A party's right to terminate a contract in the event that the other party becomes insolvent is one of the most commonly seen termination rights in outsourcing and technology agreements. However, the effectiveness of such provisions in the future could change in agreements governing the provision of IT services, as the new Enterprise and Regulatory Reform Act 2013 gives the Government the power to extend the law that currently protects supplies of gas, water, electricity and communication services during an organisation's insolvency to the supply of IT services.
Protection of essential supplies
Section 92 of the Enterprise and Regulatory Reform Act 2013 ("EERA") allows the Government to pass secondary legislation to add supplies "for the purposes of enabling or facilitating anything to be done by electronic means" to the list of existing 'essential supplies' (i.e. gas, water, electricity and communication services) that are protected under the Insolvency Act 1986. Although clarity around what falls within the scope of this potential extension will not be available until the detailed regulations are published, the language in EERA suggests that it is potentially very wide and could include such areas as the supply of cloud, data hosting and electronic back-up services.
As a consequence, supplies of many IT services could (depending on what secondary legislation is introduced) in due course fall within the scope of section 233 of the Insolvency Act 1986. That section provides that, whilst the continued provision of the 'essential services' to an insolvent customer can be made conditional on the relevant insolvency practitioner personally guaranteeing payment for the relevant supplies, the supplier cannot demand payment of pre-insolvency debts as a condition of continuing to supply.
In addition, section 93 of EERA gives the Government additional powers to introduce secondary legislation to render "insolvency-related terms" (e.g. termination rights triggered on insolvency) in a contract for the supply of 'essential services' void, where the customer suffers certain insolvency events.
Despite these (potential) restrictions on IT service providers' ability to terminate their contracts or suspend their services, the Government does recognise the need to ensure that the interests of suppliers are also protected. Indeed, section 93 of EERA provides that any secondary legislation it introduces must permit the supplier to terminate, in circumstances where "insolvency-related terms" cease to have effect, if:
- an insolvency office holder consents to the termination;
- a court grants permission for the termination; or
- any charges that are incurred in respect of the supply after the relevant insolvency event are not paid within 28 days from their due date.
In addition, EERA gives the Government the power to adopt other measures that are "appropriate for securing that the interests of the suppliers are protected".
These new powers are not due to come into force until April 2014 and only then will the full scope of them be understood. However, they have the potential to have quite a significant impact. So, it's very much a case of "watch this space".
The Government will be opening consultation on these new powers shortly.