Tech & Sourcing @ Morgan Lewis

Contract Corner

Commercial contract provisions affording a party with an excuse from performance can take varying shapes and sizes, but they all serve the purpose of relieving the party from liability for nonperformance of an obligation that it otherwise would have been required to perform under the agreement.

While “excuse” provisions (sometimes referred to as “excusal” provisions) often receive less scrutiny than more prominent disclaimers of responsibility (e.g., warranty disclaimers and exclusions of liability) their inclusion in—or omission from—a commercial agreement can have similarly significant effects on both a party’s remedies in the event of the other party’s nonperformance and another party’s ability to adequately protect itself from the other party’s failure to fulfill certain obligations on which the first party is dependent.

In this two-part series, we focus on provisions that relieve the supplier or service provider (provider) from its obligation to perform an activity that is tied to a customer dependency.

In this first part, we provide a brief overview of some key considerations for, and common structures of, such provisions. In part two, we will discuss the implications of these provisions being triggered, including the scope of the relief and any conditions that must be met in order for the provider to be able to rely on that relief.

Key Considerations

Should an Excuse Provision Be Included?

While provider-favorable form agreements may include some type of excuse from performance clause, and customer-favorable forms may omit such a provision, the nature of the transaction and the products/services being provided under the agreement should be considered to determine whether that concept is appropriate.

For example, many software-as-a-service (SaaS) and off-the-shelf software or similar technology offerings are presented as standardized products subject only to minimal configuration for an individual customer. As a result, the provider’s delivery of the relevant technology may be relatively independent of any customer obligations and relief from performance provisions can often be narrowly tailored.

In these scenarios, the parties may agree to include an acknowledgement or requirement that the customer is responsible for providing any requisite hardware, operating systems, browsers, or other underlying equipment or technology necessary to access and operate the provider’s technology (as specified in the relevant documentation) without more extensive general relief from performance provisions tied specifically to the customer’s performance.

In contrast, in complex software development or implementation services, outsourcing or managed services, or other professional services arrangements, the provider’s performance may be dependent on the customer’s ability to deliver specific resources, complete certain tasks—either at the outset (e.g., implementation) or on an ongoing basis (e.g., managed service arrangements)—or fulfill other dependencies.

What Types of Customer Dependencies are Typically Tied to Relief from Performance Provisions?

Common customer dependencies tied to relief from performance provisions include the following:

  • Content and data: If content or data is required from the customer in order to complete specified deliverables or utilize the functionality of a technology offering, these are commonly identified as dependencies
    • If there are any specific quantities, formats, types, file sizes, etc. for the content and data, it is useful to identify those details in advance to ensure the parties are aligned on what the customer is required to bring to the table
    • For managed services, business process outsourcing, or similar transactions, there are often ongoing or periodic data delivery requirements, in which case defining the data, format, and timing of delivery within the contract becomes even more important
  • Equipment, hardware, or software: If the customer is required to acquire or maintain any specific equipment, hardware, or software in order to utilize the provider’s offerings or to enable the provider’s provision of its services, these may be specified as dependencies
  • Customer personnel/resources: If the provider’s services require the customer to devote a specified number or type of employees or resources, and the provider will be unable to achieve its commitments if the customer were to fail to provide such resources, this may be included as customer dependencies within scope of the relief provisions
  • Prompt approvals and decision-making: A customer dependency that is commonly requested by providers in complex software development or managed services transactions is the customer making available the relevant project leads or other decision-makers with the authority to provide approvals (e.g., of milestones or components of deliverables in development deals) or decisions (e.g., for retained business decisions or discretionary pieces of managed services deals), and those being provided within a specified time period

Common Structures

These provisions typically fall into one of two high-level categories:

Relief tied to general dependencies (provider-friendly): Under this approach, an agreement might include broad language providing for relief from performance. An example of this would be excusing the provider’s performance if it resulted from the customer’s failure to provide “any data, materials, assistance or cooperation requested by the provider or otherwise necessary or appropriate for provider to perform its obligations.” While it is a preferable starting point for provider forms, customers typically prefer more limited, specified dependencies, as described below.

However, if the parties agree that a more general approach is appropriate based on the circumstances of a particular transaction, then the agreed-upon provision may include appropriate limitations, such as reasonableness qualifiers and requirements that any new or modified dependencies are subject to advance notice and/or mutual agreement, or other conditions (as we will explore in part two of this series).

Relief tied to limited, specified dependencies: Under this approach, the agreement may include more targeted language providing for relief from performance if directly resulting from a customer failing to meet certain specified obligations to provide identified resources or fulfill specific dependencies described in the agreement, often within a statement of work or services schedule. Typically, from a customer’s perspective, the more specificity that can be documented, the better.

For example, significant time and scrutiny are often devoted to defining dependencies and assumptions in complex development, outsourcing, or managed services deals, as we have previously discussed in the context of technology integration deals. While dependency mapping and detailed matrices of allocated responsibility may be beneficial to both parties in order to understand the interconnectedness of the services more fully from the outset, this approach may not always be practical or realistic for more routine commercial contracts.