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Back to Basics: Clear termination provisions are a must for master agreements

In this edition of Back to Basics, we explore the importance of having clear termination provisions included in your contracts, specifically in the context of a master/framework agreement (“Master Agreement”). This is the first of a series of articles dealing with the often contentious topic of termination rights in IT contracts.

A Master Agreement is the ultimate agreement between contracting parties. Not only will the Master Agreement govern your relationship with the counterparty, but it will also apply to the services you are providing or receiving pursuant to a service schedule or some other form of subsidiary document which is concluded under the Master Agreement.

With business operations, costs, and profit margins being amongst each party’s focus when contracting, experience has shown that business relationships often deteriorate as a result of either the end-customer being unsatisfied with the services provided to it, or a party not honouring its payment or other material obligations under the agreement. In these situations, the parties will rely on their respective termination rights to exit the service offering or relationship. Such exit rights are generally negotiated in the Master Agreement.

Depending on the extent of the relationship deterioration, a party may want to terminate the Master Agreement entirely, or merely cancel a service (which would usually result in the termination of a service schedule) if it no longer wishes to receive or provide those services, as the case may be.

In order for the parties to exercise their termination rights in a seamless manner, a termination clause should, at the very least, make provision for the following:

  1. termination of one or multiple service schedules, in which case the Master Agreement and the remaining service schedules, if any, will remain valid and unaffected by such termination, and the relationship between the parties can continue under the Master Agreement for the procurement of services in future; and
  2. termination of the Master Agreement in whole, in which case the Master Agreement and all service schedules concluded under it will be terminated, and the business relationship will end.

In both instances, depending on the services, a party should be able to exercise the termination option for various reasons, some of the most common reasons being:

  • in the event of a material breach;
  • if it no longer requires some or all of the services;
  • if the services have been rendered unsatisfactorily (like continuous failure to meet service levels).

Whether a contracting party chooses to terminate a specific service schedule only or the entire Master Agreement will depend on various factors, including the severity of the breach or non-performance, whether such breach or non-performance is repeated, and the extent of the relationship deterioration.

The articles that follow in this series will elaborate on other types of termination rights which may be negotiated as part of a Master Agreement, including the often contentious termination “for convenience” clause, and will also deal with the topic of extraction of services and termination/migration assistance.

The inclusion of a precisely worded and unambiguous termination clause in your contracts, not only ensures that your termination is seamless, but could also avoid unnecessary disputes down the line.

Kayla Ferreira

Corporate Commercial | Senior Associate