UK Law and Practice Contributed by: Richard Brown, Louisa Chambers, Adam Wyman and Michael Ross, Travers Smith LLP
tain a “business continuity plan” and make adequate back-up and disaster recovery arrangements. In addition, the customer may seek a parent com - pany guarantee (PCG) to secure the performance of the supplier’s obligations under the contract if there is any concern that the supplier may not have sufficient assets to meet its liabilities under the contract or is not the main trading entity in its group. The customer may also require the supplier to provide an annual statement (in the form of a board minute) confirming that its directors consider the supplier able to fulfil its obligations under the contract (and the customer may request the same from the supplier’s parent company in respect of the latter’s obligations under the PCG). Although these contractual protections will allow the customer to seek compensation from the supplier for failure to comply with the contract, they do not specifically address under-performance. As a result, it is not uncommon for a customer to seek “step-in” rights, allowing it to take over the management of an under-performing service or to appoint a third party to manage (or supervise) the service on its behalf. Less serious problems with under-performance can some - times be resolved through use of rectification plans, contract management and governance provisions, which typically require the supplier to appoint a con - tract manager who will meet regularly with the cus - tomer’s representative to discuss and seek to resolve issues in accordance with a rectification plan. These provisions may also include a right for the customer to veto proposals from the supplier to dispose of key assets or re-deploy key staff involved in the provision of the services – thereby preventing any deterioration in performance that might be caused by such dis - posal/re-deployment. Rights of termination in a variety of circumstances should also be included to protect the customer (see 4.2 Termination ). In addition, customers should ensure that, in the event of termination, the supplier remains under an obligation to provide assistance to the customer when migrating the service to a new pro - vider. As part of this, the supplier should be required to draw up an “exit plan” at the outset of the contract and update it on a regular basis (at least annually) in consultation with and/or with the consent of the cus -
tomer. It is very important, particularly in business-crit - ical outsourcing arrangements, for an exit plan to be prepared early in the relationship because, if it is left until an exit event occurs (be that a termination event or expiry), the circumstances at the time may mean that the outgoing service provider has little incentive to engage fully in the process, which could have an impact on transition. 4.2 Termination Under English law, parties have considerable freedom to decide on the circumstances in which a contract can be terminated. By way of example, a customer may seek a right to terminate a long-term outsourcing contract on notice without cause prior to expiry of its term without any compensation being payable (often called a termination for convenience). However, the supplier may not be prepared to grant such a termi - nation right or may insist on financial compensation being payable by the customer in the event of early termination for convenience. Although it is possible to challenge such provisions on the basis that they amount to an unlawful contractual penalty, they will normally be enforceable provided that the level of compensation is not out of all proportion to the sup - In most outsourcing contracts, both parties will have express contractual rights to terminate the contract if the other party commits a material breach of its terms (typically after the expiry of a cure period) or under - goes an insolvency-related event. However, the Cor - porate Insolvency and Governance Act 2020 (CIGA) introduced further provisions into the Insolvency Act 1986, including in relation to contracts for the supply of goods or services. Under CIGA, clauses that enable a supplier to terminate a supply contract (or change other terms) upon an insolvency or formal restructur - ing procedure are ineffective. plier’s loss arising from early termination. Express Termination Rights and CIGA CIGA also introduced a prohibition on terminating a supply contract based on past breaches of the con - tract once the company enters an insolvency process or restructuring procedure. This means that – sub - ject to certain exclusions (eg, suppliers who provide financial services and those who are covered by the existing continuation of essential supplies provisions)
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