They Think It’s All Over!
Why post-termination arrangements in contracts should not be ignored
The content of this article is not intended to, and does not, constitute legal advice, and should not be used, referred to or relied upon as such.
When reviewing contractual terms put forwards by your organisation’s suppliers it’s common, and entirely understandable, for your attention to be drawn to how various obligations will apply whilst the agreement is live and in-flight. Ensuring that the agreement functions appropriately from the moment of sign-off is, of course, a top priority however it can be easy to forget that the continued impact of an agreement in the weeks, months and even years following termination can also be of real significance. In this article, we explore a range of reasons why it’s vital that we do not under-value or ignore post-termination arrangements.
Confidentiality and Security
Many supplier agreements are likely to contain comparatively standardised provisions relating to both confidentiality and the secure-handling of personal data. Whilst standardised provisions of this nature are likely to compel your supplier to destroy, return or erase commercially sensitive information and/or personal data belonging to your business on termination, they may also provide the supplier with a right to retain, where, for example, the supplier is required to do so by law.
Given that the value of your organisation’s commercially sensitive information, and any associated personal data, is unlikely to be diminished solely by reason of termination of the supply arrangement, it’s important to ensure that any confidentiality and security related obligations expressly survive, and continue to apply for an appropriate period, following termination. Doing so will ensure that you are able to hold your supplier fully to account, in the event of a post-termination breach or other compromise.
Third-Party Claims (Intellectual Property)
During the course of contractual negotiations, you may have invested a significant amount of time and effort into securing a warranty that the supplier’s provision of its products and services will not cause your organisation to find itself in breach of third-party intellectual property rights. Because any claim of third-party IP infringement, whether substantiated or otherwise, is likely to be very costly to your business, you’re also likely to have spent time securing an accompanying indemnity from your supplier.
Having negotiated to obtain hard-fought protections for your business, it’s equally important to ensure that these protections survive termination. In many jurisdictions, including the UK, an aggrieved third-party can legitimately bring a claim for IP infringement several years after the alleged infringement incident. If the aforementioned warranty and indemnity do not survive termination, your business could be left exposed to the full costs and consequences of the associated claim with your contractual right of recourse against your supplier having already been extinguished.
Transition and Continuity
Like any business, we may enter a new supply arrangement with a significant degree of optimism and confidence that the supplier will perform its obligations to a good standard for the duration of the associated term. Whilst this optimism and confidence may well be vindicated in the medium to long-term, during the course of contract negotiations it’s important to keep in mind that we can never, and should not, rule out the possibility of the need for a change of supplier sometime in future.
If such a change becomes necessary, a simple right to terminate the supply agreement on the provision of a brief notice period, or alternatively, the simple expiry of the agreement at the end of its term, may not provide your business with an adequate opportunity to plan for and implement alternative supply arrangements. Indeed, the likelihood that a new supplier will be in place and ready to commence service delivery seamlessly, the morning after termination or expiry has taken effect, is comparatively low.
For this reason, and in order to safeguard continuity for your business, you may wish to negotiate and make provision for an appropriate post-termination transition period of, for example, three to six months, during which your incumbent supplier is compelled to continue service delivery, subject to the agreement of appropriate costs. By doing so, you can avoid a scenario whereby termination or expiry of your incumbent supply agreement becomes a cliff-edge in the context of your business’ day to day operations.
Audit and Compliance
Finally, if your business operates in a regulated environment, or is VAT registered, and therefore subject to potential audit by the relevant authorities, it’s important to ensure that your contractual rights to request, and compel, the production and retrieval of key records stored by your supplier, survive termination. UK anti-money laundering regulations, for example, can require the retention of records for five years or more and the authorities may seek to impose steep penalties if, owing to the termination of a relevant supply agreement, you are subsequently unable to retrieve important records, and therefore to fulfil formal audit requirements.
To Conclude
Whilst there’s no doubt that the operation of your in-flight supply arrangement is of prime importance to your business, we must also take steps to ensure that key provisions continue to operate following termination. By paying close attention to the post-termination considerations discussed in this article, your business can avoid a number of potential pitfalls. If you require assistance with any of the matters discussed in this article, or would like to find out more, please get in touch via hello@ne2-data.com