Outsourcing agreements and termination clauses – the end!
As part of this series of posts, we already covered liability clauses, but termination and the consequential migration to a different provider are crucial in outsourcing agreements in my view. This post is not meant to cover all the relevant termination scenarios, but those that trigger to major issues in a negotiation.
A major peculiarity of Italian law is that a clause entitling a party to terminate outsourcing agreements in case of breach of any provision of the agreement (which is typical in English law contracts), would not be valid. Likewise, it would not be sufficient to list all the clauses of outsourcing agreements setting out obligations on the other party in the termination clause as events leading to the termination since also such clause would risk to be challenged. Italian case law requires that outsourcing agreements expressly lists the events/breaches triggering the termination and therefore their selection might be challenging.
Another problematic termination clause is connected to the insolvency of the counterparty. Indeed, in some countries including Italy, clauses providing for the termination in case of bankruptcy of the counterparty would be null and void. So what’s the solution? My personal view to be adjusted to the peculiarities of the contract is to entitle a party to terminate outsourcing agreements on the occurrence of events that show a financial difficulty of the other party. The threshold of “difficulty” however shall be sufficiently high to avoid that the termination can be exercised only during the so called “suspicious period“. Indeed, actions taken during the suspicious period might be subject to clawback so vanishing any effort.
However, the advantage of civil law countries like Italy is that our civil code provides for general rules on termination. And for instance in case of a major breach a party might request the termination of outsourcing agreements or assign a cure period for the other party to remedy to his breach on whose expiry the contract is terminated even in absence of a specific contractual provision addressing that breach. The enforcement of such termination might be more complex (unless the other party recognises the breach) as a court shall decide whether the challenged conduct led to a major breach, but this type of provisions set a major distinction between civil law and common law contracts.
But apart from termination events (that may also include, among others, the termination at will, for the expiry of the contract, for change of control etc.) outsourcing agreements require a very detailed migration plan. Indeed, after a long contract the services provided by the supplier might have become an essential part of a business and, in absence of a migration plan, the entity receiving the service would risk to be obliged to remain linked to the same supplier for longer than it like to as the costs and efforts of switching to a different supplier would exceed the benefits.
Also, since the migration will occur at a point when the relationship between the parties might have been impaired, it is crucial that the supplier is contractually bound with a quite detailed exit plan to perform any activity necessary for the proper handing over to the new supplier. In this respect, it might be wise also to agree a migration period enough long to make sure that it can be performed without causing major operational issues.
The above is only a brief overview of more frequent issues connected to termination clauses, but as usual I would like to understand your view on the above. For this purpose, if you want to discuss the above, feel free to contact me, Giulio Coraggio, to discuss. And follow me on Twitter, Google+ and become one of my friends on LinkedIn.
Image courtesy of Flickr by Benny Lin
WRITTEN BY GIULIO CORAGGIO
IT, gaming, privacy and commercial lawyer at the leading law firm DLA Piper. You can contact me via email at email@example.com or firstname.lastname@example.org or via phone at +39 334 688 1147.