Transition-Out Obligations in Service Agreements

Morgan Lewis - Tech & Sourcing
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Morgan Lewis - Tech & Sourcing

The inclusion of transition-out obligations within service agreements should not be overlooked in the contract drafting process because they help to provide a game plan if the service provider/customer relationship winds down. In this post, we discuss some of the items a contract drafter should consider when drafting clauses to address transition-out obligations.

SHOULD TRANSITION-OUT OBLIGATIONS BE IN THE MASTER TERMS OR STATEMENT OF WORK?

Many service agreements are structured as master terms that govern project-specific statements of work or ordering documents. When determining whether transition-out obligations should live within the master terms or in an underlying statement of work, the contract drafter will want to consider the following:

  • Whether the transition-out obligations are general enough that such services can be included in the master terms of the service agreement and govern for the purposes of establishing transition support for all statements of work.
  • Whether, given the unique and diverse nature of the services, project-specific transition-out obligations should be spelled out under each individual statement of work.

WHAT SHOULD CUSTOMERS CONSIDER INCLUDING IN TRANSITION-OUT OBLIGATIONS?

When it comes to drafting the transition-out obligations, a customer contract-drafter should, at a minimum, consider the following:

  • Depending on the nature of the services and the impact of any termination or expiration thereof, whether the obligations should address either an extension period of the services and/or transition assistance. For example, if you’re licensing a software-as-a-service (SaaS) platform, you may want the ability to extend the term of the license for a longer period in order to ensure there will be continuity in service as you move onto a new service provider’s platform.
  • Defining clear performance requirements for the service provider and avoiding broad standards of performance phrases such as “commercially reasonable efforts.”
  • Establishing clear fee obligations to avoid a service provider artificially raising rates at the time of transitioning out.   
  • Adding consequences, such as credits or express liquidated damages, in the event the service provider refuses to perform its transition-out obligations.
  • Allowing the customer to trigger the transition-out rights in the event the master terms and/or statement of work are terminated for any reason.

WHAT SHOULD SERVICE PROVIDERS CONSIDER INCLUDING IN TRANSITION-OUT OBLIGATIONS?

When it comes to drafting the transition-out obligations, a service provider contract-drafter should, at a minimum, consider the following:

  • Avoiding setting fee rates during the negotiation of a long-term engagement if there’s a possibility that by the end of service those rates are going to be obsolete for your business. Instead, consider either a flexible fee range or require that any transition-out services will be performed at your then-current rates.
  • Identifying whether the performance of certain obligations at the time of termination is included within the scope of the general service requirements under the agreement or if they should be included within the scope of transition-out service and be charged accordingly. For example, if a customer has the option to demand that its data be returned by you in a format required by the customer, you may want to consider adding this to the transition-out if it will be a costly administrative task.
  • Setting reasonable time limits on any transition-out support. For example, if you’re providing an extension period to a customer that is licensing your SaaS platform, set a hard deadline for when the license will terminate so the extension period doesn’t inadvertently turn into a new long-term license period.
  • Allowing the customer to trigger the transition-out clause in the event the master terms and/or statement of work have not been terminated by you due to the customer’s uncured material breach or termination for convenience, if applicable.

These are just a handful of items to consider when drafting transition-out clauses in service agreements, and thinking through these issues on the front end of an engagement will help to avoid confusion and frustration on the back end.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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