Common Mistakes Businesses Make When Drafting Service Agreements
Businesses regularly use service agreements when working with consultants, agencies, technology providers, contractors, and other service providers. A service agreement can help define what each party is expected to do and establish the terms governing the relationship.
However, a contract may not provide much protection if important terms are vague, incomplete, or inconsistent with the way the parties actually intend to work together.
A well-drafted service agreement should clearly reflect the commercial arrangement and address the issues that may create uncertainty or disputes later.
Using a Generic Template Without Adapting It
One common mistake is relying on a generic service agreement without adapting it to the particular relationship.
Different services can involve very different risks and obligations. An agreement for software development may need detailed provisions concerning intellectual property, data security, and technical deliverables, while a marketing services agreement may focus more heavily on content ownership, approval processes, and performance obligations.
A template can provide a starting point, but businesses should consider whether its provisions actually address the specific services being provided.
Failing to Clearly Define the Scope of Services
A service agreement should clearly explain what the service provider is expected to deliver.
Vague descriptions can create disagreements over whether a particular task or deliverable falls within the agreement. A Statement of Work (SOW) can be useful for setting out specific services, deliverables, timelines, milestones, pricing, and the responsibilities of each party.
Depending on the relationship, the agreement may also address assumptions, dependencies, approval procedures, and what happens when a project changes.
Leaving Payment Terms Unclear
Payment provisions should clearly explain how and when the service provider will be paid.
Depending on the arrangement, the agreement may address:
the total fee or applicable rates;
invoicing procedures;
payment deadlines;
reimbursable expenses;
deposits or advance payments;
milestone payments; and
consequences of late payment.
Unclear payment terms can create disputes even when both parties otherwise agree on the scope of the relationship.
Overlooking Changes to the Scope of Work
A project may change after a service agreement is signed. A client may request additional services, change a deadline, or modify the expected deliverables.
Without a process for handling these changes, the parties may disagree about whether additional work is included in the original fee.
A service agreement may therefore benefit from a change-order or written amendment process that explains how changes to the services, pricing, or timeline will be approved.
Not Addressing Intellectual Property
Intellectual property is an important consideration when a service provider creates materials for a business.
Depending on the service, a provider may create software, written content, designs, photographs, marketing materials, inventions, or other intellectual property.
Businesses should consider whether the agreement clearly addresses ownership of these deliverables and how any pre-existing or third-party materials will be treated.
For U.S. copyright, the applicable rules can depend on the type of work and the circumstances. Copyright generally initially belongs to the author, subject to statutory rules such as work made for hire. A transfer of copyright ownership generally must be in writing and signed by the owner or the owner's authorized agent.
The applicable rules can vary by jurisdiction and by the type of intellectual property involved. Clear contractual language can help reduce uncertainty about ownership and permitted use.
Treating Confidentiality as an Afterthought
Service providers may receive access to confidential business information while performing their work.
This could include customer information, pricing, financial records, product plans, source code, business strategies, or other proprietary information.
A service agreement may include confidentiality obligations, or the parties may enter into a separate Non-Disclosure Agreement (NDA), depending on the circumstances.
Confidentiality provisions should be considered in light of the information being shared and the nature of the relationship. Businesses should also consider whether the agreement addresses how confidential information must be handled after the relationship ends.
Using One-Sided Risk Provisions Without Reviewing the Whole Agreement
Service agreements often contain provisions dealing with liability, indemnification, warranties, insurance, and other forms of risk allocation.
These provisions should be reviewed together rather than in isolation.
For example, a limitation of liability may restrict certain claims while an indemnification provision creates obligations in particular circumstances. The effect of these provisions can depend heavily on the language of the agreement and applicable law.
Businesses should understand how the different risk-allocation provisions interact before signing the agreement.
Ignoring Termination
A service agreement should explain how the relationship can end.
Depending on the circumstances, the agreement may address:
termination for convenience;
termination for breach;
notice requirements;
payment for work completed before termination;
return of company property and information; and
obligations that continue after termination.
The appropriate termination structure will depend on the nature of the services and the expectations of the parties.
Failing to Address Disputes
Even a carefully drafted service agreement cannot guarantee that the parties will never disagree.
A contract can, however, establish a process for addressing disputes.
Depending on the circumstances and applicable law, the agreement may identify negotiation, mediation, arbitration, litigation, or another dispute-resolution process. It may also specify the governing law and the forum where disputes will be resolved.
These provisions can become particularly important when the parties operate in different states or countries.
Overlooking the Relationship Between the Agreement and Supporting Documents
A service relationship may involve more than one document.
For example, a Master Service Agreement may establish general legal terms while individual Statements of Work set out specific projects. Other documents may address confidentiality, data processing, security requirements, or intellectual property.
Businesses should make sure these documents work together and do not contain conflicting terms. The agreement should also clarify which document controls if there is an inconsistency.
Practical Considerations Before Signing a Service Agreement
Before entering into a service agreement, businesses may wish to consider:
Are the services and deliverables clearly defined?
Are payment terms and deadlines clear?
Is there a process for approving changes to the scope?
Who will own the intellectual property created during the engagement?
How will confidential information be protected?
What liabilities and risks will each party assume?
How can the agreement be terminated?
What happens when the relationship ends?
How will disputes be handled?
Do the main agreement and any SOWs or related documents work together?
Addressing these questions early can help establish clearer expectations and reduce the likelihood of disputes.
A service agreement is more than a document that records the price and basic scope of a business relationship. It can define responsibilities, allocate risks, protect intellectual property, establish payment terms, and provide a framework for handling changes or disputes.
Many contract problems arise because important business terms were never clearly discussed or documented.
Reviewing the agreement in light of the actual services, commercial relationship, and applicable law can help businesses avoid common drafting problems and establish clearer contractual expectations from the beginning.