“Read your contracts up and down, left and right”

Lauren Jauregui

I totally agree with Lauren’s advice on contracts. You have to read your contract “up and down, left and right” before you sign it. Banks and Financial institutions enter into countless contracts and agreements with their service providers who offer goods and services. These contracts contain numerous clauses that all need to be reviewed before they are signed. The question is do you know what to look for in a contract? Do you know what are the necessary clauses that have to be incorporated in a contract?

Now this is not a contract law article; meaning, I will not dive into the basic and mandatory elements of a contract as per the law. This brief article goes further to outline some important clauses/provisions in a contract between a bank or financial institution and a service provider.

The Bank of Tanzania (BOT) released the Outsourcing Guidelines for Banks and Financial Institutions in 2008 (the Guidelines). These guidelines generally provide for the outsourcing arrangements entered into by a bank or financial institution and service providers. These Guidelines acknowledge that banks enter into outsourcing arrangements for services such as ICT services, professional services (legal, audit, actuarial etc.), loan administration, marketing and research, human resources, investment management and so much more. The BOT also recognize that such arrangements are beneficial to the banks and financial institutions.

Contents of Outsourcing Contracts

Before we go to the contents of the contracts, it is important to note that through these Guidelines, the BOT states that all outsourcing arrangements should be subject to a written contract. Hence, although the law allows verbal contracts, these types of contracts need to be in writing. In addition, the bank or financial institution’s legal counsel must review it to ensure that it is legally enforceable and that it reasonably protects the bank from risks.

As per the Guidelines, the following are the basic provisions to be included in an outsourcing contract:

i. The operational area or activity that needs an outsourced service (e.g. ICT, Legal etc.).

ii. Services and performance requirements.

iii. Monitoring and audit procedures.

iv. Business continuity plans, recovery times in the event of disruption, and responsibility for backup of programs or data.

v. Where appropriate, insurance to be maintained by the outsourced service providers (this is very important when negligence happens).

vi. Transition period and acceptance.

vii. Notification requirements and approval rights for any material changes to services, systems, controls, key project personnel including changes to the service provider’s significant sub-contractors.

viii. Ownership of records and, where relevant, software, data usage and compliance with outsourcing institution’s security policies.

ix. Default arrangements and termination rights for a variety of conditions including change in control, convenience, substantial increase in cost and insolvency.

x. Price or fee structure, duration and the mode of payment.

xi. Dispute resolution arrangements which attempt to resolve problems in an expeditious manner as well as provision for continuation of services during the dispute resolution period.

xii. Liability and indemnity for failed, delayed, or erroneous transactions processed by the outsourcing service provider.

xiii. Confidentiality and security of information of both the bank and its clients.

xiv. Prohibition of assignment of the contract to a third party without the bank’s prior consent.

xv. Where appropriate training of bank’s staff.

xvi. Review of the outsourcing service provider’s standards, policies, and procedures relating to internal controls, security, and business contingency to ensure that they meet the outsourcing institution’s minimum standards.

The above are the basic provisions as per the Guidelines. However, I am also providing some additional provisions that I feel are important:

· Anti-bribery and anti-money laundering clause: in this clause, parties commit to adhere to the anti-bribery and anti-money laundering laws, rules and regulations in the country and wherever the applicable jurisdiction.

· Force majeure clause: this protects the parties against unforeseen natural disasters.

In addition, just to advice on the termination clause, most banks have contracts with termination clauses that end the contracts either by the expiry of time or by breach of terms and conditions. Although they are legally okay, such clauses do not give banks opportunity to terminate the contracts voluntarily. The bank should be at liberty to terminate the contracts by a specific time’s notice and at will, not necessarily because of a breach.

To conclude, it is very important for banks and financial institutions to thoroughly review their contracts. This is because un-reviewed contracts may lead to unnecessary litigations, low tracking of the outsourced entity’s performance and if you have an internal auditor who learns about the BOT’s Outsourcing Guidelines for Banks and Financial Institutions he/she will be on your neck all the time.

Therefore, to avoid the auditor’s wrath on you, I advise that you prepare a simple checklist of what is needed for your contracts and every time you review a contract you get to tick the available provisions and highlighting what needs to be included.

“A contract is only as good as the people who sign it”

Jeffrey Fry