4. Termination of agreements

The contract will normally set down those conditions which will need to prevail for the agreement to be terminated before the agreed end date. These may include:

• insolvency of either party;

• the refusal on the part of either party to abide by the terms previously agreed and set down in the contract;

• non-payment;

• the completion of a key project. For example, if the client’s decision to outsource was largely influenced by the prospect of the development of new technology, it may be that once this is in place, the completion of the remainder of the agreement appears less attractive.

All of the above possibilities need to be considered in terms of the consequences for both parties. In the event that a termination of the contract becomes necessary, it will be in the best interests of both parties to ensure that the minimum of time and disruption is required in order to extricate them from the agreement. The amount of the final payment due will depend on what event triggered the termination of the contract. In the last of the examples given above, the client terminates the contract having gained the benefit of the new technology that was its main reason for wanting to outsource. In this case, the provider is likely to seek an additional payment, on the grounds that, rather than the long-term agreement which it believed itself to be involved in, the work it did during the period amounted to little more than consultancy at a lower than normal rate of pay.

The contract must also set down the procedures attendant upon the normal termination of the contract. The provider will usually agree to:

• return the responsibility for the service to the client, or pass it to a third party, with no disruption to the performance of the service.

• allow the client the continued use, under a reasonably priced licence, of software and any other intellectual property necessary for the performance of the service;

• ensure that any confidential material belonging to the client, for which it no longer has a valid requirement, is returned or destroyed;

• evacuate the client’s premises, where appropriate, leaving them in a good condition, which should be defined here to avoid any dispute on termination of the contract. The agreement will also usually state that all materials, etc. essential for the continuation of the service will remain, whilst any of the provider’s equipment, personnel and materials not required for this purpose are to be removed.

• not recruit staff from the client for a period of time laid down in the agreement.

The client agrees to:

• provide any reasonable assistance required by the provider in returning the service to the client or transferring to a third party;

• ensure that any confidential material belonging to the provider, for which it no longer has a valid requirement, is returned or destroyed. As with the similar undertaking on the part of the provider, it will normally be wise to define such materials clearly in the original contract;

• not recruit staff from the provider for a period of time laid down in the agreement.

• pay for the service until the end of the contract and, at that point, resume control of and responsibility for the service.

Flexibility and the contract

It is usually argued that clients setting too rigid a contract, e.g. ’if you fail to reach any of the following targets the penalty will be X’ usually pay more for the services than if the contract had been more flexible. As explained in the main body of the book, this usually happens because a provider considering itself under financial pressure will take every opportunity to improve its profit margin on anything it is required to do that is out of scope.

It is, therefore, essential that the client organization understands the importance of flexibility from the earliest possible moment. To start with it will be necessary to detail what is in scope and which of the related areas are outside the scope. From both parties’ point of view, but particularly the client’s, it is important that there is no room for doubt in this matter. Only when this has been achieved can adequate pricing levels be agreed for both in scope and out of scope work.

Sometimes the client organization will attempt to limit the chance of failure by producing very detailed plans for both the transition and contract life that stipulate targets that the providers must achieve. A detailed plan will be necessary and should be included in the contract so that there are clear targets for all concerned to aim for and to make it easier for managers to be able to identify reasons for delays. However, a plan that requires specified weekly or even daily deadlines will not please many providers.

A typical compromise is to ’attach’ the detailed plan to the contract and make the main targets and the relevant timescales, conditions of the contract.

Clearly, over time, technology is going to change everything done in every business. It may be, therefore, that before the end of five-year contracts which started in 2000, there are significant changes in the accepted state of the art way of carrying out some of the work that is in scope in the contracts. If, in such circumstances, the service provider recommends that the new technology is utilized before the end of the contract, what is the legal and moral situation if an increased charging rate is also requested? Presumably, if it could be shown that it was also in the provider’s interest to take up the new technology and if there was no material change to the end product, then a court of law might reason that there was no reason to change the charging basis. However, circumstances are rarely that simple and it might be a factor in the provider’s defence if it could demonstrate that it would be disadvantaged in some way by continuing with out-of-date technology.

Obviously, whatever the legal and moral rights and wrongs it would be preferable to avoid confrontation between the parties. Common sense dictates that this will be best achieved if both parties understand the in and out of scope issue and have agreed some flexible basis for out of scope charging.