When entering into long-term outsourcing arrangements, unwind provisions typically receive little attention.  The parties are almost inevitably focussed on agreeing and documenting the often transformational nature of the services to be provided, and have difficulty defining termination plans for an event that is many years away.  Often such planning work is deferred until after the contract is signed.  However as a recent NSW Supreme Court case shows, customers ignore such processes at their peril.

The Case

In Cuscal Ltd v First Data Resources Australia Ltd [2011] NSWSC 1625, Cuscal entered into a master services agreement (MSA) with First Data for the supply, by First Data, of data transfer services for a term of 5 years expiring on 31 December 2012.

Under the MSA, the parties were to agree a termination assistance plan (TAP) within 1 year after the commencement date.  The TAP was to outline the termination assistance and its cost.  If the parties could not agree on the TAP, the parties would appoint an advisory committee to agree the TAP in good faith.  The MSA stated that First Data was required to provide termination assistance regardless of whether the TAP was agreed.

You can guess what happened (or didn’t happen) next - the parties did not prepare or agree a TAP within the required timeframes.  It was not until September 2010 that Cuscal provided a draft TAP to First Data, and neither party sought to convene the advisory committee until April 2011.  The parties could not agree on the contents of the TAP, and Cuscal subsequently commenced proceedings.

Cuscal argued that First Data was required to continue to provide normal data transfer Services (the BAU Services) for a period of up to 6 months after expiry (being the period specified in the MSA for termination assistance after expiry), to the same standard as that required during the term.

The Court found that, because the phrase “termination assistance” was defined as assistance to transition the services to Cuscal or a replacement provider, First Data was not required to provide the BAU Services after expiry.  In relation to the standard of those services, the Court held that First Data was not contractually obliged to ensure continuity and smooth transition of the services, because the TAP which was never agreed, was required to set out the steps to be taken to provide such an outcome.

Lessons learned

There is no better time to negotiate disengagement provisions than prior to signing a contract, and no worse time than at the end of it.  Customers should ensure that processes for the development and settling of disengagement plans are followed.  Ideally, they should not be left until after signing when leverage has been lost, and at a minimum “bare bones” obligations should be inserted that can be relied upon if the parties fail to comply with their obligations to agree or update a disengagement plan.  The disengagement provisions should make it clear whether BAU services are to be provided during any disengagement period, the fees payable for them, and whether the other provisions of the contract (e.g. service levels) continue to apply.

In addition, we have found that customers nearing the end of long-term service agreements often do not have sufficient information to understand the likely costs they may incur during disengagement.  It can be helpful to build in disengagement and transparency obligations that help avoid this.  For example, obligations requiring annual updates of relevant information such as asset and personnel lists, and estimated costs for the provision of termination assistance.