Managing stagnation of contract partners in long-term service or software contracts: key actions to take

The problem of inadequate contractual provisions

Long-term service and software contracts are designed to ensure continuity and reliability, especially in sectors like banking, where IT services are frequently outsourced. If the service provider becomes unable to meet its contractual obligations – such as in cases of financial distress – and no provisions have been made for this eventuality, the consequences can be severe. Banks relying on these outsourced services for their daily operations may face significant business interruptions.

Key contractual provisions to include

Termination clauses: Clearly define the circumstances under which the contract can be terminated. This should include scenarios where the service provider is unable to meet its obligations due to financial instability or other significant disruptions, or upon the request of a regulator like the Financial Market Authority.

Transition plan: Outline a detailed transition plan that specifies the steps to be taken if a service provider is no longer able to continue delivering services. Include the exact procedure for transferring services to a new provider.

Escrow agreements: For software contracts, consider concluding escrow agreements regarding the deposit of the source code and other critical software components with a third party, such as a notary. If the service provider is unable to continue, the deposited software will be handed over to the client, ensuring its continuity.

Service Level Agreements (SLAs): Define clear SLAs that outline the expected performance levels and the consequences of failing to meet them. These may include penalties or the right to terminate the contract if SLAs are consistently not met.

Force majeure clauses: Include force majeure clauses that address unforeseen events beyond the control of either party, such as natural disasters or political instability. These clauses should outline the steps to be taken in such events, including the right of transferring services to a new provider.

Step-in rights: Consider including step-in rights, which allow another party to take over the service provider's responsibilities in the event of a significant disruption.

In summary, the lack of provisions for transferring contracts or services to a new provider in the event of unforeseen circumstances in long-term service and software contracts can result in significant operational disruptions, financial losses and legal complications. To mitigate these risks, appropriate contractual provisions should be agreed from the outset. With the right legal support, companies can ensure their contracts maintain continuity and reliability, even in the face of potential disruptions.

authors: Michael Magerl, Marion Schimböck