Tech & Sourcing @ Morgan Lewis

Contract Corner

In part one, we discussed key considerations for the possible inclusion of commercial contract provisions affording a party with excusal/relief from liability for nonperformance of an obligation that it otherwise would have been required to perform under the agreement (relief provision).

In part two, we discuss the implications of these provisions being triggered, including the scope of the relief and any conditions that may be imposed in order for the supplier or service provider (provider) to be able to rely on that relief provision.

Applicability and Conditions on Relief from Performance

If the parties have agreed to include a relief provision, the next consideration is what exactly should happen if a situation covered by the provision presents itself. While the most basic relief provisions leave this as an overall excuse from performance for any of the relevant events (e.g., a customer’s failure to fully perform the relevant dependencies) it may be prudent to include more detail around obligations of the parties in such circumstances.

The following are examples of additional contract terms that may be included—the appropriateness of each will depend on the nature of the arrangement and the relevant customer obligations tied to the relief provision:

  • Prompt notification and cooperation: Relief provisions may require the provider to promptly notify the customer upon becoming aware that the customer has failed to perform the relevant dependencies fully, as it may not always be clear to a customer where a dependency has not been performed in full (nor the impact of the same)
  • Efforts to continue performance: Similarly to force majeure provisions, relief provisions may require the provider to use commercially reasonable efforts to perform the relevant activity notwithstanding the lack of the customer dependency, including implementing reasonably available workarounds; where such a condition is included, a provider may request an explicit acknowledgement that this condition does not extend to materially altering the scope of services or provision of the products, or result in the provider incurring additional costs
  • Standard of care: In agreements where the provider is required to perform to a defined standard of care (e.g., many services relationships in the financial services sector), the parties may agree to condition the provider’s relief from performance on the provider having otherwise fulfilled its standard of care, notwithstanding that it is unable to meet its obligations as a result of the failure to meet the customer obligations/dependencies

Scope of Relief

In addition to the aforementioned conditions that may be imposed on receiving relief, the following are examples of further considerations as to what exactly is the effect of that relief:

  • Relief from meeting milestones/deadlines: If the primary result of a customer’s failure is delayed performance, then relief can be tied to excuse from corresponding go-live dates, deliverable completion dates or other milestones under the agreement
    • A provider may seek to ensure that knock-on effects on milestones further down the line are also covered; a customer may ask a provider to justify these
  • Relief from warranties; no breach: If a customer’s failure to fulfill its obligations or dependencies could result in impacts beyond just delays, the relief can be broader to cover warranty non-conformities or other contract breaches resulting from the failure, which is then typically still subject to the limitations below
    • As discussed in part one, a provider may seek a broad approach, whereas a customer may seek specificity as to any warranties and instances for which the provider is granted relief
  • Limitations on excuse and additional remedies: Whatever the relief being granted, a customer may seek to limit relief to the extent in which performance is actually prohibited by the failure (and not extend to unrelated breaches), with the provider agreeing to promptly resume upon resolution of the issue/completion of the dependency; parties may agree to cooperate in good faith in order to agree upon modifications or alternative methods of fulfilling the relevant dependency, where practicable
    • Further, so long as a provider’s primary concern is not being held responsible for performance, relief alone may be a sufficient remedy; however, where the provider may face significant financial or other risks upon the occurrence of delays (e.g., resourcing costs, third-party technology fees, etc.), it may seek a mechanism that addresses any additional remedies or the possibility of additional fees in order to account for its stranded costs

Read Part One >>