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Termination clauses in outsourcing agreements are critical also in order to proper manage the migration to a new supplier and pending liabilities.
As part of this series of posts on outsourcing agreements, I already covered liability clauses and SLAs/liquidated damages, but regulating the termination and the consequential migration to a different provider are equally important. And, if left unregulated in the agreement, they might lead to major issues when there is no longer a good relationship between the parties.
This post is not meant to cover all the relevant termination scenarios, but those that trigger to major issues in a negotiation.
You cannot always terminate for breach an outsourcing agreement
A common practice in English law contracts is a “catch-all clause” providing a right to terminate for an contractual breach, followed by a very detailed list of events that entitle either party to terminate.
However, a peculiarity of Italian law and of some common law countries is that a termination clause entitling a party to terminate outsourcing agreements
- either in case of breach of any provision of the agreement would not be valid,
- or on the occurrence of some events that include all the clauses of outsourcing agreements setting out obligations on the other party
could be challenged. Italian case law requires that outsourcing agreements expressly lists the events/breaches triggering the termination and therefore their selection might be challenging.
Termination for insolvency might not be enforceable
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 occurring prior to the bankruptcy. 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.
Statutory law might provide for a “catch-all” termination clause
The Italian civil code provides that a party can terminate the agreement in case of occurrence of a “substantial breach” by the counterparty, regardless of whether such breach is regulated in the outsourcing agreement.
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
- either request the termination of outsourcing agreements,
- or assign a cure period to the other party to remedy to its 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.
A migration plan is a must-have
Apart from the termination events (that may also include, among others, the termination at will, for the expiry of the contract, for change of control etc.) to be regulated in detail, 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 of the recipient. 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 a longer period just because the know-how, data and even personnel is controlled by the supplier;
- hold substantial costs and efforts to switching to a different supplier which might exceed the benefits and force the company to remain with the prior supplier; and
- suffer substantial operational damages and potential legal risks for instance in case of personal data that remain with the supplier after the termination of the data processing agreement.
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. For this purpose, 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. And if you found this article interesting, please share it on your favourite social media!
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