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The Basics

An agreement is a legal document that establishes the rights and obligations of the parties entering into it. There are different types of agreements and each has its own purpose. The contract that you enter into with any service provider, like an event organiser, a digital marketer, a software company, phone company, internet provider etc. is known as a service agreement. Before we dive into understanding the key terms, let’s learn what a service agreement in particular is designed for.

Service Agreements

A service agreement is a legally binding contract between a service provider and his/her client, ie. the service receivers. The agreement clearly states the rights and obligations of each party. It describes the relationship between the parties, sets the expectations, and addresses the way issues should be handled.

A service agreement explains the types of services given by the provider, manner, extent, delivery mechanism, manner of payment, and also the conditions under which it can be terminated. A services agreement is an important type of commercial agreement that must be carefully drafted to cover all important clauses specifying the terms of the agreement.

Key terms or clauses in a service agreement

The clauses incorporated in a service agreement are of vital importance. In addition to the basic terms and conditions covered in an agreement, a service agreement must include the following ten essential clauses:

  1. 1 Engagement Clause

The principal clause a service agreement must include is the engagement clause. A service provider can be hired as an employee or as an independent contractor. The rights and duties of an employee and an independent contractor are different. Setting a clear engagement at the time of drafting an agreement is important. Employees have a right to specific legal entitlements such as superannuation contribution by the employer, etc. Whereas a contractor is an independent business runner, hence not entitled to any employee benefits.

  1. Term and Duration

The next clause to add into a service agreement is the term of the contract. In other words, it states the commencement and termination of a service agreement. It is necessary because it clearly states the duration for which a contract will be valid.

3.Scope of the Agreement

The main objective in entering into a service agreement is to pen down the scope of services a service provider will be offering. This clause clearly defines the duties of the obligation of all the parties entering into the contract. When drafting a service agreement, the scope of services clause must be given exceptional importance. This clause must be drafted as per the nature of services provided by the party of the contract.

  1. Indemnities Clause

The next significant clause a service agreement must include is the indemnities clause. This clause functions as a form of security against any losses or damages. An indemnity clause is included in a service agreement to meet any situation that results in damage during the provision of service. Mistakes do arise at the time of the contract, which is natural. The indemnity clause states that a business will not be responsible for any liability that is the result of a contractor’s act during the agreement period.

5.Clause on Payment Mechanism

The nature of the service agreement is the exchange of service for money, so including a payment clause is necessary. The clause must clearly explain the amount to be paid, when it must be paid, and the method of payment. This clause can also include the conditions that should be met making the payment.

  1. Liability Clause

This clause either limits or excludes a party liability to the contract. There are many variations to this clause; a well-drafted liability clause can act as a shield that protects the business from significant damages or losses. Before drafting this clause, consider whether you can fulfil the obligation imposed on the liability clause and what kind of protection you need.

  1. Representation and Warranties

In most cases, a service provider will be hired based on their expertise, abilities, and credentials. But what happens when the service provider fails to fulfil the promised results? An agreement with a representative and warranty clause will give you the answer. The clause will state that the agreement was entered into on the representation and warranties of the service provider. Failure to meet the result is a material breach of contract, which must be compensated.

  1. Modification and Amendment

There often arises a need to amend certain terms of the contract. This clause makes it simple to determine the manner in which such modifications can be done. Including a modification and amendment clause prevents later disputes between the parties as a result of any changes enforced in the contract. The common practice in the legal field is to make amendments only on the written agreement between the parties as stated in the modification clause. This is an important clause that you don’t want to skip.

  1. Waiver Clause

Just because a party to the contract did not enforce some terms of the contract at a certain point does not mean he/she loses the right to enforce that term in the future. The best way to protect this right of the party to the contract is to include the waiver clause in the agreement. The clause states that a person or business does not waive any right under the agreement solely based on the fact that they did not enforce it at a specific time.

  1. Dispute resolution terms

Including a dispute resolution clause into the service agreement can be very tricky, as no one wants to think about future problems and issues when a relationship just commenced. However, a well-drafted dispute resolution clause protects the rights and duties of the parties to the contract. This clause can save lot of money and time spent on a dispute, which may arise between the parties in the future. The common conditions that the clause can include are resolving to arbitration and mediation as and when a dispute arises.

Mediation calls for the parties to attempt to resolve the dispute, which is not binding. Whereas, an arbitration calls for parties to resolve the dispute that is binding. Additionally this clause states which provisions of law will be applied in case of dispute and the court having jurisdiction over the parties to resolve the dispute.

Along with the above mentioned clauses, a service agreement should also include an insurance clause; termination clause; IPR clause – if any; and a confidentiality clause.

To Sum Up

Entering into a service agreement is a common business scenario but ensuring a comprehensive service agreement is in place is important. Always understand the key terms to be included in a service agreement before you draft one, or sign one. 

If you’re looking to draft agreements in the USA, click here.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

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