Disputes relating to termination and exit provisions
A recent dispute between AstraZeneca and IBM has highlighted the importance of considering the termination of an outsourcing agreement and agreeing detailed exit plans. Often the termination of an outsourcing agreement and what will happen on exit is overlooked as parties rush to reach agreement or focus on other more imminent elements of the agreement.
AstraZeneca and IBM entered into an outsourcing agreement for the provision by IBM of IT infrastructure services. When AstraZeneca terminated the agreement this triggered the exit plan set out in the agreement, which was designed to facilitate the transfer of IT services back to AstraZeneca or to a new provider. The agreement did not have sufficiently definite provisions dealing with termination and exit plans, which led the parties to disagree on the scope of IBM’s obligations and entitlement to payment on termination.
Under the agreement, IBM was obliged to continue to provide certain shared services for up to a further 12 months following termination for a fixed fee. The parties disagreed on what was included in the shared infrastructure services IBM was to continue to provide and the amount of the fixed fee was not defined in the agreement. IBM argued that “shared infrastructure” only included servers or software provided by IBM for more than one customer. AstraZeneca however argued that the services included power, security and data centres.
The Court found in favour of AstraZeneca and noted that although the term “infrastructure” had been used inconsistently in the agreement, on the basis of what “a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation which they were in at the time of the contract” the term was wide enough to include equipment, systems and facilities. The Court stated that the purpose of the exit clause was to ensure that AstraZeneca had all the services it needed until it had transferred all services back to AstraZeneca or over to another supplier, even if this meant gradually reducing the services. This was clearly not what IBM had intended the agreement to provide for.
In relation to the fixed fee, IBM argued that this was dependant upon AstraZeneca providing an IT transfer plan but the Court rejected this and held that the fixed fee could be set without receipt of a plan. The Court held that the fixed fee could be raised if the plan was so complex that it would have resulted in increased costs.
This case underlines the importance of carefully considering what will happen when an outsourcing relationship comes to an end because uncertainty can be costly. Parties should be comfortable with and aware of their rights and obligations on termination
What should you do?
You should agree detailed exit plans prior to signing the outsourcing agreement. The exit plans should clearly define each parties obligations upon termination, should be supported by the terms of the agreement and updated regularly. When an outsourcing agreement is being negotiated it is often at a time when the parties have a strong relationship and are committed to finding a mutually beneficial solution. Although it may seem unlikely, relationships can sour and trying to come to an agreement on an exit strategy at that stage is significantly more difficult. You should also bear in mind that although you may be dealing with certain individuals whom you trust at an organisation now, circumstances may change and individuals can move on and companies can be sold. You may then find that you are dealing with different people who may have a different attitude to the working relationship and what the agreement says.
As a customer you will want assurance that upon termination the services are not immediately disconnected and there are obligations on the supplier to aid transition. As a supplier you will want to ensure you are not subject to onerous obligations following termination.
It is also extremely important that the outsourcing agreement clearly sets out the services to be provided both during the duration of the agreement and upon termination. There should be a comprehensive definition of services which both parties are satisfied with, as otherwise disputes can arise as to what exactly is to be provided under the agreement.
How we can help
We are experienced in advising on outsourcing arrangements across a variety of sectors and can assist you with your outsourcing needs. In particular we can:
- Discuss the potential of outsourcing services, the risks involved and how to effectively remove or limit those risks
- Draft and negotiate outsourcing agreements
- Review and advise on outsourcing agreements
- Advise on the potential effects of outsourcing arrangements on employees