UK: Making A Clean Exit: Recent Case Highlights Potential Pitfalls In Exiting Outsourcing Arrangements

Last Updated: 26 January 2012
Article by Paul O'Hare and Chris Hawkins

The recent High Court judgment in AstraZeneca (AZ) v IBM (22/11/11), in which the Court was required to interpret the exit provisions in an IT outsourcing contract, serves as a reminder of the importance to both parties of ensuring that the exit terms of the contract receive careful attention at the contract negotiation stage, and that the terms governing the exit arrangements are clear and unambiguous, particularly as these terms will be invoked at a time when the parties' interests are no longer aligned, and when the commercial relationship between the parties has potentially broken down.

Background

AZ and IBM entered into an outsourcing services agreement in 2007 for the provision of IT infrastructure services from IBM's data centre facilities in the UK, Sweden, USA and Japan. Some of the services were provided using systems and infrastructure that were also used to provide similar services to other IBM customers.

AZ terminated the Agreement in April 2011, triggering the exit provisions of the Agreement. These provisions gave rise to a number of disputes between the parties, and in particular:

  • the scope of IBM's obligations during the exit period
  • whether transition of the services to a replacement supplier could be phased
  • the duration of the exit period, and
  • IBM's fees for providing exit services.

Scope of IBM's Exit Obligations

Under the Agreement, IBM was required to continue to provide the outsourced services for 12 months after the date of termination (referred to in the Agreement as the "Extended Termination Date"). In addition, Paragraph 12.1 of the Exit Schedule stated that where the outsourced services were provided:

"using shared infrastructure and the associated Systems and Third Party contracts are not transferable to [AZ's replacement supplier] which cannot reasonably take on the provision of [those services] before the Extended Termination Date ("Shared Services")"

then IBM would, if requested by AZ, offer to continue to provide the Shared Services (on the commercial terms offered to similar-sized IBM customers) for a period of up to 12 months beyond the Extended Termination Date.

The parties disagreed as to the scope of the Shared Services that IBM was required to provide beyond the Extended Termination Date. The disagreement turned on the interpretation of the word "infrastructure" in paragraph 12.1. The term was not defined, and was used in different senses in various parts of the Agreement. AZ argued that it referred to all equipment, systems and facilities at IBM's shared data centres which were used to provide the Shared Services, including the data centre facilities. IBM argued that it referred only to the IT hardware and software used by IBM to provide the Shared Services, and did not include the data centre facilities.

The Court found in favour of AZ, deciding that "infrastructure" should be interpreted in the wider sense, to include the data centre facilities as well as the core IT infrastructure. In doing so, the Court relied on other provisions in the Agreement which referred to "infrastructure", and which included references to staff, security, buildings and office space. This, the Court said, supported the view that "infrastructure", as referred to in Paragraph 12.1, was wider than just the IT hardware and software used to provide the Shared Services.

Whilst the court found in AZ's favour on this point, the different interpretations applied by the parties highlights the importance of having clear, unambiguous definitions for all key aspects of the parties' exit obligations.

Could AZ adopt a phased approach to migration of the Services?

A second dispute arose as to whether AZ could adopt a phased approach to the migration of services to the replacement supplier. AZ argued that the Agreement provided it with the flexibility to phase the migration, not only by service component, but also by 'server instance' (an 'instance' in this context being a copy of a software application or operating system running on a server). IBM argued that the right to request the provision of the Shared Services during the exit period was on an "all or nothing" basis, and that AZ did not have the right to cherry-pick the services to be provided during the exit period.

The Agreement did not explicitly address the issue and, in order to reach a decision, the Court was required to look at the overall commercial purpose of the exit provisions. The Court held that this supported the position that service migration could be phased – as it was the intention of the parties (from other terms of the Agreement) that the services could be transferred before the end of the exit period, it made commercial sense for those services to be gradually reduced over a period of time (and it would not serve any commercial purpose for IBM to continue to provide services that AZ did not require).

Length of the exit period

The parties also disputed the length of time that IBM was required to provide "termination assistance" services (defined as the assistance needed "in order to transfer responsibility for delivery, performance and management of [the services being terminated]").

The dispute centred around two conflicting statements in the Agreement. AZ sought to rely on a statement in the Exit Schedule that IBM was required to provide termination assistance until "all responsibilities to be transferred have been assumed by [AZ or a replacement supplier]" to support its argument that the obligation to provide termination assistance continued, if necessary, beyond the Extended Termination Date. IBM relied on a clause in the terms and conditions that stated that its obligation to provide the Services (which were defined to include termination assistance) continued up to and including the Extended Termination Date.

The Court found in IBM's favour on this point: because termination assistance was defined as the assistance needed in order to transfer responsibility for the terminating services, and IBM's obligation to provide the terminating services ended on the Extended Termination Date, it followed that there would be no need for termination assistance (as the term was defined) beyond the Extended Termination Date.

The lesson here is that, where (as is often the case) a customer wishes to have the ability to receive termination assistance (often in the form of training and/or access to information) after responsibility for provision of the services has transferred to the customer or a replacement supplier, express provision for this should be made in the Agreement.

Fees for Termination Assistance

The exit plan provided that "Termination Assistance as set out in this Exit Plan shall be provided for a fixed fee of £ [ ]" (the amount having been left blank in the Agreement). IBM argued that provision of the fixed fee was conditional upon (i) AZ providing a plan describing how transfer of the services to the replacement supplier would take place (described in the Agreement as an "IT Transfer Plan"), and (ii) agreement as to the duration of the exit period, as both would affect the amount of the fixed fee.

The Court disagreed, finding that it was clear (from the above wording) that the parties had intended to add a fixed fee to the exit plan that was appended to the Agreement, and that it was merely an oversight that this had not been done. The fact that IBM had not been provided with an IT Transfer Plan was irrelevant: the Court was of the view that a statement in the Agreement which provided that any changes to the exit plan (including those brought about by an IT Transfer Plan) would be subject to agreement using the contract change control process provided IBM with adequate protection, as it allowed the parties to adjust the fixed fee to take account of any changes to the scope of the termination assistance services. In addition, it did not matter that the duration of the exit period was unknown at the time of contract signature. IBM could have provided a fixed fee based on an assumption as to duration and, again, any changes to this could be tracked via the contract change control process.

Summary and Conclusions

There have been few cases before the UK courts on the topic of exit, and this case provides a useful insight into the types of issue which can arise when exiting an outsourcing arrangement. The case also serves as an important reminder to outsourcing customers of the complexities involved in termination of a long-term outsourcing contract, and of some of the key issues that should be addressed in the exit provisions of the contract to help ensure an orderly migration of services in a way that minimises risk to the customer's operations.

It is also a reminder of the importance of proper exit planning at the contract negotiation stage, including ensuring that:

  • the contract provides a sufficiently long exit period – twelve months is probably the minimum period that is required and customers should build in the ability to extend the contract (and the exit services) beyond twelve months if necessary
  • the contract allows for exit planning in advance of termination, including providing the customer with access to all information needed to retender the services. This access should be provided before service of notice of termination. The confidentiality provisions in AZ's contract with IBM had the effect of preventing AZ from disclosing certain information to potential replacement suppliers until after notice of termination had been served, and this may have impeded AZ's ability to fully control the form and timing of the retender process
  • the outsourced services can be migrated on a phased basis and, in IT deals (including Cloud models), having the ability to migrate by server instance
  • the exit schedule to the contract captures the customer's overall exit objectives – in the AstraZeneca case these principles (which had been incorporated into the contract) were used by the Court to interpret some of the ambiguities in the detailed exit terms in AZ's favour
  • the supplier's anticipated charges for the provision of exit assistance are agreed and incorporated into the contract. Suppliers should ensure that any assumptions on which these exit charges are based are also clearly documented, and that any changes to the customer's exit requirements are subject to the contract change control process
  • the contract is clear on when the supplier's exit obligations start and end, and should take into account that different obligations will be triggered at different times. If the customer wishes to have the ability to receive termination assistance charges after the services have transferred from the outgoing supplier, this should be explicitly stated in the contract (as the courts are unlikely to imply such a term into the contract).

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 Mondaq.com.

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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