The Vagaries of Exiting a Long Term Technology Outsourcing Deal
A recent judgment delivered in October this year by the English High Court (Technology & Construction Court) in the case of Ericsson Limited and Hutchinson 3G UK Limited illustrates:
(i) the importance of giving careful consideration to the financial and legal consequences of contract termination or expiry and the extent of the parties responsibilities to each other on exit;
(ii) the need to invest the same degree of commercial and legal consideration into drafting contract amendments as tends to be invested in the original deal;
(iii) the risks inherent in treating the ‘front end’ legal terms and conditions and the schedules of a contract in isolation.
It can be speculative and, to an extent, counter intuitive to focus on the end of a commercial relationship at the outset but it can be costly not to. Investing resource in proactive management of contractual rights and careful management of contract amendments is also money well spent.
Ericsson and Hutchinson entered into a 7 year deal whereby Hutchinson outsourced the network and ICT services supporting the 3G network to Ericsson. The deal is reported to have had a total contract value, in revenue terms, for Ericsson of in excess of £700 million. The parties agreed at least seven variations to the contract. Hutchinson ultimately exercised its right to terminate the contract.
As is typical in such long term IT contracts, the parties agreed a framework within which exit services could be scoped and provided on termination or expiry, the detail of which was contained in a schedule. Exit services can represent both a revenue opportunity and a cost and risk exposure for IT suppliers and only clear drafting will minimise the latter.
The issue in dispute was when those exit services should commence and for how long they should be provided. Specifically, the question was whether the exit service should commence on the date on which notice of termination was given. This could have required Ericsson to provide exit services for some thirty months prior to the actual termination of the contract (which was the period of notice given), which it submitted would expose it to unanticipated and onerous restrictions and cost.
Ultimately the Court found that the exit provisions took effect twelve months before the end of the contract. In doing so highlighted the lack of “…evidence that the parties specifically applied their minds during negotiation to the impact of [contract amendments] to the Exit… provisions”.
The Court also had little sympathy with the understandable argument that a longer exit period was necessary to facilitate the customer getting sufficient information from the supplier to enable it to successfully retender the services. It noted that Hutchinson had contractual rights during the life of the deal to get necessary up to date information. Whether or not it exercised those rights had no bearing on interpretation of the contract provisions relating to exit.
