By Holly McAdam
What happens when your contract for information and communications technology (ICT) services comes to an end? Agency ICT contracts generally have a clause dealing with contractor handover at the end of the term stating that, within a certain period of time after the date of the contract, the parties will work together to agree a transition plan. The recent NSW Supreme Court case of Cuscal Ltd v First Data Resources Australia Ltd demonstrates the dangers of this type of arrangement.
The matter involved a contract starting on 1 January 2008, under which First Data agreed to provide Cuscal with data transfer services for five years. Cuscal then resupplied those services to its customers, credit unions and financial service providers, who required the services to perform EFTPOS transactions and ATM withdrawals of cash.
In December 2009, Cuscal started a tender process for the services following the expiry of the contract. First Data didn't bid for the supply of those services and Cuscal decided to bring the services in-house.
Termination assistance plan
As is the case in most agency ICT contracts, the contract required the parties to agree a termination assistance plan. In this case, the contract provided that parties were to prepare and agree a termination assistance plan that set out the assistance to be provided, the timeframe and its cost, within one year of the commencement date. The contract also stated that if the parties could not agree on the plan, they would appoint an advisory committee to settle it. Failing this, the contract stated that the matter was to be referred to an independent expert to develop the plan.
Agencies should insist that a contract contain a basic agreement of the transition obligations.
The parties did not prepare or agree a plan within one year of the commencement date, and it wasn't until almost the third year of the five-year term that Cuscal provided a draft plan to First Data. Further, Cuscal didn't seek to convene the advisory committee until April 2011. Ultimately, the parties couldn't agree a termination assistance plan and Cuscal commenced proceedings.
Cuscal argued that First Data was required to continue to supply the normal services (as opposed to termination assistance) to "ensure continuity of supply of normal [s]ervices to customers or to ensure a smooth transition of the normal [s]ervices from First Data to Cuscal." It argued that First Data should continue providing the normal services for a period of up to six months after the expiry of the contract.
Failure to agree a termination assistance plan
In finding that First Data was not required to provide the services after expiry, the Court focused on the distinction between the normal services to be provided under the contract and termination assistance.
Cuscal argued that First Data was required to provide normal services after the expiry of the contract. Rein J noted that the contract provided for First Data to provide the normal services for five years and after that to provide termination assistance to Cuscal to transition the normal services to Cuscal. This required Cuscal to specify what customers it wanted to transition and by what date and then for First Data to specify what information it requires to transition the customers across, the date it requires it by, what steps Cuscal needs to take and the cost.
Cuscal also argued that it should be allowed to enliven the termination assistance provisions by its draft termination assistance plan provided in September 2010 (almost two years after the deadline in the contract). The Court noted that this provision could not be of a type that makes performance by the end of the first year essential to the entire contract because it deals with termination services rather than the provision of normal services, it imposes obligations on both parties (so it is not amenable to notice being given by one party to another requiring them to comply with an obligation) and the clause recognises that there may not be any termination assistance plan. However, given the "inordinate" delay in light of the timeframes in the contract and the time left before the termination assistance is required to commence, the Court held that it was too late for Cuscal to rely on this process.
Implications for agencies
This case highlights the risks associated with not agreeing transition provisions at the time of entering the contract. It is common for parties to allow deadlines for agreement of termination plans to pass and, ultimately, they face being in a position where they have no leverage in negotiating with an incumbent supplier.
Even if there is not a complete transition plan in the contract and an agency has agreed to a process for the development of a termination plans, it is in their interest to ensure that the process and deadlines are followed.
As a minimum, agencies should insist that a contract contain a basic agreement of the transition obligations that can be relied on if the agreement of a comprehensive plan doesn't occur. The basic agreement should cover what services are to be provided, the fees payable and any other provisions of the contract that continue to apply.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.