Whether you’re an interior designer, architect, consultant, plumber or general contractor; if you own or operate a business that provides a service to clients, a service agreement sets out the key legal relationship between your business and your customers. In documenting this legal relationship, it is wise to have in place a clear, well-drafted, service agreement to set out both parties’ rights and obligations at the start of the business relationship.
The nature of your business will determine the complexity of the form of agreement that best suits your purposes. At its most basic level, a service agreement will clearly state the scope of the services that will be provided, the price paid for those services, and the rights and obligations of each party when certain circumstances arise. The following are some fundamental considerations to be made when determining whether your form of service agreement is meeting your business needs.
It may seem trite, but are your agreements actually in writing? Are they actually signed by both parties, or do they exist floating in Outlook inboxes in various states of revision? Oral agreements can be difficult to enforce in most circumstances, which is why having a written agreement is the best way to clearly set out expectations, rights and obligations. Having a fully executed agreement is the best way to provide evidence in a dispute that “these are the terms to which we have agreed.”
Billing and Payment
Your business provides its services to get paid. Clearly setting out when payment is due, the penalties for late payment and your rights in the event of non-payment are essential. The more accurately you set out your payment terms and your expectations, the more likely an invoice will be paid promptly and the more likely you will avoid fee disputes.
How and when can each party walk away from the contract? It is common for parties to set out when they are able to terminate an agreement beyond when termination may be available to them under the common law of contract. For example, being able to terminate a contract if there is a specific breach that is not cured within a specified period, even though such breach may not rise to a repudiatory breach, for which termination is available under common law. It is also common for one party to terminate if the other becomes insolvent or bankrupt, or on a change of control, or if some fixed amount of time has elapsed. Sometimes it is appropriate to allow parties to terminate for convenience. It is always helpful to consider how long each party must provide notice before they terminate the agreement in such circumstances. Consider if your business will be able to demobilize in a given notice period with minimal costs or disturbance to human resources. Also, consider what expenses you would expect to incur on termination. The agreement should clearly state if, and how much, of these expenses will be reimbursed by the client in the event of termination for convenience.
Representation and Warranties
As a service provider, you should carefully review any representation and warranties in the agreement. You should be certain that you can meet the requirements of those representations and warranties and that each representation is accurately made. Look to limit the warranties as to the standard the services ought to be performed, and ensure the agreement does not raise the standard to which your results will be held to a level that your business cannot reasonably meet. Look out for an agreement providing for unreasonably subjective evaluation standards of the services by the client itself.
Liability, Insurance, Indemnities and Limits of Liability
Certain contractual provisions work to allocate risks between the parties. An indemnity is a contractual obligation by one party to be responsible for liability incurred or claims brought against the other party. Often the goal in any indemnity is to ensure that the matters in which liability will be apportioned to you, are matters that are reasonably within your control. Indemnities can be heavily negotiated. Generally, a service provider should try to give as few indemnities as possible. A limit of liability provision allows a service provider to set a cap under which all (sometimes subject to exceptions) liability under the services agreement will be subject. This cap can be fixed, or variable (for example, based on fees paid) or tied to certain insurance policy limits. A limit of liability allows for some certainty as to the aggregate total potential risk of the contract or a specific project, as well as protecting against worst-case scenarios where liability under an agreement rises to levels well above potential fees for the project, or the expected level of risk at the time the agreement was entered into.
For four generations, Mills & Mills LLP has assisted clients in the Greater Toronto Area with all of their business and litigation needs. We regularly advise business owners on business formation, day to day business operations, risk management, and all other aspects of running a venture. To speak with one of our business or litigation lawyers, please call us at 416-863-0125 or contact us online.