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Legal issues: Offshore Outsourcing

With the advent of offshore outsourcing, countries have started working in heterogeneous environment that does not consider geographical boundaries.

But the fact remains that many countries are yet to mould their legal environment to suit the demands of this global revolution. At present both the client and the service provider face many legal and business issues in their offshore outsourcing business. In this section, we have looked into certain legal issues in offshore outsourcing.

Heterogeneous Legal Systems:

As the geographic boundaries change, the rules for governance and justice also change. In any offshore contract at least two entities adhering to two different legal systems are involved. Heterogeneity in the legal system raises a major legal issue. It can generate ambiguities in the perception of the concerned entities. There is a dearth of a common legal system, which applies globally. In the absence of a common legal framework the offshore outsourcing business may fail to generate the feeling of faith. It is worth to bring to notice the legal issue dealing with technology patents. Laws regarding treatment of Intellectual property differ from country to country. This may restrict few organizations to discloser their Intellectual property for the fear of being misused. Many countries have started taking these issues seriously but still we are short of generating standardized legal rules and regulation.

Dispute Settlement in offshore outsourcing:

Another legal issue pertaining to offshore outsourcing is the issue related to dispute settlement.
A client in New York wants to sue a service provider in Shanghai. The question is where should he file the case. If case is filed in New York then there are all possible chances that the service provider will disagree as he has to come down to New York to fight the case in our legal climate. And if the client files the case in Shanghai then client has to go to Shanghai and fight the case under their legal systems. In both the cases the applicable legal laws will change. Such a case, gives rise to many questions such as which legal system should apply to settle the dispute? Which legal provision should the entities follow during the execution of the contract? Lack of commonly accepted grievance procedure creates a major legal hurdle in offshore outsourcing.

All the offshore contracts should specifically highlight the system of dispute settlement. Although there are international dispute settlement groups situated in London, Brussels and Geneva, it is advisable to clarify the legal aspects of dispute settlement in the outsourcing contract itself.

Implication of Local Laws:

If you are an outsourcing service provider then legal provisionís applicable in your region can decide your business fate.
An offshore service provider has to follow certain local laws in order to safeguard the business from civil penalties. Many times, such statutory requirements may increase the clientís liabilities there by making the service providerís proposition less competitive. Certain countries have adopted stringent laws regarding data protection and privacy. Clients along with Service providers of these countries are legally bound for sharing legal responsibility. This increases the liability of the client and could raises a legal issue while providing contract to a service provider. Such local laws force the clients to move away and focus on countries with less legal hindrance.


Various local and international issues influence offshore outsourcing. Taxation policy of a nation has a major effect on the offshore outsourcing decision. Those who outsource, look what tax implication they will have to face. Different countries shall have different tax laws. And this shall act as a deterrent in effective relationship. It is advisable that both the concerned parties mention, which tax provision, shall be applicable in the contract.

Offshore outsourcing has forced the doyens of any nation to rethink the system of governance and attempt to mitigate such other legal issues. Those countries, which have adjusted to the new demands of offshore outsourcing and have taken steps to eliminate business legal issues, are getting returns. But the fact remains that a large number of legal issues still need to be sorted out.

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