When entering into a contract or agreement to provide or receive IT services, you will likely be thinking about:

What you may overlook is what happens if you want to get out of the agreement. Almost every agreement for IT services will include rights to terminate the agreement. When drafting and negotiating your agreement, you should make sure these terms for terminating the agreement are right for you and your business. This article will explain termination rights and what you can do if you want to terminate an IT services agreement. 

What Does it Mean to Terminate?

Terminating means ending the agreement between you and the other party. This means that any written agreement for providing or receiving IT services should end and you will be released from your obligations under the agreement.

However, it is important to note that many agreements will state that certain clauses will continue even if the agreement is terminated. This means there may be some obligations you must continue to carry out. However, these are usually passive obligations rather than active obligations.

For example, a passive obligation might be continuing to keep certain information confidential.

However, it is also possible to have active obligations that continue to apply. For example, an agreement for IT services may set out certain tasks that the supplier must carry out to help the customer transition away from the supplier’s services. You will need to identify if there is a term similar to this in your agreement and act accordingly.

What Are the Most Common Termination Rights?

There are a number of rights which can be drafted into an IT services agreement to allow for termination of the agreement. The table below lists the common termination rights and what they generally mean. To access these rights, you will need to ensure that they are stated accurately in your agreement. An IT lawyer can assist you with drafting these or reviewing your current rights.

Please note the following table is only a guide on the types of termination rights and what they often mean. The terms in your agreement may be different so always check.

Termination Right

What Does This Mean?

By Agreement of the Parties

  • If both of the parties agree to end the agreement, it may be terminated.
  • This clause should state that this agreement must be in writing.

For Convenience

  • If one party wants to cancel because they no longer want to be part of the agreement, a clause may provide that this party can terminate.
  • Usually, this will require a notice period and notice in writing.
  • Sometimes, a party will only be able to use this right after a certain period of time.
  • It may be available to both, or only one party.
  • This can attract a ‘termination for convenience fee’. 

Breach Which is Incapable of Remedy

  • This means a breach of the terms of the agreement which cannot be fixed.
  • For example, if you share confidential information and this is prohibited under the agreement, this cannot be reversed. Retracting the information is impossible.
  • This type of clause will not require notice to terminate the agreement.

Breach Which is Capable of Remedy

  • This means a breach which can be fixed if the party who breaches the agreement gives notice.
  • For example, if a customer fails to pay their fees but tells the supplier that they will pay soon, the supplier cannot terminate the agreement.
  • However, if the customer still does not pay the supplier, the supplier will likely be able to terminate.

Change of Control

  • Change of control allows termination if the other party changes their identity. For example, if someone sells their business and a new owner takes control.
  • An agreement may include this right where one of the parties to the contract requires a degree of trust in the other party to be able to provide or receive the services.
  • Following a change of control, any due diligence may be irrelevant. Therefore, the party that completed this due diligence may want to terminate.

Insolvency

  • Where one party becomes insolvent, there may be a right to terminate.
  • In contracts from 1 July 2018, there is a requirement to allow a period of time before terminating for an event of insolvency.
  • As a result, other termination rights such as the right to terminate for breach or convenience are even more important.

Termination of Another Related Agreement Between the Parties

  • The agreement may note that it will be terminated if another agreement is terminated.
  • For example, if a software as a service agreement is terminated and there is a separate service level agreement which applies to the software as a service, it will make sense for the service level agreement to also terminate when the software as a service agreement terminates.

Preparing For Termination

1. Figure Out What You Want

The first step in preparing for termination is to negotiate termination clauses into the agreement which meet your needs. To ensure the termination clauses meet your needs, you should reflect on various scenarios that may play out and what outcome you would like to have in each of those scenarios. At this stage of the process, it is worth consulting with a range of people in various roles across your business.

2. Engage a Lawyer to Assist in Getting What You Want

To make sure you have termination clauses which operate the way you want them to, you should engage a lawyer to help draft and assist you with the agreement. The lawyer can then also assist with the negotiations.

3. Look at the Agreement For Any Other Required Preparations

Once the contract is in place, you should check whether you have any obligations that you should carry out in preparation for termination. For example, if you have a termination assistance clause.

If you are the supplier, you may have an obligation to assist the other party to terminate. You should set out this assistance in a plan, scope or statement of work document.

Sometimes, there will be a timeline outlining the termination assistance details. Even if there is not a timeline, it is best to put this termination assistance plan in place shortly after the agreement negotiations because the communication channels are active between the parties.

Furthermore, it is beneficial to settle your plan early as you don’t know when you might want to terminate. If you are the supplier, once you have a settled plan in place, you are clear on your obligations following termination. Alternatively, as a customer, you are confident in the assistance you will receive to transition away from the provider’s services if termination occurs.

You Want to Terminate – What Now?

Before terminating, you should exercise caution and make sure you know that you can terminate under the agreement. Be specific about the reason to terminate and which termination right you are relying on. For example, if you are terminating for a breach, you need to assess whether this is a breach that you need to give the other party an opportunity to fix before you can terminate.

In addition, it is best to document any evidence you have about why you wish to terminate and any correspondence relating to a breach or termination.

If you are unsure, you should always seek legal advice to avoid a dispute about whether you have improperly terminated the agreement. With legal advice, you can understand whether you have a right to terminate and whether there are any notice requirements setting out how you need to communicate your termination to the other party.

Key Takeaways

Whether you are going to be providing IT services or receiving them, you will need to consider how the agreement will end and how you can get out of the agreement if something goes wrong. For these reasons, it is important to start planning for termination during the drafting and negotiation phases.

If you would like to talk to an IT lawyer to help you negotiate an agreement that works for your business, you can contact LegalVision’s IT lawyers on 1300 544 755 or fill out the form on this page.

Jacqueline Gibson
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