If your company is in the business of providing services to clients, you need to clearly spell out the terms of your relationship in a type of International business service contract known as a contract service agreement.
Small business owners need to pay special attention to making sure that such agreements are carefully drafted and executed. The reason for this attention is that the adequacy of a tangible product is typically much easier to prove than the adequacy of services that have already been performed. Failure to carefully draft such an agreement with all of your clients is likely to save money in the short run but it could backfire spectacularly someday.
What Is a Service Contract?
“Service contracts” cover an extremely broad subject matter. They refer to almost any service that one party will pay another to perform. Such services could be:
- Building construction;
- Legal services;
- Freelance writing;
- IT services;
- Graphic design;
- Developing a website;
- Other services.
A service contract should detail every aspect of the cooperation between the parties with respect to the given services. Many service contracts are “adhesion contracts'' where one party drafts the contract. Other service agreements are vigorously negotiated between or among the parties. Service contracts should be carefully drafted to clear up misunderstandings in advance and keep the parties out of court.
What Does a Service Agreement Include?
A well-drafted service contract typically covers the following terms and elements, among others:
- The identities and contact details of the parties;
- Payment amounts and terms;
- Service specifications;
- Quality control;
- Milestones and deadlines;
- Consequences of unilateral breach of the agreement (including a definition of “material breach” justifying termination of the contract);
- Confidentiality and non-competition;
- The division of liability among the parties;
- Insurance and compliance terms;
- Mutual and unilateral termination;
- Governing law;
- Dispute resolution and remedies;
- Various “boilerplate” clauses such as merger and severance.
You might consider having both (or all) parties’ signatures notarized. Each party should receive a copy of the contract with original signatures.
When Is a Service Contract Used?
It’s never a good idea to do business on a handshake alone. You should use a service contract with every one of your clients, including clients to whom you offer a product warranty. You should also use a service contract when you are the client and the other party is the service provider.
Drafting and executing so many contracts might seem burdensome, but if they are done right it will increase revenue and decrease your long-term burdens. You should establish a contract management process to manage your contracts.
Advantages of Using a Service Agreement
There are many sound reasons to use service agreements, including:
- The negotiation and drafting process helps you to identify issues that you need to deal with. Identifying and resolving issues in advance helps avoid nasty surprises later on.
- Service agreements help you resolve conflicts once they do arise. Conflict resolution tends to be simpler, cheaper, and less painful.
- By reducing conflict, they help you preserve valuable business relationships for future transactions.
Considering their conflict avoidance feature, service agreements can more than pay for themselves in the long run.
How to Create a Service Contract
If you are a business owner, it is very important for you to have a service contract. Take a look at everything about the contract service agreement.
Your service contracts will govern the legal relationships between you and your customers, and between you and your service providers. This is a job that absolutely must be done correctly. Accordingly, take the following steps before you write a service contract:
- Investigate the other party, particularly if it is the other party who is the service provider. Before you enter into a contractual relationship with anyone, know who you are dealing with. Take particular care to find out if the other party is involved in any litigation.
- Determine your rate of pay. Find out the standard in your industry and use it as a basis to determine your own rates.
- Negotiate the details of the service you will provide. You need to involve the other party to work out the details of exactly what service standards will be acceptable to both sides. In the midst of negotiations, you are almost certain to run into important issues that you never would have thought of in a non-adversarial context.
- Draft the agreement. See below for some important drafting tips.
- Sign the agreement. Don’t sign it, however, until you thoroughly understand it. You are likely to need a lawyer’s help for this.
Tips for Drafting a Client Service Agreement
Following are some time-tested tips for drafting an effective service contract:
- Hire a professional business contract lawyer to draft the agreement, or at least review it, before you sign it. Get your lawyer involved as early as possible in the negotiation phase, so that they will deeply understand the business relationship between you and the other party.
- Consider executing a preliminary confidentiality agreement. If you decide to go this route, get it signed before you draft your service contract, to prevent secrets from being spilled as you reveal them during contract negotiations.
- Avoid ambiguity when drafting the contract. As you draft, pretend that there is a gremlin on your shoulder attempting to misconstrue every ambiguity; then draft the contract in a manner that leaves this gremlin with nothing left to say.
- Avoid “legalese.” You might have no choice but to include certain legal or trade terms of art. Nevertheless, don’t make the contract unnecessarily difficult to read.
- Keep your service contract as simple as possible without omitting any key terms. The easier your contract is to read, the easier it will be to comply with.
- Pay special attention to the termination clause. Should either party be able to terminate the agreement unilaterally?
- Refuse to enter into any oral “side agreements.” Everything should be in writing. Ask your lawyer about adding a “merger clause.”
- Have all parties sign the agreement in the presence of a notary public. An impartial witness or two wouldn’t hurt either.
Take Decisive Action Early in the Process
Negotiating, drafting, and managing contracts can be time-consuming and difficult. Nevertheless, well-drafted service contracts are a way for small businesses and their clients to protect themselves against the risks inherent in doing business.