In our previous article of this Back to Basics series on termination, we discussed the various ways in which a contract may be terminated, whether it be for convenience or as a result of a causal event. Following the termination or expiration of a contract, what happens to the services being provided and how is this managed by a contracting party to ensure that such termination or expiration does not have an adverse effect on business operations?
This article will introduce the concept of termination assistance, and explain the importance of including termination assistance provisions in your contract.
The inclusion of a termination assistance clause should not be overlooked, especially if the services are core business operations. The clause ensures that there is a seamless continuity of services and the handover of data and deliverables. The clause sets out the steps to be followed by the contracting parties in respect of the continued performance of their services and will only be triggered in the event that the main contract expires or is terminated.
The following should be considered when including a termination assistance clause in a contract:
- the nature of the services, the possible impact of termination or expiration of the contract, and whether it will be necessary for the contract to address an extension period or termination assistance. For example, termination assistance provisions will be required where there is a large outsource of a core component of a customer’s business, whereas an extension period would be better suited for a customer that is licensing a software-as-a-service product;
- the customer must determine clear performance requirements for the service provider during the transition period, and avoid ambiguous wording that implies broad performance standards (ie, “commercially reasonable efforts”, “reasonable steps”, “endeavour” etc.);
- the parties should agree on the charges payable for any termination assistance or extension periods at the outset of negotiating the contract to ensure that a service provider does not artificially increase the charges during the transition or exit period, especially if the termination was acrimonious; and
- the customer can consider including penalty provisions, such as service credits or liquidated damages, in the event that the service provider fails or otherwise refuses to perform its termination assistance obligations.
During the transition period, it is important for customers to ensure that their service providers are willing to assist and cooperate with the newly appointed service provider so that the service hand-over is seamless and has minimal or no impact on business operations. Accordingly, this is managed and dealt with under the clause, which generally places an obligation on the service provider to provide all necessary assistance and cooperation to the customer, and its designated third-party service provider, for the transition of the services to the latter .
Termination assistance provisions also ensure that any proprietary deliverables or documents, including any bespoke intellectual property, that has been created or developed specifically for the customer, are handed over during the exit period. It also ensures that any data with the service provider is migrated to the customer or their new service provider.
The termination or expiration of a contract should not be a material threat to the continuation of business operations. The inclusion of termination assistance provisions will give you peace of mind that business will continue as usual, despite any contractual relationship coming to an end.