Don't let it end in tears - check the details

If other remedies fail and you must terminate your deal, it is not a good time to find that contract flaws create major problems in achieving a successful handover.


If other remedies fail and you must terminate your deal, it is not a good time to find that contract flaws create major problems in achieving a successful handover.

Although the market for outsourcing services is now well established across various industry sectors and the contracts used to support such services have evolved significantly in the past ten years to reach relative stability and maturity, it is still surprising how many outsourcing contracts contain flaws or loopholes.

In many cases, the flaws and errors will never come to light because the relationship between the parties is solid and issues are resolved commercially, with no need to dust off the contract to determine a party's rights or obligations.

As well as death and taxes, one other thing is certain in life - that at some point in time, outsourcing arrangements will come to an end. Outsourcing contracts often provide that the customer may terminate the relationship at certain break points or after the expiry of an initial term.

Where the customer is the party that serves notice of termination, it will typically do so only after it has given some thought to the post-termination position and in many cases will have gone some way in its planning and preparations.

However, the customer's preparation and decision-making process is made extremely difficult if it does not have access to up-to-date and complete information about the services being provided and the staff and systems used by the supplier to provide those services. All too often, the customer will not be entitled to have access to information from the supplier until notice of termination has been given, and in many cases this will be too late (and too late in any event to be useful in determining the decision to terminate in the first case).

Without access to key information, the customer's management may find it hard to make an informed decision on whether to retain the contract, re-tender it or bring the services in-house because they may be unable to assess the cost differences between these three options.

If a decision is taken to re-tender it, the customer may find there are gaps in the information it can disclose to bidders, with the consequence that bids received may be subject to qualifications and assumptions, and ultimately the risk passes back to the customer.

Another common failing in outsourcing agreements that relates to the termination process is the amount of time given to the customer to put in place alternative arrangements and to migrate systems. Three- and six-month notice periods are surprisingly common but are woefully inadequate for going through the entire re-tendering process and negotiate a replacement contract.

Where the customer is the terminating party, it may have undertaken much of the preparation required before it formally serves notice of termination, but where the supplier serves notice, the customer may be caught unawares and totally unprepared.

Most good outsourcing agreements will contain provisions dealing with the consequences of termination, such as the invocation of an exit plan. In reality, however, many contracts do not actually require the supplier to prepare a detailed exit plan until notice of termination has been given.

Often what is actually included in the contract is a plan to create a plan with an outline of the areas to be included. If migration has to happen quickly, perhaps because of the insolvency of the supplier or because of its material breach, the customer may be unable to move as swiftly as it would like.

Step-in rights are often included in outsourcing agreements in the belief that if there are problems with the services, the customer or its agent can take over the operation of the service. But the reality is that step-in rights are extremely difficult to undertake.

Most customers will not have retained sufficient expertise in-house to perform the tasks being taken over, so they will have to seek other service providers.

But other service providers are generally reluctant to accept what is, in effect, a poisoned chalice, trying to sort out someone else's problems. Also, most contracts will preclude the invocation of step-in rights where the infrastructure used to support the services is shared.

The solution would be for the affected customers to pool together but it is rare for contracts to permit customers to jointly invoke step-in rights.

Given the substantial increase in the number and complexity of outsourcing projects over the past three or four years - and in many cases with contracts signed after rushed negotiations - it is inevitable we will see a corresponding increase in the number of outsourcing disputes, with a fair share of contracts coming under close scrutiny and their deficiencies highlighted.

Conor Ward is a partner at the law firm Lovells

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