When to use a Service Agreement

Running a business involves dealing with a wide variety of legal documents. Certain documents relate to the internal management procedures of a business, but the majority of the legal documents are used in the context of the relationship between the business and external parties.

A service agreement is one of the more common legal contracts and is used in circumstances where one party (the “service provider”) is providing services to the other (the “principal”). In general, the nature of these services will be quite specific. This article gives an overview of when to use a service agreement, the major uses for it, and the benefits gained by using one.

service agreement signing
photo credit: LOSINPUN

Major Use and Benefit of using a Service Agreement

The major use of a service agreement is to document, in an enforceable legal contract, the obligations and responsibilities of both the service provider and the principal. For the service provider in particular, there is a clear benefit of having a legal, valid and binding service agreement, ensuring that the scope of the services to be provided are clearly defined, as are the cost of the services, payment terms, and any relevant deadlines.

Without a service agreement it’s possible that the parties will be confused about their obligations and responsibilities and therefore will not fulfil them. Furthermore, if one party does not fulfil them, having a service agreement which is valid and binding will allow the wronged party to enforce performance, or claim damages.

Important Clauses in a Service Agreement

Service agreements can be complex, or simple documents. The following are some of the more important clauses that should be reviewed by both parties to an agreement:

Term – It’s vital that the term (i.e. length) of the agreement is agreed upon by the parties. This will be one of the first clauses in the agreement. Make sure it’s clear and to the point.

Fees and Expenses – The amount to be paid to the service provider for the provision of the services obviously needs to be set out clearly, as do any arrangements relating to expenses.

Indemnities– If the service provider is to indemnify the principal, or vice versa, this needs to be set out in the service agreement.

Limitation of Liability– This clause dictates under which conditions the service provider or principal will be held responsible for any financial loss. This clause is closely related to the indemnities clause.

Confidentiality– You may not be aware of the importance of this clause, but if the principal provides confidential information to the service provider, it is perhaps one of the most crucial clause of any agreement. The Confidentiality clause forbids either or both the principal and the service provider to reveal any relevant confidential information.

Examples of Situations in which a Service Agreement is Useful

There are many instances where a service agreement has come in handy for both the client and the service provider. Two of the most common instances are as follows:

Non-Performance. There are many instances of service providers who fail to complete a job adequately yet demand payment based on an oral contract. If you enter into a valid and enforceable service agreement that clearly sets out the scope of the services this issue will not arise.

Irrational Client Demands. As a service provider, there will clearly be instances where you work with a client who makes irrational demands above and beyond the agreed scope. As the client holds the purse strings, it can be difficult to say no to such demands. A clearly set out, and signed, service agreement, gives you leverage to demand payment once the agreed scope of work has been completed.

To Conclude

Service agreements are common, but important legal documents. If you can afford to, it’s a great idea to have your document either drafted or reviewed by a lawyer, but if you don’t have the budget for this make sure you use a good quality template. Both the parties should read the agreement thoroughly prior to signing in order to ensure that the agreement corresponds to their requirements. Once the agreement is signed, it becomes legal, valid and binding. For an example of a well drafted service agreement, please click here.

About the Author: Lachlan McKnight is the CEO of www.legalvision.com.au, which provides Australian law customised legal documents and online lawyers.