Contract Corner: Change Management in Commercial Contracts (Part 1)
While a primary goal of any well-crafted commercial agreement is durability—terms that work for the life of the agreement—the only certainty in the course of a long-term commercial relationship is the inevitability of change. Once a customer has become dependent on a third party for essential goods or services to operate its business, an unforeseen shift in its business requirements or a change to applicable laws can create holdup problems for customers, leading to costly renegotiations of the original agreement. The right change management mechanisms can manage these risks by allocating the responsibility and costs for changes and creating clear and effective procedures for managing and implementing changes to the agreement.
An important mechanism to allocate responsibility for changes and mitigate the risk of holdups or service disruption is to designate certain changes as mandatory—changes neither party may refuse to implement. Especially in outsourcing agreements and other complex or long-term service agreements, customers should ensure that the following changes are designated as mandatory changes, subject to processes to allocate additional costs applicable to such changes:
Changes to Laws. If there is a new or modified law or regulation applicable to the customer’s business or the services, any change to the services that may be necessary to effect compliance with the new or modified law should be designated as a mandatory change.
Changes to Customer Policies. If the customer makes a change to its policies, compliance with the updated policies should be mandatory in order to maintain consistency in the application of those policies, to the extent applicable to the vendor.
Additional Services. Generally, any additional resource or service that is covered by the scope of the existing services should be designated as a mandatory change. By contrast, new services that are not included in the existing scope of services are typically designated as permissive changes that the service provider may offer to provide but is not required to implement unless the parties come to an agreement on the new scope.
Allocating the Cost of Changes
Just as important as designating when and how a change must be implemented, change management mechanisms should also specify, for each change category, which party will bear the cost of the change and, if a change is subject to additional fees, how those fees will be determined.
Allocation the Costs of Changes to Laws. In general, the cost of changes required to comply with laws that are generally applicable to the service provider or service provider’s customers generally should be borne by the service provider. This should also apply to changes to policies where they are made to comply with changes in laws that are generally applicable to a service provider’s customer base.
New and Additional Services. New and additional services that are specific to the customer are generally subject to additional fees. The fees applicable to additional services should be provided at the existing rates under the agreement, or, if those rates do not apply, the agreement should specify that the rates will be reasonable and negotiated by the parties in good faith.
Evolution and Improvements to the Services. In outsourcing agreements and other long-term service arrangements, service providers are typically expected or required to supplement and enhance the services over time to keep pace with technological changes and improvements to service delivery methods. Any changes to the services made in fulfillment of continuous improvement obligations or otherwise rolled out to the service provider’s other customers generally should be borne by the service provider and not be subject to additional fees.