How to limit the risk of terminating outsourcing contracts

As the economy contracts organisations are looking at areas of their business to cut costs and one such area is outsourcing. There are key warning signs that may indicate a customer is looking to end an outsourcing contract. However, a provider can take steps to avoid termination and/or to be placed in the best position to argue that termination is unlawful.

As the economy contracts organisations are looking at areas of their business to cut costs and one such area is outsourcing. There are key warning signs that may indicate a customer is looking to end an outsourcing contract. However, a provider can take steps to avoid termination and/or to be placed in the best position to argue that termination is unlawful.

Most outsourcing contracts will contain termination provisions which allow the parties to end the contract in certain circumstances. This is likely to enable each side to terminate in the event of certain breaches by the other. However, anyone considering terminating for breach must proceed with caution. If it wrongfully terminates, it is likely to be subject to a substantial claim for lost income by the innocent party. Consequently, a company seeking to terminate is likely to first seek to build a case within the contractual framework.

Three key warning signs which may indicate that a customer is looking to terminate the contract may include:

  • Increased scrutiny of any service levels set out within the contract - while a failure to meet service levels on one occasion is unlikely to entitle a party to terminate, consistent failings may, either on their own or in combination with other breaches, allow a valid termination. It is important that a provider itself regularly reviews service levels to ensure that they are being met. If failings are identified internally, steps can then be taken to improve performance before any formal complaint is received.
  • Greater levels of written correspondence - if a customer is seeking to build a case for termination it is likely to set out its position in writing. It may start to produce records of meetings which have taken place. Contemporaneous records are powerful evidence of what was discussed or agreed. If any correspondence and/or notes are received, those documents should be carefully reviewed. If the correspondence is inaccurate then a written response should be prepared. If oral discussions do take place in respect of any problems or issues, it is important that a written record is made.
  • Lack of co-operation when performing joint obligations - many outsourcing arrangements will require assistance from a customer's employees to properly meet targets or service levels. If co-operation drops it may indicate an intention to seek to end the contract by claiming that performance is unsatisfactory. If a provider is being prevented from properly performing its service by a lack of co-operation, it is important that any concerns are made known to the partner and recorded in writing. This will ensure that the provider is best able to subsequently evidence that its alleged breach of contract was due to the failings of its partner.

Following the above hints is likely to limit the risk of an outsourcing contract being terminated. Even if the outsourcing contract is terminated, taking the steps outlined above should ensure that you are in the best position to succeed on a resultant claim for its losses.

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