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Tech and Outsourcing Hot Spots: Termination and Post Termination Rights (part 3)

Olswang partner Jonathan Choo
Olswang partner Jonathan Choo

Olswang associate Shaun Lee
Olswang associate Shaun Lee
Olswang Singapore-based partner Jonathan Choo and associate Shaun Lee examine what happens when outsourcing contracts end – as they sometimes do - in this third deep and incisive insight in the Technology and Outsourcing Hot Spots Series.

This knowledge partnership article follows November’s piece discussing pre-contractual negotiations in tech and outsourcing contracts, and February’s article on governances and change control procedures.

All technology and outsourcing contracts come to an end, whether because (a) parties have fallen out and can no longer cooperate with each other; or (b) there have been material breaches of the contract; or simply because (c) the customer believes that it can get a better deal elsewhere.

In this part 3 of our Technology and Outsourcing Hot Spots Series, we consider the important topic of termination as well as post-termination issues such as exit rights and migration assistance.

Parties may resort to a range of remedies when a breach of the agreement occurs. Damages will be available as of right and the innocent party might also be able to terminate the contract. This right to terminate the contract can be contractual, e.g. the termination provisions in the relevant agreement. Alternatively, there might be a common law right to terminate if the contractual breach in question is sufficiently serious or amounts to a repudiation of the contract by the party in breach.

However, as termination is a drastic remedy, more complex and sophisticated agreements have incorporated various remedies which stop short of termination, but which nonetheless serve to set things right and to continue the business arrangements. Such rights include management meetings/reports (see Medirest), step-in rights (see BSkyB) and fee penalties (Medirest). These cases have been discussed in our previous posts on pre-contractual negotiations and governance and change control mechanisms.

Even though the contract effectively comes to an end when it is terminated, there may still be obligations under the contract which survive post-termination of the contract (e.g. payment obligations).

Among other issues which fall for consideration: what happens to the customer’s data and how does the customer ensure that its outsourced services do not simply disappear pending a new service provider taking over the outsourced services or the customer itself reassuming those services?

Exit Provision – Post Termination Assistance Services

Termination provisions and post termination assistance provisions are particularly important in the context of complex outsourcing or technology agreements.

Properly drafted post termination assistance services provisions ensure clear demarcation of responsibilities in ensuring the transition of the outsourced services either back to the customer or to the replacement service provider. In a basic web based cloud hosting service, post termination assistance services could simply involve a promise not to delete any data uploaded to the provider’s servers for a set period of time post termination, as well as permission for the customer to retrieve that data in the same period (see, for example, the Amazon AWS Customer Agreement).

However, in a more complex multi-service outsourcing agreement, it is imperative that parties plan ahead so that the transition is as seamless and painless as possible. The case of Astrazeneca UK Ltd v International Business Machines Corporation [2011] EWHC 306 (TCC) provides good insight into exit provisions and the importance of clear drafting to ensure that the handing over of the outsourced services proceeds expeditiously.

The dispute in Astrazeneca v IBM concerned the extent and duration of IBM’s obligations as AstraZeneca’s global IT outsourcing provider. The agreement between the parties was embodied in a Master Services Agreement (“MSA“) which contained some 90 clauses and 32 schedules (see paragraph [3]).

Importance of clearly defining key terms

On the face of the agreement, parties had put their minds towards post termination rights and exit provisions including IT transfer and exit plans as well as payment for those services.

Even on the matter of timing, the MSA provided that for the duration of the Exit Period (Termination Date until Extended Termination Date, i.e. 12 months), IBM was obligated to provide the outsourced services as well as Termination Assistance, i.e. the assistance necessary to transfer responsibility for delivery, performance and management of the services, back in house to AstraZeneca or to a replacement service provider.

However, there was ambiguity in the definition of “Shared Services” (because of its reliance on an undefined term “shared infrastructure“). This was a key term as it allowed AstraZeneca to demand that IBM continue providing those services beyond the Exit Period. Just as problematic was the fact that the MSA also left responsibility for key obligations ambiguous and any repercussions for failure to meet those obligations uncertain.

IBM argued that there were in fact no Shared Services involved and therefore no (further) extension of time was to be granted. According to IBM, “shared infrastructure” meant IT software and hardware that was not used exclusively by AstraZeneca i.e. was shared between AstraZeneca and other clients. In this respect, parties agreed that all the servers and software in IBM’s shared data centre used to service AstraZeneca were entirely dedicated to AstraZeneca and that all the servers and software could be transfer to AstraZeneca without affecting any of IBM’s other clients.

In other words, there was no “shared infrastructure“.

However, the High Court concluded that shared infrastructure did not have the narrow meaning attributed by IBM. Hence, the entirety of IBM’s shared data centre fell within the definition of “shared infrastructure” (see paragraphs [90] to [95]) which meant that the services provided were Shared Services.

Length of (post) termination assistance

IBM argued that once the Extended Termination Date had passed, it had no further obligation to provide Termination Assistance. In contrast, AstraZeneca considered that the Termination Date was to be extended until all of IBM’s responsibilities had been assumed by AstraZeneca or a replacement provider. The High Court held that, subject to there being no Shared Services to provide, IBM did not have to continue to provide any Services or Termination Assistance to AstraZeneca beyond the Extended Termination Date.

Somewhat troubling for the parties, the High Court considered that Schedules 22 and 22A did not contain provisions dealing with parties’ obligations in respect of the transfer of Shared Services once the 12 months post the Extended Termination Date had passed. This was an issue to be left for further arguments if necessary (see paragraph [148]).

IT Transfer Plan

Remarkably, it was unclear whether AstraZeneca had been under an obligation to provide an IT Transfer Plan at all and whether IBM’s obligations to produce an Exit Plan were conditional upon AstraZeneca producing an IT Transfer Plan.

The IT Transfer Plan was defined as “one or more plans prepared by AstraZeneca for transferring some or all Services in the event of termination”. The MAS provided that AstraZeneca “may prepare” one or more such plans. On that basis, AstraZeneca sought to argue that there was no necessity for it to provide an IT Transfer Plan in contrast to the mandatory requirement for IBM to provide an Exit Plan.

The High Court agreed with IBM and considered that it was difficult to contemplate how IBM could have performed its obligations without an IT Transfer Plan. In particular, the learned judge considered that without such a plan, IBM would not know what the scope and contents of the relevant transfer was going to be in respect of its (IBM’s) own Exit Plan (see paragraph [183]).

Dealing with long tail risks and black swans

Parties should also be alive to long tail risks and black swan events.

One such example would be where a vendor / supplier / service provider undergoes liquidation, has a receiver placed over its assets or there is a change of control of the company. In those circumstances, it is critical to have contingency plans for project continuity. This is especially true in a design and build technology project where the intellectual property rights and physical control of the project remain with the vendor until completion of the project.

One possible (albeit drastic) solution is to ensure that the necessary design drawings, documents and software code are placed in escrow and that those escrow documents are updated on a regular basis so as to ensure business continuity. Naturally, there are additional costs associated with such precautionary measures and parties have to weigh the costs and benefits of mitigating such risks.

Similarly, a properly drafted force majeure clause will stipulate what happens to the parties’ contractual obligations in a situation of specified events or events beyond the control of either or both parties. Such clauses can operate to terminate the contract in its entirety or excuse performance of a party’s obligation in whole or in part for the duration of the force majeure event.

It is important to note that changes to any economic or market circumstances (including currency fluctuations) which may affect the profitability of a contract or the ease with which the obligations are to be performed do not constitute a force majeure event. We have discussed the interpretation of force majeure clauses in greater detail in a previous post.


Parties rarely enter into a business and contractual relationship planning for the arrangement to come to an end.

Rationally, parties focus their efforts working out the scope and ambit of their respective obligations. However, the nature of technology and outsourcing contracts is that such arrangements have a finite lifespan.

Furthermore, in more complex agreements, termination (whether premature or otherwise) requires planning, time and effort to untangle. Exit rights and post termination assistance services fulfil those functions but require thought and planning, just like any complex arrangement.

Jonathan Choo is a Partner and Head of Arbitration & Dispute Resolution at Olswang Asia LLP. Shaun Lee is an Associate; Arbitration & Dispute Resolution at Olswang Asia LLP.

Olswang Asia, based in Singapore, is a full service law firm particularly focused on advising businesses in the Technology, Media and Telecoms industries. For enquiries or further information, please email , or contact Olswang Asia at +65 6720 8278.

Check out Olswang’s Singapore International Arbitration Blog at http://singaporeinternationalarbitration.com/

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