Canada: Dealing With Outsourcing Supplier Instability

While it is not possible for customers to completely insulate themselves from the risks associated with supplier instability, there are a few proactive steps that customers can take to manage and mitigate those risks. These include: carefully conducting due diligence before entering into an outsourcing arrangement and performing periodic reviews during its course, inserting specific clauses in the outsourcing agreement that pre-emptively address potential issues, and having a response plan in place in case the supplier goes bust.

The economic downturn is affecting suppliers both large and small. Whereas customers have historically focused closely on supplier stability and solvency risk when dealing with smaller suppliers, in today's environment, the continued stability of even the most blue-chip suppliers should not be taken for granted. Customers should look at re-evaluating the viability of all of their outsourcing suppliers and re-assessing the risks associated with their supplier relationships (current and prospective), to ensure they are adequately protected in the event of supplier instability.

Due Diligence

Customers often perform some degree of due diligence before entering into an outsourcing agreement. In doing so, they should ensure that the nature and scope of the due diligence is sufficient for their purposes. For example, if a customer is contracting with a subsidiary of a public company, this due diligence should include information about the financial stability of the subsidiary. The customer should not rely solely on publicly available information about the public parent. Where appropriate, customers should consider whether to require a parent guarantee as part of their contractual arrangements.

In addition to initial due diligence, it is extremely important for customers to conduct regular periodic follow-up due diligence to ensure a supplier's continued stability and to identify any potential issues as early as possible. Customers should build into their contract provisions a requirement that suppliers make available the information the customer requires to perform appropriate due diligence on a regular basis.

Contractual Protections

Due diligence

As discussed above, customers should include in their supplier contracts processes to conduct periodic due diligence. In order to make this exercise meaningful, customers should also clearly stipulate their rights and remedies if the due diligence identifies any issues. These rights may include such things as triggers for:

  • governance escalation processes;
  • termination rights;
  • commencement of transition assistance (possibly at no additional charge);
  • access to and training on the supplier's source code;
  • removal of restrictive covenants, such as exclusive supplier commitments or non-solicitation commitments; and
  • removal of minimum-volume commitments.

The types of due diligence results that will be sufficient to trigger the customer's rights and remedies will likely be the subject of significant negotiation: suppliers will generally want to limit trigger events to actual bankruptcy events or similarly catastrophic events, such as injunctive proceedings relating to core intellectual property. From the customer's perspective, however, this would be too little, too late; the purpose of periodic due diligence is to identify risks before they become critical and can still be mitigated.

Termination rights

Under most outsourcing contracts, the customer will have a right to terminate upon the initiation of bankruptcy or similar proceedings. It is important to recognize, however, that once a bankruptcy or restructuring filing is commenced, rights and remedies set out in a contract are often stayed. As a result, a customer's right to terminate its contract with a supplier upon the occurrence of a bankruptcy or restructuring petition or filing may not be meaningful.

If a customer wishes to ensure that it has the ability to exercise a termination right upon a supplier's insolvency, it should broaden the termination right to pre-filing events. These events may include:

  • the supplier ceasing or threatening to cease carrying on business in the ordinary course;
  • the supplier admitting that it is unable to pay its debts generally as they become due, or acknowledging its insolvency;
  • an adverse change in a supplier's credit rating; or
  • the initiation of actions by regulatory authorities that are likely to result in the supplier's inability to provide the services under the agreement.

Suppliers will typically object to such a broad termination trigger, and try to narrow these termination rights as much as possible.

Transition Assistance on Termination

An outsourcing contract should include provisions that address in detail the obligations of the supplier to assist with transition. This assistance should include:

  • a supplier obligation to deliver up information and data;
  • a customer right to acquire hardware, software and personnel from the supplier;
  • a supplier obligation to assist the customer in finding and evaluating an alternative supplier; and
  • performance and personnel commitments by the supplier to ensure a smooth transition.

Post-Termination Intellectual Property Rights

Customers should carefully consider whether, upon termination of a supplier, they will require rights to the supplier's intellectual property in order to continue the service in-house or through another supplier. If continued use of the intellectual property is realistic (as opposed to a complete shift to a new solution from the current supplier's solution), then the customer should negotiate these rights in advance if possible. Careful attention should be paid to the terms relating to the exercise of such rights to ensure they will be enforceable in the event of a bankruptcy or restructuring. The inclusion of terms relating to security interests or partial assignments of critical intellectual property should also be considered where appropriate.

Other Contractual Provisions

To help identify and address supplier instability, customers should consider including a number of other contractual provisions, such as:

  • affirmative covenants requiring the supplier to proactively bring to the customer's attention potentially significant issues, such as significant litigation claims, rather than waiting for the periodic due diligence review;
  • requirements for the immediate delivery of confidential information and data, including any customer personal information to the customer, upon the customer's request;
  • source code escrow, source code licence or source code access and training provisions that will enable the customer to use and support a solution without the supplier;
  • removal of restrictive covenants, such as exclusive supplier commitments, non-solicitation commitments or confidentiality restrictions; and
  • removal of minimum-volume commitments.

Supplier Instability Response Plan

While it is advisable and important to include transition assistance provisions in the agreement, the reality is that customers should not count on receiving proper transition assistance from the supplier when the supplier is suffering from significant instability. Customers should, therefore, have internal governance processes and plans in place to ensure that a bankruptcy mitigation plan is put into action at the earliest appropriate opportunity.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions