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People use contracts in their personal and business dealings to build trust and protect contracting parties if a dispute arises. A contract that is often used by sole traders is an outsourcing contract. An outsourcing contract is legally enforceable as long as it satisfies all the elements of a binding contract. If either party breaches a legally enforceable contract, a court can enforce the agreement or award damages to the injured party. This article will explain what an outsourcing contract is and what key clauses it should contain. 

What Is An Outsourcing Contract?

An outsourcing contract is a legally binding contract used by businesses to subcontract certain work to a third party. By outsourcing services, business owners can have their unfamiliar or specialised tasks completed by experienced professionals. In particular, outsourcing agreements are commonly used by design and IT businesses. An outsourcing contract needs to contain certain terms to protect parties’ interests. Specifically, these terms should relate to the content of the project and the type of work that a business is outsourcing.

Key Terms

Acceptance Criteria

An important clause to include in your outsourcing contract is acceptance criteria. You will likely be outsourcing some sort of project or task that must be completed to a certain standard. Therefore, the acceptance criteria stipulate the standard to which the subcontractor must complete the project. 

If the completed project does not meet the standard outlined in your acceptance criteria, you should also have a process that allows the subcontractor to continue working on it. This should be until the project reaches a satisfactory standard.

The acceptance criteria clause is important to have in your contract to prevent having work completed to a sub-standard level.

Dispute Resolution

You should also make sure to include a dispute resolution clause in your outsourcing contract. A dispute resolution clause will outline a process that both parties must follow if there is a dispute. Generally, a dispute resolution clause will require both parties to try to resolve the issue through negotiation.

If the negotiation fails, parties should then try to undertake mediation. Specifically, this dispute resolution method involves a third party mediator. The mediator facilitates conversation between both parties to encourage parties reach a compromise.

Additionally, parties might need to undertake arbitration if they do not reach a solution during mediation. Arbitration is a dispute resolution method where an arbitrator hears both sides of the story and makes a decision. While arbitration is less formal than court, an arbitrator’s decision is still binding.

Limitation of Liability

The party who is completing the outsourced work may want to include a limitation of liability clause in the contract. This ensures that the other party cannot sue them if something goes wrong. If an outsourcing contract has such a clause, it is the outsourcer’s responsibility to make sure the subcontractor completes it to a satisfactory standard. 

Termination

Another clause that is vital for your outsourcing contract is the termination clause. A termination clause allows either party to cancel the contract if certain conditions are met. These conditions are usually if one of the parties breaches the contract or if there is a dispute between the parties. 

You can still receive damages for any loss incurred due to a breach of contract, even if you have terminated the contract. However, it is important that you do not wrongfully terminate the contract.

If you wrongfully terminate a contract, you could be in breach of the contract yourself.

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Key Takeaways

If you are a contractor who is looking to outsource some of your work, you should use an outsourcing contract. An outsourcing contract will contain all the details around the work you are outsourcing. Moreover, it will provide you with safeguards in case a dispute arises over the outsourcing arrangement. Finally, an outsourcing contract is a great point of reference for the type of work that needs completing. For legal assistance with managing your contracts, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What happens if my subcontractor does not meet the standard described in the acceptance criteria?

If your subcontractor does not meet the acceptance criteria’s standards, you can refuse to pay your subcontractor. Alternatively, you can ask them to re-complete the work to the standard specified in the outsourcing contract’s acceptance criteria clause.

Can I terminate my outsourcing agreement at any time?

No, you can only terminate an outsourcing agreement if you meet the criteria stated in the termination clause or if both parties agree to terminate the agreement.

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