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 Ł [ ]" (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.

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