Friday, May 7, 2010

Record Keeping Clauses in Outsourcing Contracts - Part 1

Record keeping is not an issue that gets a lot of attention in many outsourcing agreements. Almost as an afterthought, somewhere toward the end of an Article on audits, governance or termination transition services, there will be a provision setting out the parties’ responsibilities with respect to retention of “records”. It will be based on a comprehensive definition of “Records”, e.g.:

“books, records, reports, documents, maps, drawings, correspondence, notes, logs, system development records, accounts, invoices, backup data (including original source documents) and other similar documents, images, writings, papers or information stored by any means whether graphic, electronic, audio mechanical or otherwise”

and will run something like this:

“During the Term and for a period of seven years after the end of the Term (or such longer period as may be required by applicable Law), the service provider will maintain accurate and complete Records related to this Agreement and to the Services to be provided by the service provider under this Agreement, as may be required or necessary:
(i) for the service provider to meet any other reporting or record keeping requirements referred to in this Agreement; and
(ii) to enable the customer to verify the service provider’s compliance with the terms of this Agreement and to ascertain the accuracy of all financial matters arising under this Agreement.
Before destroying or otherwise disposing of any Records, the service provider shall provide the customer with sixty days’ prior notice and offer the customer the opportunity to recover the Records or to request the service provider to deliver the Records to the customer at the customer's expense. Except as set out in this Section, the costs of all Record keeping contemplated in this Article shall be the responsibility of the service provider.”

When tested however, i.e. when the customer pulls out the clause to see if it requires the service provider to have retained those specific records or information it needs in the upcoming law suit (or, conversely, that the clause did not require the records to be retained and they have hopefully been deleted in the normal course of business) or the service provider checks to determine precisely what its record keeping obligations are, these clauses are often not very informative or helpful. The frequently overly-broad definition of a “record”, the general nature of the obligation (“accurate and complete records”) and the amorphous definition of the purpose behind the record keeping mean, in many cases, it will be difficult to determine the service provider’s obligations precisely.

This should not be surprising. Such record keeping clauses are, in effect, record retention and destruction policies, as applied to outsourcing. However it normally takes a company many months of effort to develop an appropriate records retention and destruction policy. The company needs to identify what records it is creating in operating its business, understand how these records are used, determine its legal retention obligations and finally identify procedures that ensure the right records are retained for the correct period of time and then destroyed in an efficient manner. This can’t be done, in any detail and with any confidence that the company is getting it right, as part of another complicated task like negotiating the contract with a third party for a complex outsourcing transaction.

Notwithstanding the problems with the record keeping clauses in many outsourcing contracts, there is an argument that we are getting the right form of record keeping clauses. In the midst of death march negotiations about fundamental business issues in a complicated outsourcing, the parties are not likely to delay or derail the transaction for failure to properly define the service provider’s record keeping obligations, especially when a quick fix – “keep everything, and for a very long time” – appears to be readily available. Still, it is interesting to consider, through the prism of record retention and destruction policies, what the issues are that impact record keeping clauses and how the parties might think about them, if they had the time. That is something for next time.

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