Out-Law Guide 8 min. read
06 Dec 2011, 10:32 am
AstraZeneca and IBM (the "Parties") entered into a Master Service Agreement on 16 July 2007 (the "MSA") which governed the provision by IBM of IT infrastructure services (the "Services") to AstraZeneca's global business and was centred on data centres in the UK, Sweden and the USA. The MSA was terminated for cause by AstraZeneca on 8 April 2011. There is a separate dispute between the Parties as to whether AstraZeneca was entitled to terminate the MSA for cause or only for convenience, but this was not considered in Mr Justice Ramsey's judgment.
The termination of the MSA triggered the contractual exit management provisions which were designed to facilitate the transition of various Services back to AstraZeneca or to a replacement service supplier (referred to in the MSA as the Successor Supplier) in the event of termination. The Parties disagreed (inter alia) over the scope of IBM's contractual obligations to provide Services during the Exit Period and the how much IBM was to be paid in return for providing those Services. Given the pressing need for those issues to be resolved quickly, the case was heard on an expedited basis.
Much of Mr Justice Ramsey's judgment focused on the meaning of specific clauses of, and terms used in, the MSA. Clause 69 provided that IBM's obligation to deliver the Services covered by the MSA did not cease upon its termination, but rather IBM was obliged to continue to deliver the Services up to the end of the Exit Period. The Exit Period was defined as the period commencing at the time that the termination notice was given and ending on the Extended Termination Date. AstraZeneca extended the Exit Period with the effect that the Extended Termination Date is 8 April 2012.
IBM was also obliged to provide AstraZeneca with Termination Assistance during the Exit Period in accordance with Schedule 22 of the MSA, the Exit Plan (which contains the detailed obligations of the Parties during the Exit Period) and the IT Transfer Plan(s). Appendix 1 to Schedule 22A provided that AstraZeneca was to pay a "Fixed Fee" for IBM's performance of the Termination Assistance, but the amount of the Fixed Fee was not defined by the Parties in the MSA.
Paragraph 12 of Schedule 22 concerned the Shared Services to be provided by IBM. The meaning and effect of this paragraph was at the heart of the dispute between the Parties:
"12.1 If Terminating Services are provided by using shared infrastructure and the associated Systems and Third Party contracts are not transferable to the Successor Supplier which cannot reasonably take on provision of those Terminating Services before the Extended Termination Date ("Shared Services") then, if so requested by AstraZeneca:
12.1.1 [IBM] shall no less than thirty (30) days prior to the Extended Termination Date provide AstraZeneca with an irrevocable and unconditional offer open to acceptance within thirty (30) days to continue to provide those Shared Services on a transitional basis for no more than twelve (12) months following the Extended Termination Date to AstraZeneca and the Successor Supplier;
12.1.2 the Shared Services shall be offered on the commercial terms on which [IBM] provides similar services to or for its customers of a similar size to AstraZeneca based on the volume and nature of the services to be provided (including terms as to charges and limitations on [IBM's] liability); and
12.1.3 AstraZeneca or the Successor Supplier may elect at their discretion to accept [IBM's] offer of Shared Services."
Paragraph 7 of Schedule 22A concerned "shared infrastructure" which formed part of the definition of Shared Services:
"For any area of the Services that is provided using [an IBM] shared infrastructure, i.e. not dedicated solely for the purposes of AstraZeneca, a suitable working solution is required at the Transfer date. It is recognised that those Services provided using a shared infrastructure may require specific plans to transfer. For the services using [IBM's] shared infrastructure, the following information is required [it then sets out information in relation to staff, infrastructure and physical and logical security]...Should it not be possible for AstraZeneca to transfer the Shared Services to a Successor Supplier before the Transfer Date, [IBM] will, if requested, continue to provide the Shared Services [pursuant to the terms of paragraph 12 of Schedule 22]."
Shared Service and Shared Infrastructure
Some of the Services provided to AstraZeneca by IBM pursuant to the MSA were Shared Services, i.e. shared with other customers of IBM. The Parties recognised that Shared Services may be impossible to transfer to a Successor Supplier (or to AstraZeneca) in the event of termination. Accordingly, the MSA provided that, at AstraZeneca's request, IBM was obliged to provide the Shared Services to the Extended Termination Date. Shared Services are "defined" in paragraph 12 of Schedule 22 of the MSA by reference to the phrase "shared infrastructure". In argument, IBM sought to limit the Services it would have to provide during the Exit Period by arguing that it was only intended to cover situations where IT infrastructure such as servers or software was used by IBM in the provision of Services for more than one customer. AstraZeneca argued that the term encompassed more than this and extended to the underlying services, such as power, security and data centres.
In line with clear judicial authority, Mr Justice Ramsey construed the MSA in accordance with the principles stated by Lord Hoffmann in Investors' Compensation Scheme Limited v West Bromwich Building Society  1 WLR 896 and reviewed by Sir Anthony Clarke MR in The Resolute  1 Lloyd's Rep 225. The task of the Court was summarised as ascertaining the meaning which the document would convey to 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, but excluding their previous negotiations and declarations of subjective intent.
The word "infrastructure" was used by the Parties throughout the MSA in a number of different senses and was not a contractually defined term. The Court decided that in construing paragraph 12 of Schedule 22 (and the word "infrastructure") it was necessary to have an understanding of the overall scheme (i.e. the complete MSA) and to construe paragraph 12 in the context of that overall scheme.
Mr Justice Ramsey considered the issue of whether the term "infrastructure" included the equipment, systems and facilities at IBM's shared data centres (the "WDCs") which IBM uses to provide the Data Centre Facilities under the MSA. Mr Justice Ramsey placed significant emphasis on the provisions of paragraph 7 (see above): as paragraph 7 provides that, for Services using IBM's shared infrastructure, certain information was required in relation to staff, infrastructure and physical and logical security, this indicated "strongly" that elements of staff, infrastructure and security could potentially be matters of shared infrastructure where they were not dedicated solely for the purposes of AstraZeneca. The Court held that the term was wide enough to include the infrastructure in the form of equipment, systems and facilities at IBM's shared data centres which are used to provide the Data Centre Facilities under the MSA and that those shared data centres include the WDCs in the USA, Sweden, Singapore and Japan. Accordingly, IBM was required to provide a wider variety of services for an extended period than it had wanted or, it seems, anticipated.
The Court also had to consider whether AstraZeneca had a right to select what Shares Services it required to be continued post-termination or whether, as IBM contended, AstraZeneca could not cherry pick which of the Shared Services it wanted IBM to provide during the Exit Period. Mr Justice Ramsey found in favour of AstraZeneca reasoning that commercially the overall intention of the exit provisions was that by the end of the Exit Period, the Terminating Services will have been transferred to AstraZeneca or a Successor and that those Terminating Services might be gradually reduced over a period of time.
Payment for Termination Assistance
As set out above, the MSA contemplated that AstraZeneca would pay IBM a "Fixed Fee" for providing the Termination Assistance. IBM argued that the provision of a Fixed Fee for the Termination Assistance was conditional upon AstraZeneca providing an IT Transfer Plan (i.e. a plan setting out how AstraZeneca intended to manage the transfer of the Services) and the length of the Exit Period being certain. The Court rejected this argument, holding that IBM could set an initial Fixed Fee without having received an IT Transfer Plan and without knowing the actual length of the Exit Period. The Court held that the Fixed Fee could be amended if the Exit Period was extended or if the IT Transfer Plan revealed complexity that would have resulted in increased costs.
The case demonstrates the importance of ensuring that exit management provisions receive careful attention from the parties and their legal advisers during contract negotiation. Failing to consider the parties' obligations in the event of termination can lead to considerable uncertainty and increased costs. Parties embarking on high-value, complex IT outsourcing projects should focus their minds on what they want to happen should their commercial relationship come to an end (this should not be an afterthought) and should resist the temptation to be swept up in the deal which is being done.
The opportune time to negotiate such matters is pre-contract when the parties are on a stable footing and their relationship is likely to be at its strongest. It is important that the parties agree a set of guiding principles for managing exit and a solid exit management framework should be included in the agreement. Fine-tuning of the exit management process during the term of the contract, perhaps through formal annual reviews of any exit plan, may also provide the parties with a useful opportunity to add detail to an agreed framework and address any unforeseen issues which may have arisen. However, attempting to negotiate exit processes following termination, perhaps in acrimonious circumstances, is unlikely to be productive or to result in a favourable outcome for either party.
A well-thought out exit strategy is in the interest of all parties. For example, a customer will want to be reassured that the IT services upon which it has come to rely in order to carry out its day-to-day business processes will not suddenly be disconnected in circumstances where a new IT supplier has not been lined up or other solution put in place. Similarly, and as demonstrated by the facts of this case, a supplier will want to ensure that its ability to supply services to other customers is not compromised by the burden of performing unexpected post-termination services for an undefined period of time and without payment certainty.
Where a supplier is being paid for providing exit assistance (i.e. dedicating time and resources or providing documents detailing on the services or solution which had been provided), the process usually runs smoothly (provided the payment structure is agreed) as the supplier will usually ensure that it makes a margin. However, where it is agreed that exit assistance will be provided free of charge, there is less incentive for the supplier to divert valuable resources and problems are more likely to arise as a result. Nevertheless, this case illustrates that even when it is agreed that a supplier will be paid for providing exist assistance, the situation becomes more complicated where the service provision post-termination relies on, for example, a shared infrastructure or third party contracts.
Mr Justice Ramsay's purposive approach to construing the MSA does not break new legal ground, but it does demonstrate that the Court will place heavy reliance on the commercial purpose of the deal and consider the deal document in the round when construing clauses or terms which are the subject of argument.