The Legal View: Breaking Up
This article originally appeared in Outsource Magazine Issue #27 Spring 2012
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 sides 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, not least because these terms will be invoked at a time when interests are no longer aligned, and when the commercial relationship between the parties may well have broken down.
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.
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, the Exit Schedule stated that where the outsourced services were provided using “shared infrastructure”, IBM would, if required, offer to continue to provide the shared infrastructure for up to 12 months beyond the Extended Termination Date.
The parties disagreed as to what was meant by “shared infrastructure” in this context. 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.
Length of the Exit Period
The parties also disputed the length of time that IBM was required to provide termination assistance.
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 contract term which 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 for customers is that, where (as is often the case) a customer wishes to have the ability to receive termination assistance (often in the form of access to information and/or supplier personnel) after responsibility for provision of the services has transferred to a replacement supplier, express provision for this should be made in the Agreement.
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).
About the Author
Paul O’Hare is Partner, Commercial Technology Practice at Kemp Little LLP, and a National Outsourcing Association Board Representative for NOA Legal Members.