What actions can we take with a provider who is breaching contractual obligations?

Friday, February 12th, 2016

When a service provider accepts a contract, they are aware of their contractual obligations. They will also be aware of the consequences when they fail to meet their obligations. The purpose of the contract will be set out in the service specification. The recipients of a service will, rightly, expect the Provider to undertake the services in full, not in part.

The purchasing organisation (the buyer) has options when dealing with a Provider who is failing to meet their obligations. One option is to ignore the situation and acquiesce in the default. This is unprofessional. The next option is to examine the contract provision for the defaulting Provider to submit a corrective plan for approval by the buyer and, when approved, to implement the corrective plan. A well drafted contract will include provision for the buyer to claim agreed damages. These damages are probably likely to be liquidated damages or the provision of service credits. The ultimate option is to terminate the contract, recognising that there are consequences, not least implementing ‘Plan B’, always assuming that the buyer has ‘Plan B’ in place.

When the Provider is in default, the buyer should send a formal notice that the default has occurred and, depending on its seriousness at least request the corrective plan. Legally, some defaults are so serious that they are incapable of being corrected and therefore termination is the only option.

A procurement specialist should be in a position to advise, perhaps with in-house legal advice, what the consequences are of termination. The consequences may include the buyer paying for the transfer of IT systems where the intellectual property resides with the Provider. The situation will be far from straightforward when there is only one service Provider and no credible alternative exists. The impact of the contract default will then have to be assessed in relation to the nature of the service provision. When the health of individuals is compromised this can expose the buyer to legal claims. This is a situation to which a buyer does not want to be exposed to.

Our recommendation is to deal immediately and comprehensively with the non-performing Provider. This may mean escalating the issue to the most senior level at the Provider. Most Providers do not want a scenario where their reputation is at risk, nor, frankly, do they want a situation where their profit is compromised.