Service Agreements Simplified
Note: Readers are cautioned not to rely on this information as legal advice and to always consult with an attorney in their jurisdiction.
Services agreements, and service agreements that set forth levels of service, can help clarify each party’s goals, limit the liability of the parties, and ensure that both parties get the services and payments they expect.
So what does a service agreement contain? And how will it help you in the mong run? Let’s take a look.
1. Description of Services
It is important to clearly define the services that are to be performed, and any deadlines for work product or performance. Without clarity, each party, even in good faith, may have different ideas — but they may not discover this until the work is completed and one party is not satisfied. The more detail about the relationship stated in the contract, the lower will be the risk of misunderstanding or unfulfilled expectations later.
Service levels that are designated for technical or other performance should be set forth in an exhibit to the agreement and stated in detail; these some times also include financial penalties or rewards. There is no set formula for determining these levels and numbers.
2. Payment Details
The agreement should include a provision that states:
- how much is to be paid,
- when it is to be paid,
- what is included in the payment (expenses, taxes, travel),
- procedures for invoicing, and
- penalties for late payments.
3. The Relationship Between Parties
The agreement should include a provision that clearly states that the relationship is not a partnership, joint venture or employer-employee. Since some of these relationships can be implied by law, this is an important provision.
4. Dealing with Confidential Information
The agreement should include a provision that states that:
- the parties will exchange confidential information,
- how that information will be identified and handled,
- restrictions on disclosure and misuse, and
- exceptions to what is included in confidential information.
Depending on whether the agreement is for provision of services or the hiring of a service provider, and which party drafts the agreement, the exceptions may be more broad or more narrow.
5. Ownership of the Work Product
The service provider will want to make sure the agreement does not include a provision stating that the customer owns the work product, so that the Provider may continue to perform similar services for other customers without the risk of legal interference or restriction.
The company that hires the service provider will want to ensure that they fully own the work product and that the agreement contains the legal language as required by copyright law.
In either case, the owner of the work product may agree to give a license to the other party to address its required uses.
6. Outline of Representations and Warranties
These may include the following or other warranties:
- That the service provider will re-perform defective or non-conforming services for a time period indicated
- That the services will be performed at or above industry standards
- That the service provider will not infringe third party rights in performing services
- That the service provider is not violating any other agreement by performing services
The type and number of warranties included will depend on whether the agreement is drafted by the service provider or hiring company. The service provider should be sure to include the correct legal language, in the correct font size (no I’m not joking) to waive the warranties implied by the Uniform Commercial Code.
Despite its name, the Uniform Commercial Code varies by state, but generally is uniform nonetheless. The UCC implied warranties include:
- that the item will do what it is intended to do,
- that it may be fit for a particular promise if so stated,
- that it does not infringe third party rights and
- that the seller has proper title to sell the item.
7. Details of Indemnification
The hiring company should ensure that the agreement contains a provision stating that the service provider will indemnify the company for any breaches of the warranties.
Indemnification means that the provider will have to pay the company for any third party litigation costs that result from its breach of the warranties.
8. Identification of the Limit of Liability
The service provider should include a provision that limits its liability to the maximum amount it receives under the agreement, and for both direct and indirect damages. This wording must be attorney-drafted to be effective. Properly drafted, this is an extremely beneficial provision to lower risk.
9. Outline of Term and Termination
The agreement should include a provision that outlines how long the agreement will be in effect, and the options and results for termination.
10. Insurance Details
The hiring company should require a minimum level of insurance coverage from the service provider so that it can be sure that any negligence or liabilities are financially covered.
11. The ‘Force Majeure’ Clause
The service provider should ensure inclusion of a force majeure clause. Loosely translated from the French, this means a ‘superior force’.
A force majeure clause means that in the event of war, acts of God, strikes, weather and other uncontrollable forces, the parties are excused from performing.
12. Rules for Non-Solicitation
To protect both parties, the agreement should include a mutual restriction on each party soliciting employment from the employees of the other.
Services level agreements and service agreements help to clarify goals and ensure a meeting of the minds, limit risk, and ensure both parties get what they want.
Include these 12 elements in your service agreements and not only will you ensure that all the invovled parties know where they stand, but also that they’re protected if anything goes wrong.