Making the right exit: Lessons learned from AstraZeneca and IBM

Making the right exit: Lessons learned from AstraZeneca and IBM

Author: Lindsay Romecin

After what must have been many hours negotiating their Master Services Agreement (MSA), AstraZeneca UK and IBM recently found themselves involved in a complex dispute on the meaning of the terms contained within it.

The issues centred on the fact that as comprehensive as the MSA was (with 90 clauses and 32 schedules governing the provision of IT infrastructure services); it was imprecise in dealing with the exit obligations on IBM following termination of the MSA.

What caused the disagreement?

On 8 April 2011 AstraZeneca terminated the MSA.

The MSA set out that on termination, IBM would continue to provide services to AstraZeneca up until the termination date agreed between the parties. The initial termination date agreed was 8 April 2012.

However, under the MSA IBM was obliged to continue to provide certain 'shared services' for up to a further 12 months. These shared services were described as services that IBM was providing to AstraZeneca and its other customers using infrastructure which could not be handed over to AstraZeneca's next supplier or handed back to AstraZeneca.

The MSA also contained an obligation on AstraZeneca to produce an IT transfer plan for IBM detailing how the services would be transferred away from IBM. In return for this assistance following termination of the services, IBM was entitled to charge a fixed fee.

The discrepancy arose when the parties could not agree:

  • what constituted 'shared infrastructure'
  • whether IBM's provision of the termination assistance services was conditional on AstraZeneca producing the IT transfer plan
  • whether IBM's fixed fee was conditional upon receiving the IT transfer plan from AstraZeneca and establishing the exact length of the termination assistance period

AstraZeneca argued that the shared infrastructure included world class data centres in USA, Sweden, Singapore and Japan, which should continue to be provided for a fixed fee past the initial termination date, despite the fact that AstraZeneca had not produced an IT transfer plan.

What did the court say?

The court took the view that it would determine the meaning of the MSA on the basis of what 'a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation which they were in at the time of the contract' would understand from the MSA.

The court, finding in favour of AstraZeneca, noted that the term 'infrastructure' had been used inconsistently in the MSA, but was wide enough to include the equipment, systems and facilities at all of IBM's world class data centres.

The court agreed that the purpose of the exit clauses was to ensure that AstraZeneca had all the services it needed until it had transferred all services back to AstraZeneca or over to the next supplier, even if this meant gradually reducing the services.

The court rejected IBM's argument that the provision of termination services and the fixed fee was conditional upon IBM receiving the IT transfer plan from AstraZeneca.

What does this mean?

This case underlines the importance of considering thoroughly what will happen when an outsourcing relationship comes to an end. This is often overlooked in the dash to seal the deal, but can be a costly afterthought.

What should you do?

The case also highlights the need to agree detailed exit plans - or timelines for agreeing exit plans - prior to signing contracts, and which clearly define each party's obligations upon termination. These exit plans should be supported by the terms of the contract and updated regularly at pre-agreed intervals.

The negotiation stages of any contract often represent the time when the parties have the strongest relationship and the greatest commitment to finding a mutually beneficial solution. Time spent at this stage is invariably used much more efficiently than once the relationship has soured.

Finally, it is important that both parties are clear about what services are being provided exclusively for the customer's benefit, and which are shared with other customers.

A customer will want to be assured that the critical services it relies on will continue for as long as it needs them, whilst a supplier will not want to be tied to providing exclusive services for an indefinite period or cost.