Dependencies in Technology Integration Transactions, Part 2: Breach Remedies | Morgan Lewis – Technology & Procurement

In Part 1, we discussed what a dependency in technical integration is and how it is handled in contracts. In this issue, we consider how to address the risk that the assisting party does not provide the requested information or assistance.

Causation: Sole vs. Main Cause of Default

If the assisting party fails to provide the agreed assistance, resulting in the failure of the responsible party to integrate, the responsible party shall be exempted from liability. But what if the responsible party facilitated the breach?

Imagine a scenario where the integration process is delayed by two factors:

  1. The assisting party fails to provide the required assistance
  2. The responsible party did not complete the previous dependency on time

the only reason

In technology integration transactions, single-cause language may be pushed by the assisting party, so that relevant remedies would only be triggered if the sole reason the responsible party failed to proceed with the integration was a breach of the duty to assist.

main reason

Instead, the responsible party may push for primary cause language, stating that the responsible party would be released from liability if the assisting party’s breach was the primary cause of the responsible party’s failure to perform.

Non-monetary remedies: time shift, deemed acceptance, service credit freeze

Let us consider the non-monetary remedies available to address donor failure to provide agreed support.

time shift

The responsible party’s integration obligations are usually time-bound, meaning that if the integration (or specific integration milestones) are not completed on time, the responsible party will be in default. The parties agree that when the assisting party violates the obligation to provide agreed assistance, it is reasonable for the relevant time limit to be automatically extended. Occasionally, the parties may agree to add additional days to allow the responsible party to resume put on hold integration activities.

Time-shift clauses are more suitable for contracts where the transferor is responsible for the integration. In contracts where the recipient is the responsible party, time-shifting clauses are of little use unless the parties agree to defer a portion of the consideration and the responsible party’s payment obligations are deferred in the event of a default.

deemed accepted

Sometimes the recipient’s assistance is critical to a successful integration, so the responsible party is justified in pushing for a deemed-acceptance remedy. In such event, if the assisting party materially breaches its assisting obligations, the responsible party will claim that its consolidation obligations are deemed to have been fully and properly performed.

Service Credit Freeze

In complex integration projects, parties may negotiate service-level agreements (SLAs) for integration services. In such cases, it is not uncommon for the responsible party to insist that no service credits will be accrued if the assisting party remains in breach of its assisting obligations.

Monetary remedies: liquidated damages, service credits, price adjustments

If non-monetary remedies are insufficient, the parties may consider introducing monetary remedies, namely liquidated damages, service credits or price adjustments.

liquidated damages

Liquidated damages are most applicable to contracts where the receiving party is the responsible party. When drafting a liquidated damages clause, ensure that the liquidated damages are a reasonable forecast of the actual damages caused by the breach. If the amount of the liquidated damages is found to be excessive – or if damages are easily calculated at the time the contract is entered into – the relevant contract terms may be deemed to be penalties and void.look at our previous post More details on liquidated damages.

service credit

When the scope of assistance is so broad that it is comparable to the scope of integration services, it may be wise to agree on an SLA. In such cases, service credits may be an appropriate remedy. However, be aware of tax and accounting rules, as treating the assistance obligation as a separate service may lead to unintended tax consequences.

price adjustment

A price adjustment is a mechanism in which the recipient attempts to create an incentive for the transferor to achieve a specific outcome of integration. This is especially useful if the success of the integration depends on the transfer of something that is not strictly for sale (for example, active users or employees). In such event, failure of the assisting party to provide the requested assistance will result in an adjustment to the purchase price. For the price adjustment mechanism to work, all parties must first agree on specific key performance indicators (KPIs) for the integration—or develop separate KPIs for separate integration workflows—and incorporate them into the price adjustment formula.

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