Thinking of Terminating Your Outsourcing Agreement?

Making the decision to terminate an outsourcing agreement is often very difficult and is usually only pursued if enforcing existing rights is not sufficient to address a customer’s major concerns or renegotiating the agreement can’t achieve the desired outcome.

If a customer begins to think about terminating an agreement, it is useful for customers at that juncture to undertake a complete review of the agreement in relation to termination options and consequences to help inform the decision. What should such a review entail?

Can you terminate? And what are you terminating?
First, be sure as to what the “agreement” entails. Review all amendments and change notices, and consider whether the parties have varied the agreement through their conduct. Are there any other contracts between the parties which will be affected by a termination, or even terminated automatically as a result?

Second, what termination rights do you have? Outsourcing agreements will usually include rights for a customer to terminate for material breach, for convenience, upon certain events occurring (such as the supplier’s insolvency or change of control), and for certain specified breaches (such as confidentiality and IP breaches). There may also be rights as to partial termination (e.g. by geographies or service tower).

If you are looking to terminate for material breach, is the breach remediable? If so, review the agreement as to the cure period and the process the parties must follow regarding notice of the breach and remediation. How long has it been since the breach occurred? Could the supplier argue that you have waived your right to rely on the breach or acquiesced in the conduct?

In assessing your right to terminate, keep in mind the consequences of getting this wrong. Purporting to terminate an agreement without a valid right to do so may amount to a repudiation of the agreement. This may entitle your supplier to elect whether to accept your repudiation (and sue you for damages for wrongful termination) or affirm the agreement and insist on continued performance.

If your supplier is a foreign counterparty, check whether there are any local mandatory laws which may affect or even override your rights.

The cost of termination?
Prepare your business case as to the cost of termination. Different costs may be triggered depending on the basis of termination. Your business case should also include the cost of engaging with an alternative provider, such as those associated with conducting an RFP process, through to contracting with the supplier, and thereafter the costs of transition and transformation. Here are a few business case components to get you started.

Termination or Express Fees. Are there any fees associated with the termination? These will usually arise with a termination for convenience (often on a sliding scale), but certain breakage or stranded costs may also arise for other types of termination.

Liabilities, Indemnities and Other Cost-Underwriting Clauses. Will any of these bite in the situation you find yourself in? Are you liable to the supplier in any way (considering the accrued rights and obligations of the parties will survive termination)?

Intellectual Property. Upon termination, will you need to make use of software, data or other information owned by the supplier (such as the supplier’s pre-existing IP or IP created independently)? And if so, does the agreement include a right to use these after the termination of the agreement? If not, you will need to either adapt your systems, data and materials to ensure you no longer depend on the supplier’s IP (at your cost), or purchase a licence from the supplier for continued access to the supplier’s IP (which assumes a licence is on offer from the supplier).

Asset Transfer. Are you obliged to purchase, or will you require, any assets upon termination? These may not necessarily be purchased from the supplier under your current arrangement, but may have to be factored into the transition costs with an alternative provider.

Third Party Contracts. To what extent are there any costs with the termination of any subcontracts or third party contracts? Or perhaps the cost of assignment of those contracts to you or your new provider?

People Costs. Your agreement or even local laws may govern the transfer of staff on termination and exit. In the UK the Transfer of Undertakings (Protection of Employment) Regulations 2006 will govern a service provision change. A transfer of UK-based supplier staff engaged in the provision of the services may take place to the customer or an incoming supplier on their current terms of employment. Check whether you have agreed the apportionment of liability and appropriate indemnities in respect of employment issues and related claims in the agreement. And if supplier employees do not transfer to you or the incoming provider by way of law, are there any employees you would like to employ directly? And can you do so without infringing any non-solicitation clauses in the agreement?

What you end up with after termination?
Do you have sufficient information for you to understand how the services are provided and what is required to provide them, including:
• People • Equipment used to provide the services • Software • Data • Third party service providers
• Process and procedures manuals
• Any other intellectual property • Service delivery locations
For each of these issues mentioned above, do you know what you will own or have access to after the termination, and what the supplier will own or retain?

What is the timing for exit and transition? How can you minimise disruptions at critical times for your business (such as year end or other busy periods)? If you are engaging a new supplier, how long will it take you to find the new supplier and for them to be in a position ready to provide services?

What information regarding the incumbent provider and the services are you contractually able to provide to the new supplier?

What is the supplier obliged to assist with in terms of exit planning, migration of services and ongoing service provision? If the transition is not going according to plan, is your provider obliged to extend the period during which it provides termination assistance? And if so, upon what notice period? Alternatively, can you terminate the supplier’s assistance early?

Review the exit plan and the termination assistance provisions of your agreement. If there is anything that needs to be updated, make sure this is done.

Be clear as to the supplier’s obligations to maintain service levels and avoid disruption to the services. Conversely, do you wish to implement any changes to the services or service delivery to assist with migration? For example you may wish to stop all non-critical changes (e.g. software changes, hardware updates or personnel changes), taking into account who bears the costs of such changes and whether there is additional disruption to services.

Issuing notice of termination
Comply with any procedural requirements specified in the agreement for serving notice of termination, including notice periods, form of notice, and means of service. Keep records to demonstrate compliance if required later.

Be clear as to what you are terminating, especially if you are seeking to only terminate part of an agreement or protect certain contracts from the termination. Document your grounds for termination. Where you are terminating for breach, be sure to keep records of the impact of the breach on the business.

Consider if any intellectual property rights need to be asserted, and whether there are any other legal requirements which must be met for an assignment of IP.

And finally, a word of caution. If you are engaged in a dispute with your supplier, ensure that communications are controlled and documented so as to ensure that legal privilege is not waived and that any matter discussed as to termination and exit is without prejudice to any potential litigation.