Brexit and IT contracts: Managing termination issues - a legal perspective

Is Brexit ending your business relationships? Arnold & Porter's Michael Bywell has advice

In certain areas, the outcome of Brexit for technology companies may be a net positive.

Opportunities could arise when enterprise vendors who lose business in certain areas see increased demand elsewhere or where customer-side organisations see a surge in work implementing operational and system changes brought about by decisions to downsize or relocate. New requirements in the public sector as the UK reorganises may also present new opportunities.

However, down-sizing, de-scoping and offshoring all carry legal and commercial risks, and great care should be taken to ensure that such risks are properly managed.

For example, where customer-side organisations want to downsize their UK operations or change their IT strategy to save money (eg. by de-scoping or offshoring) they may run into disgruntled vendors who are not prepared to agree contract variations that reduce their revenue stream.

Vendors are likely to be even less interested in any suggestion that they agree to a consensual walk-away or termination.

It is one thing for a senior executive in a customer organisation to say, "We need to save costs, so let's de-scope current technology vendor contracts" and quite another to make this happen without triggering wrongful termination lawsuits by vendors.

In some cases, there may be an ‘easy out', for example where the contract term is about to expire anyway, or where there is a termination for convenience clause. But where these escape routes do not exist, customer-side organisations may have a fight on their hands.

Because of these risks, customers seeking to terminate must get their legal strategy in place at the outset and before any steps are taken. Here are some practical tips for a successful termination strategy:

• Investigate the contract and its termination provisions.

• Check the contractual notice provisions, as a failure to comply with these may invalidate any termination.

• If the contract term is about to expire or there is a termination for convenience clause (which sometimes comes with an obligation to pay compensation to the vendor) consider whether these provide a quick and easy way out.

• Otherwise a more complex strategy centred on termination for cause or breach of contract by the vendor may be required.

• Where breaches have occurred, consider what open (complaint) correspondence and/or contractual notices should be sent to safeguard and prosecute accrued rights and generate leverage for any subsequent negotiations.

• Consider whether any settlement or compensation offers should be made on a without prejudice basis; with a view to negotiating an agreed termination and exit.

• In order to defend complaints and safeguard its own negotiating position, a vendor faced with the threat of termination by customers should also undertake an assessment of the merits of the case for termination (there is often fault on both sides) to better understand its position.

• To justify termination for cause the terminating party needs to show a legal entitlement to do so under the contract and/or a common law).

• Any termination notice should ensure that any entitlement to ‘loss of bargain' damages (which may be higher than contractual damages) is not lost.

• Remember that even where termination cannot be justified, the customer may be entitled to damages for any breaches that have occurred.

• If a consensual exit cannot be achieved or is not sought in the first place, a decision on whether to terminate should be taken without delay. The courts will not permit the terminating party to delay for an unreasonably long period of time and the right to terminate may be lost.

• Get third party help where required. This could be in the form of a mediator to help resolve issues or independent expert to referee any transition out arrangements concluded as part of the deal.

Termination by vendors is less common but can arise where customers are in breach (eg. for non-payment or non-performance of dependencies). In that event, the considerations outlined above will also apply.

However, where contracts have (through no fault of the customer) become uneconomic to perform, vendors considering termination options need to be wary of any ‘wilful abandonment' type clauses in the contract, which carry the risk that any attempt to walk away will amount to a repudiatory breach of the contract, thus entitling the customer to terminate.

Michael Bywell is an IT partner at law firm Arnold & Porter LLP.