Lessons in IT Contracts: Beware of the Cancellation Clause
In Markit Systems (Pty) Limited v Fulcrum Group (Pty) Limited, the Gauteng Local Division of the High Court held that the customer was within its rights to cancel an agreement it had with a service provider because the parties had not been able to agree on the scope and details to be included in the schedule to the agreement.
Markit Systems Proprietary Limited (the “service provider”) and Fulcrum Group Proprietary Limited (the “customer”) concluded a written IT-services agreement in April 2017. The agreement required that the service provider develop and support an insurance broker software to replace the customer’s existing and outdated software system.
The agreement did not include the specific details regarding the customer’s requirements and scope of work, but rather, referenced a business requirement document ("BRD") which was a schedule to the agreement. At the time of signature, the schedule containing the BRD was a blank page, save for the title and the parties were to populate the BRD within three months of signature of the agreement.
The agreement included a clause that entitled either party to terminate the agreement immediately, at any time, by written notice to the other party if they could not agree on the details to be included in the BRD. In December 2017, the customer gave the service provider written notice of immediate cancellation of the agreement, on the grounds that they were not able to agree on the BRD. The service provider argued that it was the customer who had failed to meet its obligations in terms of the agreement, in particular, the customer was required to initiate the process by giving the service provider the requisite information and data that would have enabled the service provider to analyse and document the customer's business requirements, and thus the customer did not cooperate in trying to agree on the BRD.
The court held that the express agreement between the parties was that the work would start immediately on conclusion of the agreement, as such the service provider had a positive obligation to immediately start the process of analysing and documenting the customer's business requirements in order to complete the BRD. The failure to agree upon the detail to be included in the BRD was as a result of the service provider's failure to comply with its obligation to analyse and document the customer’s business requirements. Therefore, the customer was entitled to immediately terminate the agreement.
Parties should spend some time upfront and before concluding an agreement understanding and clarifying the scope of work, deliverables and the expected timelines – all of which should be clearly documented in the agreement between them. This will prevent any disagreement or interpretation issues which will arise in the event that the parties fail to agree on the scope of work later.
In general, IT services agreements are a unique category of service agreements and there are numerous considerations that should ideally to be taken into account early on in the procurement and later contracting process. At ENSafrica, we are able to assist in drafting and negotiating different types of technology agreements.
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