Just like most contracts, a technology agreement will eventually reach an inevitable moment where it ends, whether it is because the agreement has run its full course and is set to expire, or because one party has decided to exit the arrangement by exercising its right to terminate the contract.
Typically, in the case of technology agreement, frustration towards the vendor or the product is usually the reason why a customer chooses to cease using a technology product and to get out of the contract. Let’s face it, if the products and the services provided by the vendors are excellent and reasonably priced (yes, pricing is also often a huge element influencing the decision of customers), even after the expiry of the agreement, the customers would still be looking to extend or renew the engagement.
From a commercial perspective, that instinct is entirely understandable. If there is a better or more suitable product in the market, or a comparable product but with more reasonable pricing, it makes perfect sense for a customer to consider the available alternatives. But from a legal standpoint, the consideration is far less straightforward. Just because there is an intention to exit a technology contract, it does not necessarily mean you are able to do just that. Legal counsels will often have to answer this question – do the companies actually have the right to get out of the technology engagement immediately?
There is a common assumption in many organisations that contracts can be exited whenever the relationship is no longer working. In reality, however, most organisations will find themselves in a position where they are unable to exit an agreement immediately as they wish. This is because most technology contracts are structured very differently and are designed to ensure continuity of the relationship, instead of flexibility of exit (although they might present an illusion that exit is going to be easy).
This means that once the contract is signed, termination is no longer simply just a commercial decision alone, it becomes a legal exercise constrained by the four corners of the contract itself.
In this article, we are going to briefly discuss the three primary exit routes provided in most technology contracts and share some of the common pitfalls and complications that we have seen in our experience working with technology users and technology solutions providers in their IT projects. Each of these exit routes may appear straightforward on paper, but in practice they come with their own sets of limitations.
Termination for Cause
Termination for cause is the most commonly relied upon route for termination, and it is unsurprising that it is also the one that gives rise to the most disputes.
When it comes to exercising the right to terminate a technology contract for cause, the contract itself will typically require for there to be a material breach on the part of the vendor, a formal notice of such breach to have been provided by the customer to the vendor, and that the vendor to be given a cure period to remedy the issue. Essentially, the contract creates a mechanism where several layers of requirements need to be fulfilled before the customer can exercise the right to terminate the agreement for cause. Of course, this itself is not the issue, similar mechanisms are frequently found in many other non-technology contracts.
The difficulty to rely on the provision on termination for cause to exit a technology contract is largely contributed by the nature of modern technology vendors these days. Many large technology providers today operate mature, standardised platforms, have well-developed internal processes, and are experienced in managing contractual performance. As a result, they are often able to maintain performance just above contractual thresholds, respond quickly to breach notices and eventually implement remediation measures within the designated cure periods. Take service levels as an example. Uptime guarantee is usually carefully calibrated and negotiated by the technology providers such that the commitment falls right at the comfort level of the service providers, and adequate resources will always be maintained to ensure that contractually agreed incident response and resolution time can be met. At the same time, the technology contract will normally be drafted such that “material breach” triggering termination for cause requires repeated or consecutive failures (usually breaches of the same service levels back-to-back for 3 – 6 months consecutively). The result is that even where performance is frustrating from a business perspective, it may still fall short of constituting a material breach capable of triggering right to terminate for cause.
Depending on which side of the coin we are on, mature services and stable performance are of course desirable. However, this same stability can also become a constraint in scenarios where customers wish to pivot to more cost-effective solutions or to different provider simply because the existing arrangement no longer aligns with business strategy. In such cases, the vendor’s ability to consistently meet contractual thresholds makes it difficult to establish a basis for termination for cause.
The position may differ when dealing with smaller or less mature technology providers. Their performance standards may be less consistent, thereby making it relatively easier to invoke the right to terminate a contract for cause. However, a different challenge may arise in justifying if a breach can be characterised as material, especially where the contracts do not clearly define when breaches are considered material. Vendors may argue that the failures are minor or remediable, or allegations may be raised that issues are caused by customer misuse or external factors. As a result, even in cases of underperformance, the right to terminate for cause may remain uncertain.
Termination for Convenience
Termination for convenience is often viewed as the “cleanest” exit option in contract. Customers can exercise their rights to terminate a contract without having to prove breach or needing a cause for doing so.
In our experience, however, a termination for convenience clause is not always readily available in a technology contract. Precisely because the ease with which such a clause provides to the customers for them to terminate a relationship, vendors frequently resist such a clause so that the engagement is more certain.
Even where termination for convenience is contractually allowed, they usually come with some conditions – termination fees representing a percentage of the fees payable for the remaining unutilised portion of the services or product subscriptions; allowing the vendors the right to recover all upfront costs or investments; or minimum commitment periods (first 3 – 5 years for example) during which termination for convenience cannot be exercised.
We have even seen instances where a vendor allows termination for convenience of one of its software subscriptions, but only on the condition that all other subscriptions within its software portfolio are also terminated at the same time. This is particularly common in environments involving integrated or interdependent software suites and where there are mission-critical systems. In such scenarios, while termination for convenience is contractually available, exercising it would require the customer to migrate multiple systems simultaneously, transition large volumes of data across different workstreams, and to replace interconnected functionalities in parallel. The operational burden can be significant.
These mechanisms surrounding termination for convenience are deliberately structured to protect the vendors’ commercial position and to discourage early termination. The result is that while termination for convenience may exist legally, it may be commercially impractical. This is often what we call the “illusion” of convenience.
Expiry of Contract
When all else fails, there is still the good old exit strategy – allowing a contract to run its course and expire on its own. However, if you think that this route is the safest, think again. Depending on the type of technology solution subscribed to, the contracts may include auto-renewal clause or strict notice periods for non-renewal. Failure to comply with these requirements can result in the subscription or the contract being renewed or extended automatically, thereby delaying exit by another contract cycle. Unless there is mature contract lifecycle management practice in an organisation, many businesses only begin thinking about exit after automatic renewal has already been triggered.
In another one of our experiences, a software subscription agreement makes it a condition that the customer deletes all copies of the software from its environment (both production and testing environments) before a non-renewal notice is considered effective. The customer issued a non-renewal notice 3 months prior to the expiry date of the agreement, but it was subsequently found out by the vendor during an audit that the customer retains a copy of the software for an additional month pursuant to its internal business continuity protocol. This gave rise to a demand from the vendor for automatic renewal of the software subscription for an additional subscription cycle.
The experience showcased the importance of ensuring that all contractual obligations on exit are met, even when it comes to letting a contract expires.
Avoiding the Exit Friction
Even where a contractual right to terminate or exit an agreement exists, that does not mean exit can be executed smoothly. There is a critical distinction between the right to terminate and the ability to disengage.
During contract negotiation, it is important for the legal team to approach exit as a designed outcome. This begins with asking the right questions upfront – are termination triggers realistically achievable and aligned with the commercial objective of the company? Is there a viable termination for convenience option? What are the conditions or consequences of exit?
The battle for a strong position to disengage is not just one for the legal team, but a joint war with the business unit and software end users. It is essential for there to be an alignment between the commercial objectives of the company and the approach to contract review to ensure executable and realistic exit options.
The Technology Practice Group at Halim Hong & Quek frequently advise and assist clients in their technology outsourcing endeavours, whether it is on-premises solutions or cloud-based offerings. If you have any questions or would like to enquire about our services, please feel free to reach out to the partners and co-heads of the Technology Practice Group, Lo Khai Yi and Ong Johnson, for more information.
Our Technology Practice Group continues to be recognised by leading legal directories and industry benchmarks. Recent accolades include FinTech Law Firm of the Year at the ALB Malaysia Law Awards (2024 and 2025), Law Firm of the Year for Technology, Media and Telecommunications by the In-House Community, FinTech Law Firm of the Year by the Asia Business Law Journal, a Band 2 ranking by Chambers and Partners and a Tier 3 ranking by Legal 500 on FinTech, as well as a Tier 4 ranking by Legal 500 on Technology, Media and Telecommunications.
About the authors
Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”), Technology
Acquisition and Outsourcing, Telecommunication Licensing and
Acquisition, Cybersecurity
ky.lo@hhq.com.my.
◦
Ong Johnson
Partner
Head of Technology Practice Group
Fintech, Data Protection,
Technology, Media & Telecommunications (“TMT”),
IP and Competition Law
johnson.ong@hhq.com.my
More of our Tech articles that you should read:
