How to renegotiate an IT contract

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....

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?

Read more on IT outsourcing