Contract management, exit and TUPE transfers18 February, 2013
This is the sixth article in the Back to Basics series. The previous articles in this series have focused on the core provisions which are found in commercial contracts and how these provisions can be adapted to meet the needs of the parties. This article looks more generally at the practical aspects of successful contract management, both during the life of the contract and upon termination.
Many of the issues outlined in this article relate predominately to outsourcing contracts or long-term supply contracts but the general principles can be applied to a wide range of commercial contracts.
Although it is often said that once a contract is signed it is destined to be put away in a filing cabinet never to be looked at again, successful contractual relationships are often dependent on the parties actively monitoring the contract and controlling the key aspects of the relationship between supplier and customer.
Contract governance should enable the customer to ensure the delivery of a cost effective and reliable service and, if anything were to go wrong, contract governance can provide a clear audit trail to assist the parties in resolving the issue.
Contract governance encompasses four main areas:
- Ongoing performance management
- Dealing with under-performance
- Allowing controlled flexibility
- Escalation and dispute resolution
Escalation and dispute resolution has already been covered in a previous article in this series so this article only looks at the first three points set out above.
Ongoing performance management
Ongoing performance management often includes review meetings between the supplier and the customer, performance reports issued against defined service levels (SLAs) and key performance indicators (KPIs) (see the box below for more details) and third party input, such as user satisfaction surveys.
There is no one prescribed structure for managing the ongoing performance of a contract. The appropriate structure will depend largely on the size and scope of the deal, the nature of the services being provided and the organisational structure of the customer and supplier.
When deciding on what performance management measures to put in place, the parties should consider what they are trying to achieve from the contract and what factors will impact on whether the parties consider the contractual relationship to be operating successfully.
From a customer perspective, the issues which should be monitored include:
- Whether the specific goods or services are being provided on time and to the required quality
- User satisfaction
- Accurate invoicing
And a supplier is likely to be concerned with:
- Receiving the necessary input from the customer within the required timescales and in a clear and accurate manner
- Prompt payment
Dealing with under-performance
A key element of performance management is dealing with under performance. It is important that the contract managers feel equipped to address any problems promptly as they arise in accordance with agreed procedures set out in the contract. Under performance can be minimised by having a performance management structure that allows prompt and ongoing feedback. This can avoid a problem worsening and can avoid a supplier being confronted by a disgruntled customer raising a problem for the first time which the customer has known about (and been seething about) for some time.
SLAs and KPIs
Contracts often contain service levels (SLAs) and key performance indicators (KPIs) against which the services can be measured. Measures can include successfully reaching milestones, meeting response times, service availability and other objective measures. Having clear service levels enables the parties to monitor the supplier’s performance and gives the customer the opportunity to raise any issues with the supplier at an early stage if the performance is dropping below the levels detailed in the contract.
It is important that both parties are aware of what the SLAs and KPIs will actually mean in practice. For example, it is very common for providers of cloud based services to offer availability SLAs but, as can be seen from the table below, whilst a 99% availability SLA might sound good, it actually enables the service to be unavailable for over seven hours each month without the supplier having failed to meet the SLA.
SLA (per day) (per month) (per year)
hrs:min:sec hrs:min:sec hrs:min:sec
99.999% 00:00:00.4 00:00:26 00:05:15
It is also important that customers are aware of any exceptions to the SLAs. Using the cloud service example again, it is usual for suppliers to exclude certain downtime from the SLA measurement, such as downtime due to scheduled or emergency maintenance. The customer should ensure that they are aware of this excluded downtime and appreciate the effect that this will have on the SLA as, for example, a 99.999% availability SLA will be essentially worthless if the contract allows the supplier to take the system down for an hour each day to perform maintenance.
Allowing controlled flexibility
The final element of successful contract management is controlled flexibility. This is particularly important in outsourcing arrangements and other long-term contracts. During the contract term, there will inevitably be changes in each party’s requirements or expectations. The contract should contain appropriate mechanisms for the negotiation, agreement and implementation of these changes. It should address whether the supplier can charge for changes, and, if so, on what basis. Most importantly, the change mechanism should be designed to fit the needs of the people who will use it. Although each agreed change may have a material effect on the contract, change control is an operational tool to enable the continual evolution of the contract and it should be viewed as such.
As well as ensuring that the contract clearly sets out the circumstances when it can be terminated, consideration should be given to what will happen upon termination of the contract. It is often vital for a customer’s business continuity that there is an orderly transfer of the relevant services either to the customer (where the services are being taken in-house) or to a replacement supplier, without any undue disruption to such services.
A well drafted exit plan should cover any specific rights which the customer will require upon termination and should address the following issues:
- continuation of provision of the services for the duration of the notice period and any transition period;
- co-operation with the customer and, where applicable, the replacement supplier to ensure an orderly transfer of the services;
- knowledge transfer from the supplier to the customer/replacement supplier;
- return or transfer back of each party’s assets, data and confidential information;
- the treatment of employees and any obligations to inform or consult under TUPE (see below for more details); and
- remuneration of the supplier during the exit phase.
It is not unusual for a customer and supplier to elect not to negotiate and agree a detailed exit management plan as part of the original contract negotiations. However, the exit provisions should not be ignored during the initial negotiations. Even if the contract does not include a detailed exit plan, it should include a set of legally binding principles which will apply during the exit phase and the supplier should be required to prepare a detailed exit management plan which addresses the tasks which will need to be carried out from an operational perspective to ensure an orderly exit.
The contract should specify a date by which the detailed exit management plan should be delivered to the customer for review and approval and there should be an obligation on the supplier to review and update the exit plan on a regular basis. The customer should not overlook these obligations and should take steps to ensure compliance by the supplier.
Transfer of employees upon termination of a contract
The termination of a supply of services contract can sometimes give rise to the transfer of the supplier’s employees to the customer or a replacement supplier. This transfer occurs by virtue of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) which are intended to provide protection for employees in the event of a service provision change.
What is a service provision change (SPC)?
There are two broad categories of SPC which can occur upon termination of a contract:
- Appointment of a replacement supplier – whereby the customer terminates the contract with one supplier and appoints another supplier to provide the same (or similar) services
- Insourcing – whereby the customer terminates the contract with the supplier and brings the services back “in-house”
In order for there to be an SPC the supplier needs to have an organised grouping of employees situated in Great Britain, which has as its principal purpose the carrying out of services for or on behalf of the customer and the customer must intend that those services will, following the SPC, be carried on by the new supplier or the customer’s in-house team other than in connection with a single specific event or task of short-term duration.
Recent case law has confirmed that the ‘organised grouping’ requirement for an SPC connotes that employees should be organised in some sense by reference to the requirements of the client in question. A SPC will not occur where, due to circumstance, a group of employees are in practice, but without any deliberate planning or intent, be found to be working mostly for a particular client.
What is the effect of a SPC?
If there is a SPC to which TUPE applies upon termination of a contract, those employees providing services under the contract at the date of termination will automatically transfer to the replacement supplier (or the customer where the services are being taken in-house) on their existing terms and conditions of employment. However, as can be seen from the summary set out above, it can sometimes be difficult to identify in what circumstances a TUPE transfer will occur.
What are the practical implications of a TUPE transfer, for the supplier?
In many circumstances, it will be in the supplier’s commercial interests to argue strongly that TUPE applies, so that their employees will transfer across to the new supplier/customer. If the employees don’t transfer, there is a risk the supplier won’t have any work for them which could mean that the supplier may face the costs and issues involved in making those employees redundant.
However, there may also be situations where a supplier may wish to retain its employees who would otherwise transfer under TUPE. This may occur where, for example, those employees may have particular skills or contacts that the supplier wants to retain.
…and for the transferee?
The company taking over the transferring service (being either a new supplier or the customer) will naturally look at matters from a different perspective from the outgoing supplier. On one hand, it may be happy to take on the employees who have been carrying out the service to make sure it has the necessary resources and skills to continue to provide those services. But on the other hand, it may already have sufficient resources to enable it to carry out the services, making any staff from the outgoing supplier surplus to requirements.
Dealing with TUPE in a contract
Given the practical implications associated with TUPE transfers, it is useful for parties to consider at the outset whether they intend a TUPE transfer to occur upon termination of the contract. This will enable the supplier to structure its workforce in a way which will give rise to (or avoid) a transfer and it will enable the parties to agree suitable indemnities to divide the employment liabilities in an equitable manner; usually by making the transferor responsible for the employment liabilities which arise pre-transfer and making the transferee responsible for those which arise post-transfer.
Next article in the series
The next article in the Back to Basics series will look at the ‘intangible’ aspects of a contract, namely intellectual property rights, data protection and confidentiality.
Reviewed in 2015