A successful outsourcing arrangement ideally requires an agreement which provides an unambiguous structure for the parties’ ongoing relationship. Theoretically, clarity should obviate dispute. In practice, however, unforeseen circumstances or disputes can arise. Early advice on the contentious issues can be crucial as the continuance of business relationships often depends on careful management of the legal risk from the outset.

The recent case of Vertex Data Science Limited v Powergen Retail Limited (2006) illustrates how ambiguity in an outsourcing agreement can result in serious contentious issues and large scale litigation.

In Powergen, the question of whether Vertex breached its agreement with Powergen was contentious because the level of service required from Vertex was unclear. This is a frequent source of disputes. Furthermore, Mr Justice Tomlinson stated in Powergen that "it is perfectly possible that the terms of the SLAs permit a level of performance which is… unsatisfactory". Thus, the terms of the contract will, if clear, prevail over objective standards of what may be commercially acceptable. Service levels, and the mechanism for measuring their performance, should be agreed before commencement to avoid any ambiguity in this area.

Benchmarking is also a common cause of disputes. A customer may want adjustments of service levels and pricing in line with market comparables, whilst in a developing and cost-efficient IT market, the supplier will be concerned about incurring the costs of new technologies whilst reducing its fee. Disputes can arise from a failure clearly to set out the contractual effect of a benchmarker’s determination, who will bear the cost of any required technology refresh and precisely what factors are to be considered in the comparison of the supplier’s services to similar services in the market. Ambiguity in the latter formed part of the dispute in Cable & Wireless plc v IBM (2002).

The agreement itself should take steps to anticipate disputes. For example:

  • Minor breaches of service levels can be legislated for through the use of service credits or other liquidated damages mechanisms, thereby avoiding disruption to the ongoing provision of services which negotiation or legal action would entail.

  • Dispute resolution provisions should be used. However, Cable & Wireless illustrates that agreements to negotiate, such as escalation clauses, will often be unenforceable, and will not bind parties into a dispute resolution process even if they are commercially helpful. To make such clauses enforceable, a "minimum duty of participation" must be imposed, preferably through reference to a particular process (in that case reference of disputes to CEDR).

  • Parties can attempt to exclude remedies for breach. Such terms must be clear. In Vertex, a provision that disputes be referred to arbitration, with the arbitrator unable to grant injunctive relief, contained ambiguous qualifications and failed to prevent a party from attempting to circumvent the contractual arbitration process and to seek injunctive relief from the court.

Serious disputes may result in termination of the agreement, and while it may not be possible without dispute resolution lawyers to assess the validity of a purported termination, some practical post-termination arrangements and exit strategies can be put in place. However, even these provisions are not always foolproof and careful thought must be given to the wording of the exit strategy mechanism.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.