Exit Management: IBM v AstraZeneca

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In a recent ruling, the UK's Technology and Construction Court has interpreted exit provisions in a Master Services Agreement ("MSA") between IBM and AstraZeneca ("AZ").  AZ terminated the agreement – which was for the provision of operational IT services and data centre facilities - in April 2011.  The judge's ruling on the meaning of the parties' exit obligations is heavily fact-dependent, focusing on the language used in the contract.  Nonetheless, it serves as a useful reminder of the importance of defining clearly both the scope and duration of post-termination services and termination assistance.

Defining the scope of post-termination services and termination assistance 

The MSA required IBM to continue to provide "Shared Services" for a limited period after the end of the Exit Period, if associated third party contracts and systems were not transferable and the successor supplier was unable to provide replacement services.  The contract defined "Shared Services" as services provided using "shared infrastructure" but unfortunately, did not define "infrastructure".   IBM tried to argue that "infrastructure" applied only to infrastructure used for operational services and did not include infrastructure in its shared data centres.  The judge disagreed, pointing to references in various schedules where the term "infrastructure" clearly included "buildings, office space, staff and physical and logical security".   The effect of the judge's ruling is that IBM could, in principle, have to continue to provide services from its shared  data centres for up to 12 months after the end of the Exit Period.

Duration of termination assistance

The parties were also in dispute over the duration of IBM's obligation to provide termination assistance.   The court had to determine whether the obligation continued until all transfer activities were completed, even if this went beyond the end of the defined exit period.  The court ruled that the obligation ended on expiry of the defined exit period.  References in the contract to an "Actual Exit Period" were intended to accommodate the situation where the transfer of a particular service was completed early, rather than to a period after the defined exit period had expired 

Other issues

The court also had to consider whether the contract required AZ to produce an IT Transfer Plan.    The question arose principally because of inconsistency of language.  One clause stated that AZ "may produce one or more IT Transfer Plans"; another used the word "shall".   

The judge said that the use of the word "may" should be construed as giving AZ a discretion whether to produce more than one IT Transfer Plan, rather than whether to produce an IT Transfer Plan at all.  He went on to say, that even if the language might be construed otherwise, a commercial construction would prevail.  There was a clear underlying commercial intention that AZ should provide an IT Transfer Plan, as without one, IBM would not know what the scope and contents of the "Transfer" were.

Comment: 

Customers and suppliers benefit from having in place a clear exit strategy from the outset. This should be supported by contract terms and by an exit plan – updated throughout the life of the contract - that clearly defines each party's exit obligations. Nonetheless, the exit management provisions of outsourcing agreements are often neglected in the rush to finalise the deal.  Uncertainties over the scope or pricing of termination assistance will come to the fore eventually, and the willingness of the parties to resolve those uncertainties will be influenced by the reasons for the termination and their relative bargaining strengths. Time spent on the exit provisions at the deal stage of a transaction is usually well spent.