Coronavirus Considerations: Technology Contracts beyond Force Majeure
Customers and suppliers, even if not immediately affected by the outbreak of the coronavirus, should be undertaking a comprehensive review of their technology contracts so as to determine their contractual rights, limitations, and obligations in the context of current, and possible future, circumstances
We set out below some specific technology contracts issues to consider:
- Engage with the other party as quickly as possible (either as part of normal contract or relationship governance or separately) to identify issues and agree options to deal with any risks (including appropriate workarounds / mitigation measures). Key concerns would include:
- hardware supply chain disruptions arising due to shutdown of factories, port, airport and/or customs closures, longer processing timeframes for freight, and reduction in flight numbers. Query whether hardware can be procured from elsewhere, and if so, how quickly and how any additional costs are to be apportioned between the parties; and
- whether adequate business continuity plans are in place, and if so, at what point they should be activated. Often parties execute contracts with placeholders for business continuity, disaster recovery, project plans, etc., to be fleshed out between the parties or provided by the supplier at a later stage. However, it is quite common for parties to neglect such key deliverables. If the business continuity or disaster recovery plans have not already been prepared and agreed, customers should ensure their suppliers prepare and submit these plans asap.
- Assess the various contractual levers that can be utilised to deal with any contingencies (in addition to invoking Force Majeure provisions). For example, whether:
- extensions of time should be granted (and/or delay penalties waived) by the customer to factor any project delays that may occur beyond the reasonable control of the supplier, and which cannot be mitigated by the customer using commercially reasonable endeavours;
- there is scope to provide service level relief (either by reducing the service level metrics or waiving service credits for any failure by the supplier to meet service levels), where the supplier’s ability to perform its obligations under the ‘run-phase’ of the contract is directly or indirectly affected by the coronavirus outbreak;
- change control process can be used to cover any additional costs that may arise (for example, by virtue of the supplier having to provide support on site, or engage personnel from a higher cost jurisdiction where the lower-cost offshoring location is affected by government restrictions on the movement of people). It may, of course, trigger a wider commercial discussion and possible pricing renegotiation;
- provision of services remotely, particularly in cases where supplier personnel cannot leave their homes or are being refused entry by immigration authorities in the country where the customer’s premises are located. Very often, technology contracts specify levels of onsite and offshore/remote resources to be used. If so, these need to be reassessed in light of any restrictions. See our piece on the legality of VPNs in the UAE.
- Determine if any termination rights exist (other than for the persistence of a Force Majeure event) that would enable either party to terminate the contract (for example, termination for convenience rights). If so, what is the notice period, and are there any early termination fees payable?;
- Consider if the customer can exercise any step-inrights, and if so whether the supplier will be required to bear the costs of the customer or its third party nominee in performing the relevant obligations under the contract in place of the service provider;
- Determine whether disengagement services are to be provided following any termination so as to provide for a proper and orderly transition of the services to another supplier (assuming the replacement supplier’s operations are not also, at least currently, equally affected by the spread of the coronavirus). If disengagement services are within scope:what is the period during which disengagement services are to be provided?
- which party will obtain ownership of the hardware and equipment utilised in the provision of the services?
- what are the licensing arrangements for software owned by the supplier and/or any third party software?
- is the customer able to hire the supplier personnel?
- what training is required to be provided by the supplier to the customer and any new, incoming supplier?
As above re: business continuity / disaster recovery, if an exit plan was supposed to have been put in place, but has not yet been prepared, customers should ensure the preparation of an exit plan is actioned asap. For a more in-depth analysis of disengagement services, please see our previous article on this topic.