Callum Sinclair, Head of Tech & Commercial, Burness Paull
The coronavirus has occupied the attention of press all over the world. As the circumstances change rapidly, imposing additional burden across industries, it’s clear that technology businesses and related contracts are going to be critical for many through the next few weeks and months. Businesses will have to review and revisit a number of their practices – working from home technologies, the cloud and VPN infrastructure which backs those up, as well as the IT support arrangements that will keep operations running.
In the UK, principles that apply to the usage of force majeure clauses and general law of frustration will generally be relevant as much to technology contracts as they do to other commercial contracts, and are very much in focus at the moment.
There are however some additional factors to think about in major bespoke strategic IT contracts such as IT Outsource, Strategic Partner, SIAM (Strategic Integration and Management), Managed Service, and other major IT Project Agreements..
The implementation of IT projects and services may be delayed by a lack of personnel due to illness, or their ability to work on client site. Major projects often have prescribed Milestone Dates to be met, that are linked to liquidated damages payments where these Milestone Dates are missed (e.g. for periods of parallel running of systems). There may also be certain reliefs available to suppliers via a Customer Responsibilities mechanism – set obligations or dependencies on the customer that cannot be met for the same staff-related, or other, reasons.
As ever, pragmatism is encouraged, but always with a clear understanding and sensible planning by reference to contract backstop positions. Relationship dialogue between customers and suppliers about the moving of Milestone Dates, waiver of delay damages etc., or specified reliefs may be appropriate, but it is important that these are genuine. Steps should be taken to mitigate effects, and businesses must ensure that everything is appropriately documented, whether via Change Control or otherwise. Businesses should be careful of attempts to use COVID-19 as an excuse for other delays, or that there is no inadvertent waiver of rights (e.g. to Delay Damages where Milestones are moved through Change Control).
Service Levels form an essential part of the IT contract and set out the required standard for performance and obligations of the parties. These could be as simple as ensuring that availability and support KPIs are met, or there could be a more complex points-based KPI dashboard, but it is important that these are kept under review. Service Levels may trigger remedies such as service credit payments, so reporting and validation of them is more important than ever.
Charges under the contract may be affected by a change in working patterns – for example, if there is metered charging for provisioning cloud licences for home working, or for Moves, Adds and Changes as a result of getting IT equipment to employees and contractors homes.
Supply Chain Rights
There may be a need to step up monitoring of performance and financial health of sub-contractors, and to ensure that provisions – for example, in relation to payment of sub-contractors – are being complied with. Contingency supply and planning is key, as customers and suppliers must be ready to move quickly to assign or novate sub-contracts or to bring elements of service back in-house to accommodate supplier failure. It is already evident that COVID-19 related questionnaires being sent to ensure that businesses are duly prepared for disruptions in their supply chains.
Often major IT contracts will have obligations on suppliers to develop, update and maintain business continuity, disaster recover and exit plans, and to invoke these at the appropriate time. Now would be a good time to ensure plans are up to date. Suppliers will no doubt be inundated with requests regarding plans, so it may be that a short form questionnaire to get basic COVID-19 planning for continuity and exit suffices in the meantime.
With heightened risk of supplier failure, it is essential that there is a solid understanding of how continuity will be maintained, and if it can’t be, ensuring the transition to contingency suppliers is as smooth as possible. This includes factors such as the transfer of contracts, assets, people, and ensuring no vendor lock-in through problematic IP issues.
Suspension, Termination, Step-In
A good awareness of suspension / termination rights for both parties will be important. Whilst everyone is hopeful that pragmatism will prevail, there can already be seen instances of contract termination, and many more of planning to understand rights of suspension and termination. Rights of termination for convenience, for non-payment, for breach and performance failures, and on insolvency, are obviously important. Businesses have to bear in mind that many contracts are drafted with broad definitions of insolvency allowing for this to be anticipated and for termination to occur before actual insolvency occurs. Some other less obvious rights may come into play for example, on change of control as there may be deals and pre-packs to rescue failing suppliers and customers.
Step-in was previously thought to be a nuclear remedy and very unlikely to be exercised even where it exists in contracts, but these are unprecedented times and there is a high possibility that the approach towards the step-in rights will change.
A number of large contracts, for example the Crown Commercial Service/Government Legal Service Model ICT Services Agreement for major public sector IT projects, would normally have detailed financial distress provisions. These can involve monitoring and reporting of changing credit ratings, escalating reporting requirements and payment into escrow where business get into difficulty. Again failure to observe these requirements can result in termination – whereas observing them can aid prudent planning on both sides as well as contractual compliance.
As mentioned earlier, circumstances are changing rapidly and change control and contract variation mechanisms should be used to ensure that changes to contracts are consequently tracked and documented. In theory, each business (or a court in the event of dispute) should be able to determine the current contract between the parties by consolidating change controls with the baseline contract – if that discipline slips, it may be difficult to interpret what the contract actually says.
Parties may be seeking cost or service reductions (or perhaps increases for things like cloud services), and change control mechanisms may impose constraints on circumstances where changes can be rejected or accepted by the parties e.g. a supplier not being obliged to accept anything that would push them into financial hardship or loss-making position, or being required to accept change controls except in the event of unlawfulness or technical impossibility.
It is unlikely that parties’ minds will be focussed on benchmarking exercises at this time, but it is one to bear in mind as the world comes out the other side of the COVID-19 crisis. There may be a significant drop off in prices as vendors might look to attract new business, which could have an impact on comparative suppliers and services. This could be a potential opportunity for customers, provided they stick to prescribed mechanisms in the contract and take advice. Equally, even the prospect of benchmarking could present opportunities for a re-cut deal with a current supplier.
It is worth closely scrutinising reporting and audit rights in IT contracts. Whilst on-site inspections may not be possible at the moment, there is likely to be a step-up in requirements to provide information both ways as parties grapple with continuity and service planning for coronavirus.
Businesses may be entitled to a lot of information, particularly as customers requesting detail from their vendors. If businesses do have reason to doubt pricing strategy, or suspect that there is any inaccurate reporting, then there may be certain steps that these businesses or their auditors can take to validate that information.
Other contracts and conclusion
There are many other types of day to day IT agreements which may be affected by some of the same sorts of issues – software licences, hardware agreements, applications and web development agreements.
For example, for cloud and “as a service” agreements and terms, there may be issues around ability to hit KPIs and service levels relating to uptime/availability and support where infrastructure is under strain, even for the hyper-scale providers.
It is clear that these are unprecedented times and global businesses face challenges that they have not faced before. In order to be as prepared as possible, customers and suppliers will need to make sure they have solid understanding of their contractual provisions, are up-to-speed with reviewing their IT contracts and keep records of all decisions/changes made in case of a future conflict. Businesses with effective operations and processes in place can not only utilise existing contractual arrangements to minimise their potential loss, but will also have a plan for action once lockdown is over.