See Through... or See you... in court


The contract is signed and archived. Relief. On to the next one…

Not so. A recent case in the Technology and Construction Court (an arm of the High Court in England) serves as a reminder of the pitfalls of ignoring contracts after signature.

The Case

In the case of AstraZeneca UK Ltd (AZ) v International Business Machines Corporation (IBM), a dispute arose concerning the services to be provided at termination of a major outsourcing contract for the provision of IT and data centre services and facilities (MSA).

Three main issues were disputed, relating to (i) the scope of post-termination services and termination assistance to be provided by IBM, (ii), the duration of the termination assistance to be provided, and (iii) the fees payable for the termination assistance.

All three contested issues related to drafting inconsistencies or failures. In addition, the third contested issue was exacerbated by the fact that AZ undertook under the MSA to deliver an IT Transfer Plan relating to the IT services which it required to be transferred to the replacement provider on exit. AZ failed to deliver any such plan.

The court required to interpret the MSA applying established common law rules of interpretation, which prevent reliance on previous negotiations or historical statements as to intention. This necessitated very detailed submissions by QCs on behalf of each of the parties, and caused delay and expense to AZ.

The court ultimately determined the extent of IBM's obligations to provide termination services, and a mechanism for IBM to quote for the provision of these services, but the scope of the services was inevitably impacted by AZ's failure to produce a statement of its requirements in the form of the IT Transfer Plan.

What can we learn from the case?

Relations between supplier and customer are never going to be easy on exit - particularly where the contract is terminated for cause, as was the case here. The customer will be under pressure to ensure continuity of service, and any dispute concerning the transfer of infrastructure, systems, data or information to the replacement provider (or customer as may be the case) will have serious implications for the customer. Where the dispute ends up in court, the costs and continuing service implications will be even greater.

Whilst parties may feel uneasy negotiating the terms of exit at the outset of their relationship, when positivity is considered key to the success of the future service provision, it is important to remember why exit arrangements appear in outsourcing contracts in the first place. There are three main lessons from this case:-

Failure by the customer to properly address and negotiate its exit requirements places the customer at risk of effectively being bound to the supplier. The supplier will have considerable leverage where the ongoing service is heavily dependent on systems, infrastructure, data or information being transferred to the customer or a replacement provider on exit.
Exit management is an organic process that will evolve during the lifetime of the contract. Not only should customers ensure that detailed exit plans are included in the original contract, but it is essential that exit planning is seen as an ongoing requirement, and that plans are reviewed to reflect changing needs and are updated and agreed, at least once annually during the term of the contract.
Last but not least, clarity and consistency in drafting should not be jeopardised in the rush to get the contract signed.