USA Law and Practice Contributed by: Jeffrey Harvey, Randall Parks, Andrew Geyer and Cecilia Oh, Hunton Andrews Kurth LLP
4.2 Termination The customer typically has myriad reasons to termi - nate an outsourcing agreement. For example: • material breach; • persistent breach; • convenience; • data security breach;
cal in light of the asymmetrical relationship. Indemni - ties typically cover only third-party claims (and all of the losses associated therewith); claims by the cus - tomer for the provider’s breach are typically remedied through breach of contract actions. Remedies Remedies for breaches of representations and war - ranties are typically in the form of defect remedia - tion and damages – although certain representations and warranties, such as services not to be withheld, include additional remedies such as injunctive relief. Remedies for breaches of confidentiality and data security typically take the form of damages (including notification-related costs) and injunctive relief. Rem - edies for service-level failures typically take the form of financial credits (which are not generally exclusive remedies and can sometimes be “earned back” by the provider) and termination rights. Cost-Related Protections and Scope “Market currency” provisions (eg, benchmarking) gen - erally require the provider to make price concessions based on the results of a benchmarking or other mar - ket comparison and could result in a no-fee or low-fee termination right if the provider does not make those price concessions. “Disputed charges” provisions usually allow the customer to withhold payment for invoicing errors or deficient performance of services. “Additional services” provisions typically require the provider to perform out-of-scope but related services at a commercially reasonable price. “Cover services” provisions require the provider to cover the difference between the provider’s fees and a replacement pro - vider’s fees when the original provider is unable to perform the services due to such things as a disaster or other force majeure event. “Sweeps” clauses typically require the provider to perform all services that are an inherent, necessary or customary part of the services specifically defined in the agreement, as well as all services previously performed by any displaced or transitioned employ - ees. However, detailed scope definitions tend to be the best defence against misunderstandings over the work to be done.
• extended force majeure events; • service-level termination events; • insolvency of provider; • regulatory changes; • transition failures; and • change of control of provider.
The provider, on the other hand, is generally only able to terminate for non-payment of material amounts. Customers also require robust exit protections. These protections generally take the form of termination assistance, which often includes continued perfor - mance of the services for a period of time in order to allow the customer to transition the services either back in-house or to another provider, as well as other exit activities (eg, knowledge transfer, return of data). Exit protections can also include rights to the pro - vider’s equipment, software, personnel and facilities. 4.3 Liability The parties’ liability exposure under an outsourcing agreement is often limited both by type and amount. Agreements typically provide that damages are limited to, among other things, actual “direct” damages (ie, no consequential or indirect damages). The amount that can be recovered – as well as whether such amount will serve as an aggregate cap on liability – tends to be heavily negotiated. The limit is usually defined as a multiple of monthly charges typically ranging from 18 to 36 months. In those agreements where the liability cap is not a per claim cap, a liability cap reset concept is generally included. These can take many forms – the most common of which are annual/biannual lia - bility caps and the inclusion of a termination right in favour of the customer if the provider refuses to reset back to zero the damages that have contributed to the cap after the damages sustained by the customer have reached a certain percentage of the cap.
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