The Age of Viral Outbreaks Impact on Outsourced

The Age of Viral Outbreaks – Impact on Outsourced Functions and Relationships DLA Piper – 30 March 2020 Please note: This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.

Introduction Speakers Mark O'Conor Partner London, UK mark. oconor@dlapiper. com www. dlapiper. com UKG/98428074 2

Today’s webinar Kit Burden Vinny Sanchez Anne Friedman Mark O'Conor Partner Los Angeles, USA Of Counsel Los Angeles, USA Partner London, UK kit. burden@dlapiper. com vincent. sanchez@dlapiper. com anne. friedman@dlapiper. com mark. oconor@dlapiper. com Scott Thiel Paul Allen Kristof De Vulder Partner Hong Kong Partner Dubai, UAE Partner Brussels, Belgium scott. thiel@dlapiper. com paul. allen@dlapiper. com kristof. devulder@dlapiper. com Partner London, UK www. dlapiper. com UKG/98428074 3

Current state of affairs Speakers Mark O'Conor Partner London, UK mark. oconor@dlapiper. com www. dlapiper. com UKG/98428074 4

Why we are talking right now • Customer / supplier perspective • Supply-chain domino effect • Private / public sector perspective • “I have no customers so I don’t want to pay my suppliers right now” • “Is this force majeure, if so what does that mean? ” • “My staff are in lockdown, so I can’t physically staff the call centre” • “Can I be proactive? what is everyone else doing? ” • ”I need to write to all of my customers, what do I say? ” • “how do I seek relief from performance / payment? ” www. dlapiper. com UKG/98428074 5

First steps in the analysis Speakers Kristof De Vulder Paul Allen www. dlapiper. com Partner Dubai, UAE Partner Brussels, Belgium paul. allen@dlapiper. com kristof. devulder@dlapiper. com UKG/98428074 6

Supervening events & relief from performance 3 step analysis • What supervening event has occurred, what is the impact, and what actions have the parties taken? Facts Contract Terms • What does the contract say about a party being relieved from performance because of a supervening / force majeure event? • What does the applicable law say about a party being relieved from performance because of a supervening / force majeure event? Applicable Law www. dlapiper. com UKG/98428074 7

Supervening events & relief from performance Factors to consider Facts Contract Terms Applicable Law • What supervening event has occurred (including any local “shutdown” orders, border closures, social distancing requirements)? • Who is seeking to be relieved from performance / enforce an obligation? • What obligations have been affected? • What workarounds are available? • What has the affected party done to mitigate the impact? • What sector is affected? • Other matters? • Is there a force majeure clause? What does it say? • definition of force majeure event • requirements of the force majeure clause • consequences of calling force majeure • What requirements exist regarding business continuity? • What does any “Relief Event” clause require? • What is the governing law of the contract? • Are any of the following relevant: • Force Majeure • Frustration • Hardship • Consider application of any local laws • Consider any sector specific laws www. dlapiper. com UKG/98428074 8

First steps in the analysis Speakers Kristof De Vulder Paul Allen www. dlapiper. com Partner Dubai, UAE Partner Brussels, Belgium paul. allen@dlapiper. com kristof. devulder@dlapiper. com UKG/98428074 9

Broad concepts A basic and universally acceptable principle of contract law is "pacta sunt servanda": agreements must be kept The major legal concepts dealing with the problem of changed circumstances are: force majeure, hardship and frustration www. dlapiper. com UKG/98428074 10

Force Majeure – civil law Not only a contractual right! • Does the contract contain a Force Majeure clause? • If no FM clause, or if clause incomplete, unclear or insufficiently detailed: • Fallback on general civil law: Force Majeure principle recognized in most civil law jurisdictions • Criteria: • Impossibility of performance; • NOT caused by a fault from the debtor; • Unforeseeable and inevitable • Other elements: • Causal link (and ‘directness’ of the link); • Burden of proof; • Impact on wider supply chain. www. dlapiper. com UKG/98428074 11

Force Majeure – civil law Other mechanism/theories • Abuse of rights • Good faith principle • ENAC • Hardship • Frustration • Also: • Other clauses of the agreement (postponing payment/delivery, volume reduction, …) • Opportunities to consider a commercial solution • Key strategies for mitigating the risks associated with these ever-increasing global outbreaks in pending contract negotiations www. dlapiper. com 12

Common Law destruction of subject matter No doctrine of force majeure or hardship, frustration most analogous • Consider: • can the fundamental underlying purpose of the contract be met, notwithstanding the supervening event cancellation of expected event death or incapacity • has either party caused the supervening event • does the contract expressly state that the party claiming relief accepts the risk for the supervening event Common Frustrating Events • is the supervening event financial in nature only (e. g. , global financial crisis) • If the answer to each of the above questions is "no", then there may be a prospect of the contract having been frustrated. • Note, answering "yes" to one of the above questions is not necessarily fatal to a claim of frustration, each case should always be considered carefully. • Always consider the terms of the contract, and in particular any force majeure provisions. www. dlapiper. com UKG/98428074 acts of state delay change in law 13

Other contractual/commercial considerations Speakers Anne Friedman Of Counsel Los Angeles, USA anne. friedman@dlapiper. com www. dlapiper. com UKG/98428074 14

Additional Contractual Considerations Whether express or implied, every contract under common law includes the concept of good faith and fair dealing Duty to Mitigate • With COVID-19 infiltrating almost every common law jurisdiction, the parties on both sides can argue that given the global pandemic that the parties are acting in good faith to perform their obligations, subject to the conditions and mandates in place in their jurisdiction. • Whether express or implied in an agreement, each party has a duty to mitigate damages. In light of the COVID-19 scenario, mitigation is interpreted widely subject to contractual limitations (e. g. , work from home, deal with the supply chain available, work within local mandates). www. dlapiper. com UKG/98428074 Obligations of an Employer to Provide a Safe Working Environment • Certainly in the US, and likely in most jurisdictions, an employer must provide a “safe” working environment. Many US (and global) legal mandates have required workers not to go to the office. 15

Additional Contractual Considerations Continued • Supplier Refusal to Perform – aka Contract Repudiation • It is likely that in many cases – a vendor cannot require its personnel to perform in unsafe working conditions (which links to the prior bullet) • A customer could argue that the vendor’s failure to perform equates to refusal to perform • However, a vendor would likely argue either that force majeure, compliance with laws, or unsafe working conditions would counter and overrule the customer’s repudiation position • The ultimate conclusion is likely based on the actual contractual verbiage and BC/DR plan • As noted in prior discussion, Relief Event or Force Majeure will likely factor into this discussion www. dlapiper. com UKG/98428074 16

Impact on outsourced services Speakers Scott Thiel Partner Hong Kong scott. thiel@dlapiper. com www. dlapiper. com UKG/98428074 17

Impact on outsourced services in a legal context • Heavily people intensive business • Strains on IT resources and difficult decisions for employers and employees: • Risks of heightened exposure • Revenue and wages • Potential liability for employers if employees get sick • Ability to access facilities: • Stage 1 -3 lock downs • Public transport • Illegal gatherings • Infosec strategy linked to controlled On-Prem delivery centers, not WFH • Shaping the Curve - Balancing the challenge of Today against Post Business objectives www. dlapiper. com UKG/98428074 18

Asia perspective Speakers www. dlapiper. com Kit Burden Scott Thiel Partner London, UK Partner Hong Kong kit. burden@dlapiper. com scott. thiel@dlapiper. com UKG/98428074 19

Focus On China • Rapid Growth in China Tech Outsourcing Market • China lock down Late January to Mid March - Supply Side problems • Force Majeure certificates issued by the China Council for the Promotion of International Trade • Purchasing managers’ index (PMI) fell by more than half to an all time low of 26 • The importance of “Guanxi” not litigation • The Curve has flattened - Mid March onwards • Demand side problem may keep PMI low? • Ruthless Focus on Back to business Question: future prospects: • US trade war / de-globalization head winds • Massive Technology Skills base and strong Culture of innovation will be hard to resist? www. dlapiper. com 20

Focus On India • India has long been a global COE / engine room for outsourced services • IBM for example has more employees in India than it has in the US • As from 24 March, India has “locked down” harder and further than most other countries, globally • Implications: • Service centres where remote working is not possible • Limitations of ability of providers to source lap tops for ALL employees, simultaneously • Practical limitations in terms of domestic network infrastructure • Impact re compliance with customer specific policies and security requirements Question: future prospects: - More outsourcing to save costs, or fewer projects owing to financial pressures? www. dlapiper. com 21

Commercial Contract Tools and Realities Speakers Kit Burden Partner London, UK kit. burden@dlapiper. com www. dlapiper. com UKG/98428074 22

Specific Nuances of Outsourcing Agreements 1 BCP/DR obligations 2 It’s not just the Force Majeure Clause you need to look at…. 3 4 5 Excused Event/Relief Notice provisions Obligations to proactively notify Step In Rights Variations and Change Control But the force majeure clauses will often be “beefed up” in outsourcing contracts too…. www. dlapiper. com UKG/98428074 23

Excused Events/Relief Notices Usually sit SEPARATE from the force majeure clause, and cover: Failures by the customer to comply with their obligations Relief will then often be conditional upon contemporaneous notice being given Obligations to seek to mitigate/avoid the impact, and recommence performance asap KEY QUESTION: Will a non performance by the Customer due itself to an FM event such as COVID-19 fall under this provision, or under the separate FM clause…? Question as to whether clause will then allow for recovery of costs as well as relief re non performance www. dlapiper. com UKG/98428074 24

Step In Rights Provisions allow a Customer to “step in” to re-take responsibility for the provision of the services How long does the Customer have to wait? Who bears the costs? DO the “triggers” include COVID-19 style service impacts? What happens when any time limit is met? Eg hand back, or termination? www. dlapiper. com UKG/98428074 Is there a limit on duration? What happens re the charges in the meantime? 25

Variation and Change Control Outsourcing contracts will often have a set process for agreeing contract variations Current trend = for parties to seek to agree variations owing to impact of COVID-19 Can cover a limited time period if necessary Why? May provide a greater degree of certainty as to outcome www. dlapiper. com UKG/98428074 May avoid potential disputes down the line Shows “partnership” in practice From a service provider perspective, may avoid the less palatable aspects of invoking force majeure…. ! 26

Pricing/Commercial Impacts Outsourcing contracts will also frequently have quite complex pricing arrangements, which may themselves be impacted by COVID-19 Flexible pricing re volumes of customer requirements FTE pricing – still chargeable even if FTE’s not productive/available? Minimum Revenue/Volume Commitments Would a Customer be able to assert Force Majeure as a reason for not meeting a MRC…? Potential uplift in costs/supply chain for the Supplier www. dlapiper. com UKG/98428074 27

Challenges facing customers and suppliers Speakers www. dlapiper. com Anne Friedman Vinny Sanchez Of Counsel Los Angeles, USA Partner Los Angeles, USA anne. friedman@dlapiper. com vincent. sanchez@dlapiper. com UKG/98428074 28

Challenges Facing Customers and Suppliers Governance / Vigilance in Hyperdrive What customers are thinking? 1. 2. 3. 4. 5. 6. Financial wherewithal of supplier Adequate assurances of performance WFH security risks Prioritizing resources and performance Compliance with government orders Offensive tactics. . . What suppliers are thinking? 1. 2. 3. 4. 5. 6. Ability of customer to pay / potential insolvency risk Requests for Relief / Waivers / Consents Balancing security vs performance Allocation of strained resources Juggling govt orders targeted at supplier and different orders impacting customers Defensive tactics. . . COLLABORATE www. dlapiper. com UKG/94194555. 1 29

Business Continuity and resilience Speakers Vinny Sanchez Partner Los Angeles, USA vincent. sanchez@dlapiper. com www. dlapiper. com UKG/98428074 30

Business Continuity and Resilience Top Considerations in the Age of Viral Outbreaks 1 1. What are the express contractual BC/DR obligations? 1. What may be some implied BC/DR obligations based on best practices / industry standards and related reps/warranties to perform in relation to those? 2 3 Key Questions 1. What is the relationship to force majeure, step-in, SLA performance and other provisions? 1. What is the capability to staff BC/DR given government shut-down orders? Is BC/DR an essential service / business or supporting one? 4 What is the strategy for accessing critical data resources in light of potential pandemic consequences? 5 6 7 www. dlapiper. com 1. What is the strategy for accessing source code escrows? Are they up-to-date? Have “release conditions” already been triggered? What are the potential security implications of invoking BC/DR and WFH? UKG/98428074 31

Business Continuity and Resilience Top Considerations in the Age of Viral Outbreaks What to do? It’s not too late! 1 2 3 4 5 • Evaluate what constitutes a “Disaster” under current plans • Re-examine non-tech aspects of BC/DR strategies (e. g. , WFH, govt shut-downs, quarantines) • Consider allocation of resources and prioritize • Re-evaluate concentration and country risk (e. g. , border lock-downs, ability to migrate to alternative delivery centers) • Evaluate security implications of invoking BC/DR under various scenarios www. dlapiper. com UKG/98428074 6 7 8 9 10 • Confirm escrows are up-to-date and whether release conditions have been triggered • Confirm there is a strategy in place for retrieving data (e. g. , from Xaa. S providers) • Consider communication strategies with customers and suppliers • Implement “Germ Games” • Elevate Business Continuity and Resilience in an outsourced governance framework 32

A practical scenario Speakers Kristof De Vulder Paul Allen www. dlapiper. com Partner Dubai, UAE Partner Brussels, Belgium paul. allen@dlapiper. com kristof. devulder@dlapiper. com UKG/98428074 33

COVID-19 Challenging times, difficult circumstances, unprecedented www. dlapiper. com UKG/98428074 34

What do I do? Consider Context Legal Analysis Facts, Contract, Law www. dlapiper. com Relationship, Risk, Dynamics, Value and Values UKG/98428074 Generate Options Customer vs Supplier Agree Strategy Execute What steps, what order, when and with whom? How do we protect ourselves? What happens if things go wrong? 35

A perfect storm • Both customers and suppliers face huge challenges as a result of the pandemic: • Many companies invoke force majeure or frustration • IT projects become distressed • This will inevitably lead to • Contractual tensions • Risk of termination • Technology disputes www. dlapiper. com 36

Review the exit provisions • Examine which termination rights exist: • Is there any right for either party to terminate for convenience? • May a party claim relief under termination for cause provisions? • Are there any potential cure periods and notifications, including as they may relate to notice and termination rights under the force majeure provisions? • What are the options for nonrenewal, especially if there automatic renewal provisions or you are otherwise closing in on a renewal period or notice requirements associated with a renewal • Determine the exit rights and obligations in relation to • Assets; Third party contracts; IP; Data and records; Knowledge transfer • Termination assistance and post termination obligations www. dlapiper. com 37

Anticipating tech disputes The way forward • Identify and anticipate any possible tech disputes • Take measures to minimise risk • Take action before the situation escalates • Start negotiations before matters become too tense www. dlapiper. com 38

Resolving tech disputes Things to consider if the matter gets contentious • Identify persons involved • Consider issues central to the dispute • Check dispute resolution provisions and time limits • Risk, regulatory and reputational issues • Value/cost/benefit • Team • Correspondance and privilege Watch out for our « Top tips for dealing with Tech Disputes » www. dlapiper. com 39

Future of outsourcing Speakers www. dlapiper. com Vinny Sanchez Kit Burden Partner Los Angeles, USA Partner London, UK vincent. sanchez@dlapiper. com kit. burden@dlapiper. com UKG/98428074 40

Future of outsourcing No doubt that we are at a “Before and After” threshold…. The Pessimistic view The Optimistic view • Seismic impact upon service providers in terms of period of disruption itself • Confidence shaken in delivery model amongst impacted customers • Pandemic reinforces nationalist movements • Further “hit” for service providers through decline in spend on discretionary tech projects for years to come • Outsource industry proves capability to function in the most extreme of circumstances • Shift in delivery models opens up new markets / opportunities • Digital adoption goes into hyperdrive to insulate vs similar pandemics resulting in greater investment in IT • Cost cutting leads to increased use of outsourced solutions www. dlapiper. com UKG/98428074 41

Closing remarks Speakers Mark O'Conor Partner London, UK mark. oconor@dlapiper. com www. dlapiper. com UKG/98428074 42

Key take-away points • We are all in this together • Short term vs long term intentions – what is the business dynamic? • Do the reasons for the outsource still exist? • In assessing the impact on the commercial relationship – context matters; what is impacted? • Secondly, in a business to business environment, the contract words matter (not just the FM clause) • But the contract words will be impacted by local law • Be systematic – gather facts, create options, plan the engagement (and plan B) www. dlapiper. com UKG/98428074 43

Q&A www. dlapiper. com UKG/98428074 44

CLE Credit Code: J 55412 - 2417 For more information please visit www. dlapiper. com/coronavirus Please note: This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction. www. dlapiper. com UKG/98428074 45