Take care to clearly define scope of work in service agreements

By Maryke Sher-Lun & Jan-Hendrik Gous on 28 September 2021

The recent decision in the case of Markit Systems (Pty) Ltd v Fulcrum Group (Pty) Ltd (39734/2018) [2021] ZAGPJHC 36 (8 April 2021) in the Johannesburg High Court again illustrated the importance for a services agreement to clearly define the respective obligations of both the customer and the service provider. This is particularly true for an agreement where the required scope of work is yet to be entirely formulated at the signature date.

Facts of the case

Markit Systems (the service provider) concluded a services agreement with Fulcrum (the customer) in terms of which Markit Systems would develop and support an insurance broker software system to replace Fulcrum's outdated system.

The scope of the project under the contract was to be agreed upon between the parties and recorded in a separate "Business Requirement Document" ("BRD") which was intended to be a schedule to the agreement. The BRD was to set out the customer's requirements after a detailed analysis of its business by the service provider. When the agreement was signed, the BRD schedule was still blank, and it was required of the parties to thereafter agree on the contents thereof and populate the same.

The agreement furthermore entitled either party to terminate the agreement at any time in the event of the parties being unable to agree on the details to be included in the BRD. When such an agreement had not been reached after eight months, the customer duly provided notice to the service provider in terms of which it terminated the contract based on the averment that the BRD had not been agreed.

The service provider in response argued that the failure to complete the BRD was due to the customer's failure to cooperate and to provide the information and data needed to analyse and record the customer's specific requirements. Based on the aforesaid, the service provider argued that it was in fact the customer who breached the agreement and that its purported cancelation amounted to a repudiation of the contract, entitling the service provider to claim damages.

Court's decision

The court found in favour of the customer and held that there was an express agreement between the parties that the work would start immediately after conclusion of the contract. The court referred to clause 2 of the agreement which determines that "Once Markit has analysed and documented Fulcrum's business requirements, both parties shall jointly agree on … a BRD". The court held that there was a positive obligation on the service provider to immediately start the process of analysing and documenting the customer's business requirements in order to complete the BRD.

The court found that the service provider was the party with the expertise and skill required to undertake the work and that it was accordingly required to take the lead with the project. The court held that the failure to agree on the specifics of the scope of work was due to the service provider's failure to comply with its obligations as aforesaid, and that the customer was accordingly within its rights to cancel the contract.

Takeaway

This is a devastating judgement for the service provider which could have been avoided if more care had been taken when drafting the agreement. The case illustrates the importance to formulate the required scope of work as clearly as possible before signing an agreement. The description should contain clear deliverables to be provided by the service provider and the timelines within which the same is to be delivered.

If the parties are unable to fully formulate the scope of work when concluding the contract, it should nevertheless be formulated to the extent possible. Options for a partially formulated scope of work include:

The scope of work can be formulated at a high level, including the basic deliverables and timelines, but subject to amendment by agreement between the parties. This can provide a default position in case the parties are unable to agree on a scope of work at a later stage.
Dispute resolution clauses should be drafted in a manner that sets clear escalation points if the parties cannot reach agreement. The use of expert determination provisions can also be considered.
Clear obligations should be imposed in respect of what is required of each party to cooperate and contribute to finalising such specifications. Either party should only be entitled to terminate the contract if it has complied with the specific obligations imposed on it.
The agreement is split into two separate agreements: an initial consulting agreement and a second services agreement to be entered into at a later stage. The consulting agreement empowers the service provider to prepare a detailed project plan and sets out the required input of the client at certain key points. The parties only sign the second agreement once it is capable of being populated with a scope of work based on the outcome of the first agreement. However, the service provider can recover their time spent preparing the project plan whether or not the client goes on to accept the scope of work.
The parties can enter into a master services agreement ("MSA") without concluding any orders, and the client can then place an order in terms of the MSA once the scope of work is sufficiently clear.
If the client lacks experience in negotiating the scope of work for complex or high-cost services, a third-party consultant can be engaged to help to scope the project. Although this may increase the initial outlay, it may ultimately decrease the total cost of the services as the client will be far clearer on what they need.

Ultimately, although it is tempting to sign an agreement as soon as possible, the time at which both parties are most incentivised to settle the scope of work is in fact prior to signing a services agreement. Signing prematurely can provide a false sense of completion, which can lead to delays in finalising the scope, and in turn delays in the performance of the services, as well as disputes and scope creep. As this recent case demonstrates, the parties should also be mindful that they run the risk of having the agreement cancelled altogether if they are unable to agree upon a scope of work. It is accordingly prudent to delay signing a services agreement until the parties are truly in agreement.

Failing the inclusion of such clear provisions in the contract, either party runs the risk of having the agreement validly terminated based on an open-ended cancellation clause without any recourse.

Please note that our blog posts are informal commentaries on developments in the law as at the time of publication and not legal advice. You should place no reliance on our blog posts; we look forward to discussing your particular matter with you.