Response to consultation on draft Guidelines on the sound management of third-party risk
Question n. 4 for Public Consultation: Is Title IV of the Guidelines appropriate and sufficiently clear?
Paragraph 110 (b) of the draft EBA Guideline, which reiterates paragraph 99(b) of the existing Guideline on outsourcing arrangements EBA GL 2019/2, is likely to be considered inconsistent/unenforceable with the legislation of (at least some of) the Member States.
Paragraph 110(b) of the draft Guideline requires that
“[…] the written third-party arrangement should: […]
”b. set an appropriate transition period, during which the TPSP, after the termination of the arrangement, would continue to provide the function performed to reduce the risk of disruptions; […]”
A. The requirement that a Third-Party Service Provider (TPSP) must continue to provide services after the moment the contract has legally ended (“the termination of the arrangement”), appears to create a legal paradox.
As a principle of contract law in most jurisdictions, the cessation of future performance obligations is both the defining characteristic and the essential purpose of contract termination. This creates a direct conflict:
On one hand, the contract is terminated, and the TPSP is, by law, no longer obliged to provide the services.
On the other hand, the terminated contract must still legally bind the TPSP to provide the service, as mandated by paragraph 110(b).
This apparent conflict cannot be solved by relying on the “surviving clauses” approach. Surviving clauses typically refers to adjacent, non-operational aspects of the contract (e.g. confidentiality, dispute resolution, warranty etc.), and are not intended to maintain the main obligations relating to the ongoing provision of services.
If the “surviving clauses” approach were nevertheless applied to justify the continuation of services, one may observe that the majority of the contract’s operational clauses (e.g. SLAs, pricing, liability provisions, regulatory-induced requirements, terms and condition of the service etc.), would have to survive and only few clauses, if any, are effectively terminated. Consequently, the real legal effect of termination is nullified, as the key operative clauses remain active despite the formal termination of the agreement.
B. On a different note, the legal acts and instruments of the competent authority implementing this paragraph 110(b) may not have a legal force equal to the force of a law adopted by legislative power of a Member State. One may argue that since (i) the principle of releasing the parties from their contractual obligations is expressly stated or otherwise reflected in the main legislation of at least some of the Member States and (ii) the general legal regime of contracts and contractual obligations falls outside the mandate of the competent authority, the respective competent authority’s legal acts and instruments for implementing the guidelines may lack the legal force to supersede or derogate from the provision of the abovementioned main legislation.
Therefore, even if the contracts between financial entities and TPSP may include a clause such as the one prescribed by paragraph 110(b), this clause may be very well considered unenforceable under the law by a court of law, prior, during or after the termination of that particular contract. Such outcome is irrespective if the obligation to provide the services after the termination is expressly written in the contract itself, or if the contract only sets the transition period and then make a reference to the implementing act of the competent authority that states the obligation to perform the service after the termination of the contract.
C. The requirement set out in paragraph 110(b) is likely to cause significant dissensions and deadlocks during pre-contractual negotiations between financial entities and TPSPs. Faced with a clear regulatory mandate, financial entities are compelled to insist on the verbatim inclusion of the clause requiring service continuity after termination. Conversely, a diligent and risk-aware (risk-averse) TPSP may find itself obliged to refuse this clause - or heavily condition it – due to the inherent legal uncertainty and risks it imposes.
Also, the lack of conditional criteria in paragraph 110(b) may pose a risk to contractual equilibrium. As currently drafted, the requirement to continue services after termination does not explicitly condition the TPSP’s obligation upon the financial entity’s continued adherence to its own fundamental duties, such as payment and providing necessary inputs or operational support. While it is true that in some jurisdiction exceptio non adimpleti contractus may constitute a sufficient safeguard for the TPSP during a post-termination dispute, perhaps it is preferable that the paragraph 110(b) expressly state that the mandatory transition period is conditional upon the financial entity’s continued good faith fulfillment of all necessary counter-obligations.
We propose that the transition period take place before the termination of the contract, and not after the termination of the contract.
We respectfully submit these considerations to the attention of EBA and kindly suggest the revision of the wording of paragraph 110(b) of the draft Guidelines, in order to ensure that the requirement is clear, legally sound and enforceable in all jurisdictions of the Member States.