End outsourcing contracts with painless approach

If dispute resolution procedures have failed and an outsourcing arrangement is destined to bite the dust, its demise will be less painful if the right clauses were in the contract at the outset.

No outsourcing contract is complete without detailed termination and post-termination clauses, said technology lawyer Donna Short, senior associate, Henry Davis York in Sydney.

Whilst any lawyer would include termination clauses in an outsourcing contract as a matter of course, York said, "I think [in some cases] it's probably not done as effectively and comprehensively as it should be.

"I think the main problem is people forget about transition to the next phase [of outsourcing]: either back in-house or to another service provider."

In a recent paper Short outlined what she advises should be included in a termination provision.

According to Short, standard termination rights should apply "if a party has breached a condition of the contract; if a supplier fails to satisfy a performance criteria after being given the opportunity to rectify the failure; the insolvency of a party; and by agreement between the two parties".

Short added that those entering into an outsourcing contract should consider inclusion of a clause which will allow them to terminate the contract, with notice, for any reason.

She advises customers to ensure that should such a clause be activated, the supplier is not entitled to compensation.

Termination provisions are not complete without an "after termination" clause, Short said.

Such a clause is designed "to clarify for the parties what they have to do and what they can require the other party to do" in the event of a termination.

Short outlined some basic obligations that should appear in an after-termination clause, including: each party should return confidential information provided by the other party and destroy any copies;the customer shall take on any third-party software licences held on their behalf by the supplier;the customer shall offer to repurchase equipment originally divested as part of the outsourcing deal;the supplier shall surrender software licences for customer's proprietary software;the supplier shall deliver up all of the customer's property in its possession including proprietary software or modifications or enhancements and delete and migrate or otherwise deal with data stored on the system; andthe supplier shall continue to supply services to the customer for as long as reasonably possible whilst the customer transitions to a new arrangement.

Short suggested that companies who outsource should consider setting a schedule of fees at the outset of the contract to apply upon its termination "for services provided after termination", such as data migration to the in-house system or new service provider's system.

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