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For most organisations, termination issues arise on a routine basis due to changes affecting the business - for example, as a result of recent acquisitions or expansion. Where this occurs there is often no need for inherited IT systems or outsourcing arrangements so steps are taken to terminate the third party supply contracts involved.
The need to terminate can also arise where trading conditions change and it is thought necessary to change the way in which the business services its IT requirements and business processes - for example, to achieve deeper cost savings. Depending on the view taken, this may involve outsourcing existing internal requirements or in-sourcing services currently performed by a third party supplier (i.e. taking the work back in-house). There might also be a debate over whether to "off-shore" services or bring them back "on-shore."
A third category arises where the business wishes to terminate due to the poor performance of third party service providers. In this case, the business may wish to replace the supplier with another company or perform the work itself.
In many respects, the task of identifying the need for change is considerably easier than the job of implementing it. In most cases the need for change will speak for itself. However, setting up and implementing the termination event requires careful consideration and it is prudent to obtain legal advice from the outset in order to inform the strategy to be adopted and ensure that the correct notice procedure is followed. It may also help in protecting any sensitive internal communications from disclosure in the event of subsequent litigation.
Termination is clearly a major event in the life of any commercial contract. For the party on the receiving end of a termination notice it will probably result in a great deal of disappointment, a lost business opportunity and, in some cases, reputational damage.
Consequently, that party is likely to fight any attempt to terminate (other than in the most straight-forward of cases such as expiration or non-renewal and termination for convenience) and look to secure some form of compensation. This means that the party seeking to terminate must get it right from the outset and prepare itself for a tough set of negotiations in relation to a consensual exit or, failing that, litigation.
What follows is a selection of legal tips for preparing and executing a successful termination strategy:
All contracts come to an end at some point. Some will simply expire or be terminated for convenience. Others will end in more acrimonious circumstances and may end up in court unless a consensual termination can be agreed.
Where contracts are terminated without proper justification, the outcome may be to reduce (or eliminate) any anticipated savings associated with the decision to change contractual arrangements. Proper consideration should therefore be given to the contract between the parties and the risks associated with getting it wrong - before any steps are taken to end the relationship.
In most cases, the desired outcome for all parties will be a negotiated or consensual termination. Neither party will want to become embroiled in a time-consuming and expensive legal battle. For its part, the customer will probably want a quick and clean exit and co-operation in transitioning the services back in-house or to another supplier. On the supplier side the main concern (commercial terms apart) is likely to be reputational damage and how this can be minimised or eliminated altogether.
Hopefully the guidance provided in this article will go some way towards helping readers achieve good outcomes and avoid the legal pitfalls that can be involved when seeking to terminate IT and outsourcing contracts.
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