In our last Contract Corner post, we discussed the benefits of negotiating flexible termination options, including partial termination rights. However, as we noted, without the cooperation of the outgoing service provider, flexible termination rights may not be enough to ensure a successful transition of services following termination. In this Contract Corner post, we will focus on termination assistance services and other exit rights that should be part of contract termination provisions.
Termination Assistance
Termination assistance services generally include (1) the continued provision of existing services for a set period of time and (2) assistance required to facilitate the orderly transfer of services to a customer or a new service provider. The following are some key considerations:
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Timing. An agreement should specify when a service provider is required to commence termination assistance services and for how long following termination or expiration of the agreement. Typically, termination assistance services begin after the delivery of a termination notice or a defined period prior to the scheduled expiration date. It is not unusual for termination assistance services to be provided for up to two years in outsourcing or other complex commercial agreements.
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Service Standards. An agreement should specify that there will be no degradation in the ongoing services provided during the termination assistance period and that all existing service levels and other service standards continue to apply.
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Costs. Customers should endeavor to limit costs during any termination assistance period to the fees of providing ongoing services, with termination assistance provided at no additional cost. For agreements that include low-volume triggers for repricing of services, the ramp down of service volumes during a termination assistance period should be exempt from repricing triggers.
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Cooperation. An agreement should specify that the service provider is required to cooperate with, and provide the services directly to, any successor supplier or other third parties. Customers should ensure that such cooperation is not restricted by the confidentiality provisions of the agreement.
Other Exit Rights
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Knowledge Transfer. Upon termination or expiration, customers and their third-party designees should have access to all data and work product that relates to customers’ business for purposes of knowledge transfer and training. All such data and work product should be transferred in an agreed format to avoid unnecessary data entry or conversion costs.
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Right to Hire Personnel. Although service providers typically object, customers should consider including a right to hire service provider personnel in connection with a termination or expiration, especially former customer employees who continue to provide services to the customer. Any such right should include an obligation not to interfere with the customer’s recruiting efforts and not to enforce any noncompete agreements or other restrictive provisions in employment contracts.
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Assets and Software. Customers should consider the requirement to sell or license assets and software necessary for the performance of the services following termination, including the cost, if any, for such sales or licenses. Depending on the services and pricing structure, customers may consider owning critical assets and licensing critical software directly to mitigate any transition risks.
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Third-Party Contracts. The necessity of assigning third-party contracts between the service provider and subcontractors should be reviewed. In connection with this obligation, the agreement should require the service provider to include appropriate provisions in all of its third-party agreements to ensure that they will be assignable to the customer.
This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our prior Contract Corner posts for more on contracts, and be on the lookout for future posts in the series.