Preferred supplier? 

Outsourcing agreements sometimes contain clauses giving the supplier a preferred supplier status and the right to be notified of new tenders and tender for the services. On the other hand, the customer will insist on a "most-favoured customer" clause, whereby if the supplier offers better terms to another customer, then the customer will also be offered these terms. In both cases the clauses are difficult to police and enforce and the wording of the clauses should be carefully drafted to ensure that the obligations are enforceable and not considered to be anti-competitive. 

Dispute resolution and remedies

The contract should set out the detailed operating framework for the management of the relationship between the customer and the supplier, for example, covering the personnel involved in managing the relationship, any meetings that are to be held and any reports that need to be submitted. The outsourcing agreement will also need to include a clear escalation procedure where problems arise whether for intellectual property or other legal issues. It is important that the parties agree in the outsourcing contract a process of escalating remedies if problems arise which supplement the agreed delay deduction and service credit regimes.

In doing so, the following issues should be considered: 

·         Providing a mechanism whereby the supplier is compensated for the acts and omissions of the customer which cause a delay in the implementation of the services or a performance failure and ensure that these are not weighted against the supplier.

·         Allowing for increased performance-monitoring in the event of a failure by the supplier.

·         Allowing a proper opportunity to remedy any remedial breaches and have a consistent link with the service level.

·         Providing for escalation of the dispute through internal management levels on an agreed timescale.

·         Allowing the customer to "step in" to the outsourcing agreement in order to take back the responsibility for all or part of the services in the event of a material performance failure by the supplier.

In these cases, it would be prudent to include following an internal escalation procedure, a mediation clause to ensure that the parties try in good faith to address their dispute. It is goo however to remember that for certain breaches, such as confidentiality or intellectual property, the customer will still need the right to recur to the courts in order for example to obtain an injunction to stop further breach of confidentiality, or intellectual property.  

Termination

The outsourcing agreement will also need to contain detailed provisions for termination and exit management. Rights of partial termination should also be considered if the services are capable of separation. The customer should be able to terminate for fundamental or persistent breaches of the agreement. It is important that termination provisions are carefully drafted if the parties wish to have a right to terminate for a breach other than a repudiatory breach.

The customer will also wish to be able to terminate on the insolvency and possibly the change of control of the supplier.  In addition, the customer may wish to be able to terminate at will for its own convenience. Consideration should be given to the possibility of requiring partial termination where all or some of the service elements may be brought back in-house or transferred to another supplier. 

While the customer will want to be able to exercise clear termination rights if the supplier is in material breach, the customer most likely terminate the outsourcing agreement only in case of absolute necessity since termination will result in the customer having to re-procure the services. One possibility is for the customer to reserve the right to issue a warning notice to the supplier. Such notices should attract management attention, but not be a termination notice.

The issuing of a given number of warning notices could however, in itself, be a ground for termination even if none of the individual breaches of themselves constitute a material breach. The supplier will also want to be able to terminate for non-payment by the customer. However, careful consideration will need to be given by the customer to any request by the supplier to have the ability to terminate the contract upon other events of customer default.

The supplier should ensure, however, that it is not liable for non-performance to the extent that such non-performance arises as a direct result of the customer's default and that the customer agrees to pay reasonable unmitigable costs and expenses which are incurred by the supplier as a result of any such customer default. 

Exit management

An exit plan is essential whatever the duration of the outsourcing agreement. It should cover all specific rights which the customer will require on termination and address:

·         The continuation of provision of the services for the duration of the notice period and any run-off period including potential co-operation with the new outsourcer or customer (in case of in-sourcing).

·         The return or transfer back of assets and software (if required) and necessary assignments/licences of intellectual property and the provision of information and know-how to the customer or a new supplier.

·         The treatment of employees and any obligations to inform or consult under TUPE and other relevant regulations. 

The degree of detail which the plan must contain depends on each case, In any case, it must be sufficiently certain to prevent dispute as to the parties' intentions. Often the agreement provides for a detailed exit plan to be produced within a certain time, together with a process for agreeing and amending the plan. The plan will then be reviewed and kept up to date during the life of the contract. 

All articles are for general purposes and guidance only and do not constitute legal or professional advice. Copyright 2011 Anassutzi & Co Limited. All rights reserved. Information may be shared or reproduced only if accompanied by the author’s name and bio.