Let's call the whole thing off – outsourcing exits
07 February 2012
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This article was first
published in the December 2011 issue of Outsource
Magazine
Nobody wants a relationship to end
acrimoniously – but without an understanding of what to do if
things do fall apart, there could be tears aplenty…
Most of us sometimes grapple
with exits from outsourcing relationships. Yet despite a wealth of
experience surrounding termination, it is not uncommon for deals to
end acrimoniously. If relationships are deteriorating, it is easy
to act first and regret later. Without a clear understanding
of your rights, mistakes can be easy to make.
I just need some time to
myself
One way to deal with a
breakdown in relationships is to call for time out. Either the
customer suspends payment or the supplier suspends
performance. However, it is a common mistake to think that a
party has an automatic right to suspend a contract. Take this
passage from Channel Tunnel v Balfour, 1992 in the Court of
Appeal:
“It is well established that
if one party is in serious breach, the other can treat the contract
as altogether at an end; but there is not yet any established
doctrine of English law that the other party may suspend
performance, keeping the contract alive.”
If you have a specific suspension right written into the contract,
then you’re on safer ground – but only if you exercise your right
properly. In Atos v De Beers, 2010, Atos was suffering costs
overruns and delays. As a result, De Beers withheld payment. Atos
then suspended work, relying on their contractual right to suspend
for non-payment. However, Atos overstepped the mark. They
threatened to suspend work not just until payment was made but
until De Beers agreed to pay an additional £4.6 million, to move to
time and materials charges and to waive claims against Atos. The
judge concluded that Atos had no intention of seeing through the
contract as it was written, and thus was in breach of contract
allowing De Beers to terminate.
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So, a party which has contractual suspension rights must take
care to act within its rights and not to seek additional advantage
as a condition to recommencing performance.
You’re not the person you used to be
Another possibility as
relationships decline is that the customer reassesses its strategy
and no longer wants to deal with the supplier. Although the
contract may allow the customer to terminate for convenience, this
might be linked to unattractive termination costs. Waiting until
the contract expires can be equally unappealing. A frequent
solution customers hit on is to search hard for a breach of
contract which would allow termination. This does not always end
well, however, as was shown in the case of Southwark London Borough
Council v IBM, 2011.
Southwark hired IBM to
provide some of the tools needed for a new data management system,
with other tools coming from Orchard. A new Data Integrity Manager
was hired by Southwark part way through the project. She did
not favour the Orchard software and was more familiar with other
solutions. So she set about rewriting the requirements, claimed IBM
could not meet the new requirements and closed down the project.
Then, Southwark threw the book at IBM accusing them of
misrepresentation, negligence and breach of contract.
Over the course of the
trial, Southwark’s case unravelled. Southwark did not bring some
key witnesses. Every email was pored over, revealing that not
everyone at Southwark thought IBM was at fault, and that IBM had
been clear about the capability of its solution. In a matter
of days, Southwark’s case collapsed.
The lesson is that if you do
want to get out of a contract you must carefully and
dispassionately review the situation. Trying to engineer an exit
can end in disaster.
I’m leaving you my
dear
Of course another possible
way out is to terminate for material breach. Even here,
caution is advisable.
The big mistake is to
terminate and then discover the breach was not so material. This
might be a wrongful termination entitling the other party to
damages.
A second concern is that
most contracts allow 30 days’ notice for a breach to be remedied.
The case of Schuler v Wickman, 1974 concluded that the breaching
party need not turn back the clock to remedy the breach, but should
put things right for the future. In Peregrine v Steria 2004 it was
suggested that this means putting the other party in the position
it would have been in but for the breach, and the court suggested
compensation might do the trick.
There is more case law which
builds the picture, but what should be clear is that frequently the
courts will allow the party in breach to redeem itself if there is
a remedy period in the contract.
This is goodbye
The most black-and-white
legal right of termination is to claim the other side has failed so
fundamentally that it has shown it will not honour the contract, a
so called repudiatory breach. If one party is in repudiatory breach
that will entitle the other party to terminate and treat the
contract as discharged.
But what of exit
obligations? It can be ambiguous whether exit obligations will
survive in these meltdown situations, even though there are good
arguments why they should. Practically, it may turn out to be
difficult to compel a supplier to support transition beyond perhaps
the basic hand over of customer materials. Discovering the
limits of your exit rights after termination is hardly great for
business continuity.
As soon as termination is in
mind, customers should assess their exit requirements and work out
how to secure their operations, either through the contract or if
necessary through contingency plans.
What should be clear from
this article is that suspension, termination and exit can throw up
complex and unanticipated problems. However, with a
considered and disciplined approach, it is possible to steer clear
of the pitfalls and manage difficult circumstances to get to the
right result.
For more information please
contact Simon
Briskman, Partner or Huw
Beverley-Smith, Director in the Technology and Outsourcing Group at Field Fisher Waterhouse LLP.