauses providing for the supplier to be obliged to return such materials to the customer or to destroy them, providing the customer with relevant proof of destruction); and
2) as mentioned in question 14.1, any foreground IP right, i.e. raised from the execution of the agreement by the supplier; typically, regulation thereof is strictly connected with parameters such as, inter alia, the kind of rights concerned and the specific activity carried out by the supplier for generating such rights, including the materials used by the supplier (e.g. materials incorporating possible pre-existing IP rights).
14.4 To what extent can the customer gain access to the supplier’s know-how post-termination and what use can it make of it?
Given its importance and considering the customer’s need to re-internalise the outsourced service after the agreement is terminated, usually the customer requests the supplier to transfer to the customer its know-how on the outsourced services following termination of the agreement.
On the other hand, the supplier usually makes sure in the agreement that any know-how that is not developed by the supplier in the performance of the contractual services is owned by the supplier. This makes sure that the supplier can use such know-how for other customers and also after the termination of the agreement.
15 – Liability
15.1 To what extent can a party limit or exclude liability under national law?
Under Italian law, it is forbidden to limit contractual liability in case of fraud, wilful misconduct or gross negligence (Article 1229 of the Civil Code).
15.2 Are the parties free to agree a financial cap on liability?
Yes. Indeed, outsourcing agreements usually provide for liability caps, obviously subject to the restrictions provided for by Italian law and as indicated in the answer to question 15.1.
16 – Dispute Resolution
16.1 What are the main methods of dispute resolution used?
In most outsourcing contracts, the parties appoint different committees in order to monitor the service carried out by the supplier and to deal with possible issues which may raise in connection thereto (e.g. review of price, possible delays). The number of committees and relevant members, level of authority and role of such committees may vary depending on the complexity of the services.
In case of disputes, outsourcing agreements may also provide for alternative dispute resolution mechanisms, pursuant to which the parties must follow a specific procedure before commencing any court proceeding. In the event this procedure is unsuccessful, the agreement may provide that litigation should be submitted to a specific court or be decided by an arbitral tribunal.
17 – Good Faith
17.1 Is there any overriding requirement for a customer and supplier to act in good faith and to act fairly according to some objective test of fairness or reasonableness under general law?
Articles 1175 and 1375 of the Civil Code provide that the parties must perform their contractual obligations correctly and in good faith. This is a general rule applicable to any contractual relationship, and therefore also to outsourcing agreements.