Ofcom ruling shows importance of indemnifying against regulatory fines in outsourcing agreements, says expert

Outsourcing contracts expert Iain Monaghan of Pinsent Masons, the law firm behind Out-Law.com, said that the indemnities account for situations where a supplier’s breach of contract causes the customer to be subject to regulatory fines. Contracts also often allow the customer to recover associated costs, such as the cost of steps it takes to recover its reputation, he said.

Monaghan was commenting after the telecoms regulator Ofcom decided to levy a £750,000 fine on TalkTalk for "making an excessive number of abandoned and silent calls to potential TalkTalk customers" in February and March 2011. TalkTalk has said that it will "fully recover the financial penalty imposed" from two suppliers that involved in the operation of its call centres. The company said that it "immediately stopped using" Teleperformance and McAlpine Marketing after the regulatory issue was flagged.

Ofcom has the power to levy fines of up to £2 million from companies they find have "persistently misused an electronic communications network or electronic communications services" under the terms of the Communications Act. The regulator has previously stated that firms that abandon more than 3% of live calls across call centre operations within a 24 hour period are subject to regulatory action and has said that it considers "persistent misuse to be serious".

"Normally there are minimum service levels set out in outsourcing contracts," Monaghan said. "For a call centre operator acting for a customer, this may mean having to meet targets in relation to the average time to respond to calls and the number of calls lost, for example. Where suppliers fail to meet service levels customers will normally be able to claim service credits that enable them to receive a discount on charges from the next bill."

"In addition, outsourcing contracts will generally contain provisions that allow customers to claim for damages where suppliers breach their contractual agreement. In regulated industries, customers may also require suppliers to agree to specific provisions that enable them to recoup the cost of regulatory penalties imposed on them as a result of actions taken by those suppliers."