They say that all the best case law is made in market downturns,
writes Mark Lewis, Partner and Head of Outsourcing, Berwin Leighton
Paisner LLP, London.
This recession will see its fair share of IT and IT-enabled
servicescontract cases. How many make it to the law reports will
depend on whether they go through the courts, arbitration or other
sorts of dispute resolution, where it may be possible to keep the
outcome private.
What drives litigation in IT services contracts? Medium to
long-term contracts (so mainly
outsourcing) from which customers want out or which they
want to renegotiate. But you can't usually just terminate
contracts or renegotiate them to
reduce scope and charges: more usually, you have to go through
contract change control for that,unless you had the foresight
as customer to insert a contractual right to wriggle out of the
contract by early break at low-cost options.
Not easy to negotiate, even these days. So you start to build a
case by looking at service level breaches, adding them up and
seeing if they compute to sufficientlyhigh severity level breaches
to claim material or persistent breach (all the best contracts have
rights to terminate for these breaches). Then you have the leverage
to get your supplier around the table to force a renegotiation.
Andthis has often worked.
But if the supplier can point to various "relief events" (what
one lawyer in Scotland delights in calling "exculpatory events")
excusing or delaying supplier performance, the supplier may not
just roll over and agree. Then there is usually a fightand
sometimes it will land up in court. Good for lawyers and sometimes
even case law, but not for much else.
Why else would a customer and supplier sit down to renegotiate
an IT outsourcing contract? Well, through the possibility of
material breach rights to terminate because a customer has gone
bust (it does happen, but customers try to argue against giving the
supplier the right to terminate for the customer's insolvency), or
because the supplier has gone bust or has suffered a change of
control (ownership and/or management - think HP/EDS).
Another trigger point for renegotiation is that many modern IT
outsourcing contracts allow the customer the right to carve out of
scope whole service stacks, single or groups of services, or
service elements - often at no cost or being treated as equivalent
to convenience termination. But there would usually need to be a
contractual renegotiation to reposition services, service levels
and charges. So the parties have to get round the table and
negotiate changes through the change-control mechanism.
But how many suppliers and customers, when facing market
conditions as those we face today, would sit down amicably and
agree to renegotiate their IT outsourcing contracts without any
form of legal or contractual coercion? Not many. Certainly no more
than a handful in my outsourcing experience over 20 years. But
surely that's what the "partnership" we hear so much about in
outsourcing is - or what it should be about?