11 March 2024
11 March 2024
A service agreement like any other type of contract can be ended or terminated. This can involve certain actions that must be taken subject to the provisions of the service agreement. This guide can enlighten you on the steps on what to do when you decide to end a service agreement including what to do in case of disputes between the client and the service provider.
A Service Agreement is a contract wherein one party, the service provider, agrees to provide, perform, or render certain services to the other party, the client. The services can be a one-time service such as being a clown for a birthday party or painting a room or it can be a continuing service such as writing an article for a blog or providing accounting services.
The relationship between the service provider and the client is that between contracting parties which means their relationship is based on and is governed by what is provided in the service agreement. The provisions in a service agreement include how the services are rendered, the causes for termination of the agreement, the costs or fees for rendering the service, and other conditions or clauses that may protect the rights of the parties.
This should be differentiated from an employment contract, as an employment contract is one where the employee is under the control and supervision of the employer, while in a service agreement, the service provider (which is also called an independent contractor) has autonomy or independence in the manner by which his services are rendered. The following contracts are examples of service agreements:
In the above examples, the service provider is not considered an employee but is an independent contractor who has independence and autonomy concerning the performance of his work or services.
For an extensive explanation of the difference between a service agreement and an employment contract, the following guide can be visited: The Difference Between Independent Contractors and Employees.
On that note, the steps on how a service agreement can be terminated are discussed below.
The first step to determine the manner by which a service agreement can be terminated is to check for clauses stipulated in the service agreement about termination which are also called termination clauses.
If the service agreement does not have any termination clause, it is important to look for the term or duration of the agreement. The agreement will expire or will be completed after the end of the term or duration. This is further explained in Section 3.4.
The circumstances under which either party can terminate the agreement include but are not limited to those explained in the succeeding paragraphs.
3.1 Termination for convenience
This clause allows either party to end the agreement without cause or for no reason.
The service agreement usually provides for a period to be followed before the termination becomes effective.
Example: Company A engages Company B which is a marketing agency. Company A decides it no longer wishes to pursue the services of Company B. The service agreement provide for a 30-day period that should be followed before the effective date of termination. This is a case of termination for convenience as there is no apparent reason for the termination.
It must be emphasized that the parties are free to agree on the number of days for the notice period and this may depend on their respective circumstances. Usually, the notice period is 30 days.
A service agreement can be terminated if there are provisions in the contract that were violated by either the client or the service provider. This is termination for cause
Example: Company A found that Company B has been subcontracting Company B's services. Under the service agreement, this is prohibited. In this case, if the service agreement is terminated, it will be "for cause".
If there is a specific obligation under the service agreement that was violated or not complied with by the service provider or the client and this is stated in the agreement, it can result in the termination of the service agreement.
Note that the service agreement may provide that there be a specific number of days within which the violated specific obligation be fixed or remedied, if it can no longer be fixed, the contract will be considered breached and thus terminated.
In essence, if the said specified obligation is violated by either the service provider or his client and can no longer be fixed or remedied, this already amounts to a breach of contract. In other words, when there is termination for cause, there is a breach of contract.
Breach of contract occurs when there is a material violation of the provisions of the service agreement by either the service provider or the client. A breach of contract does not necessarily mean that there can be a case that is brought to court as the parties can mutually agree that the termination ensues without the intervention of a court. If a case is filed in a court of law concerning said breach, it entails the remedies included in the succeeding paragraphs that may be obtained from the court.
Note that there are other remedies that may be availed of without resorting to the termination of the agreement which is explained in Section 4.
These types of clauses are those where after a duration or term such as a period of one year, the agreement can be renewed automatically. If applicable, the parties must be aware of any automatic renewal clauses and the procedures for opting out.
Opting out of the service agreement means that either party can notify the other that they no longer want to renew the service agreement.
The term or duration of the agreement generally lasts for at least a year. And there is no hard-and-fast rule as to how long it lasts, as the parties can agree on this matter and include the same in the service agreement.
This is the simplest manner by which a service agreement is terminated. This occurs when the term or duration of the service contract has been completed, and this is also called the expiration of the contract.
This can be determined by simply reading the clause showing the term or duration of the contract or the date when it expires.
While generally, there are no specific requirements before the effective expiration of the service agreement, there may be requirements under the same that should be followed by the parties. This is further discussed in Section 5.
There are remedies that do not result in the termination of a service agreement but can be used by a non-breaching party to fix certain matters in case a dispute concerning the service agreement is brought to a court of law.
Specific performance is defined under the law as the remedy of requiring exact performance of a contract in the specific form in which it was made, or according to the precise terms agreed upon.
For an action for the reformation of the instrument to prosper, the following requisites must concur: (1) there must be a contract; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to express the true intention of the parties is due to certain causes such as mistake, fraud, inequitable conduct or accident.
A service agreement generally has a notice period for termination, this must be followed. This is dependent on the terms of the agreement agreed upon by the parties and the usual period is 30 days. A formal termination letter can be used for this purpose.
If the service agreement will no longer be renewed, then a Notice for Non-Renewal of Contract may be used. On the other hand, if the service agreement is terminated for cause or due to a breach of contract, then a Breach of Contract Notice may be used.
The law encourages the parties to negotiate and arrive at an amicable resolution of disputes before resorting to litigation or bringing disputes in court. This is consistent with the spirit of freedom of contractual relations. An example of a document that can be used to document the negotiation of the parties is a Mutual Release, Waiver, and Quitclaim.
A arbitration clause provides is basically an agreement within the service agreement whereby the parties agree that they will bring any dispute arising from the agreement to the proper arbitral tribunal or arbiter. The decision of the arbitral tribunal or the arbiter is binding and must be followed by the parties. For more information the the law on arbitration may be inspected to check the options of the parties.
Note that litigation (which requires the intervention of a court of law) is more expensive than arbitration, and arbitration usually involves a speedier process. Arbitration is a remedy available if so provided by the service agreement or if resorting thereto is mutually agreed upon by the parties. On the other hand, in the absence of an arbitration clause and the dispute between the parties cannot be resolved by them alone, litigation can be resorted to.
In case the parties do not have any issue with terminating the service agreement, then the steps in the succeeding paragraph should be followed.
Restitution is essentially the act of returning the things that either party received during the effectivity of the service agreement. If termination proceeds, then the parties must return whatever they may have received by reason of the service agreement. An example is if the client provided a laptop from which the service provider can perform his services, such laptop must be returned to the client.
Even if the parties decide to terminate the service agreement, the client must still pay outstanding obligations. Further, if there is a penalty clause in the service agreement for which the service provider may be liable, this must also be settled.
A penalty clause in a service agreement provides for a specified amount of money that should be paid if a party breaches the service agreement or performs an act that is a cause for the termination of the agreement. If there is a dispute concerning a penalty clause, the parties may resort to arbitration (if the service agreement includes an arbitration clause) or bring the dispute to a court of law through litigation.
Claiming the amount of penalty does not always require litigation or arbitration as the parties are allowed to agree on whether or not the breaching party will be liable for penalty without undergoing the process of litigation or arbitration.
After sending the termination letter and completing all necessary steps, confirm with the other party that the service agreement has been officially terminated. After which, a written confirmation or acknowledgment of the termination may be requested by the terminating party to the other.
Ending a service agreement is a painful process but the process must still be undertaken, included here is the proper determination of the cause of termination, whether for convenience or for cause, or whether the service agreement can be renewed or otherwise.
Further, it is important to know the legal consequences follow if the termination is caused by a violation or breach of the agreement, these could be damages as well as penalties. Lastly, it is also important to resort to certain alternative such as negotiation and arbitration if that was agreed upon by the parties.