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Important Clauses to Review before Signing a Service Agreement

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Last revision: 17th May 2021
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Category: Sales and Commerce

If you are a service provider who has many different clients, it's likely you've signed a Service Agreement before. If you are an individual or have a small business without permanent employees, you may hire service providers a lot. Therefore, you'll also likely have used Service Agreements in the past.

With the gig economy growing every day, many people are starting freelance or service-based contract careers. Many others are using service providers and freelancers to help with their own business ventures.

Service Agreements are great ways to formalise a gig-type relationship between parties easily. In certain cases, more specific agreements may be used, such as a DJ Agreement for DJ services,

Before signing one of these agreements, however, it's really important to make sure that the document accurately reflects the work and the relationship both parties want.

In general, there are a few specific definitions to know regarding service relationships. The client is the party that hires someone to do the work for them. The service provider is the party that is hired to do the work. The Service Agreement is the document that outlines the work to be done and the parties' relationship.

In this guide, we'll discuss some important clauses the parties should review before signing a Service Agreement. These provisions are applicable to both parties, but some may be more important to one party than the other.

By the end of this guide, you'll have a strong understanding of the most important clauses in Service Agreements.

Please be advised that nothing in this guide is meant to constitute legal advice, and it should instead be taken as informational only.


1. The scope of services

One of the most important central clauses to the contract will be the part that describes the actual services to be performed. In this clause, the client and the service provider define their expectations for the work. The parties will want to make sure that this clause accurately describes the work that is to be done. If it is too broad, the service provider might be required to do more work than they expected. If it is too narrow, the client might be getting less from the service provider than they expected. If it is too vague, then it could lead to a disagreement down the track. It's extremely important to review the description of the services to ensure the work will be exactly what you want.

Final takeaway: Carefully read the clause which describes the services to be provided, to ensure it is accurate.


2. Payment terms

What are the specific payment terms? Will the client pay a deposit before the work begins? What happens if the client doesn't pay? Can the service provider charge a late fee or additional interest?

These are all questions that need to be answered before the work begins. Often, service providers will require a deposit before the work begins, so it's clear to them the client is serious. The service provider may also need to hold times in their calendar or decline other jobs. It's also a good idea for a service provider to implement a late fee policy, where extra charges or interest can be assessed against the client. The service provider may also wish to have a clause that says you can terminate if the client pays late.

Final takeaway: The payment terms should be fair and reasonable.


3. Materials

If any materials are being used for the services, then you will want to make sure the contract makes it clear who is required to pay for the materials. Will this be covered by the service provider, or will it be an additional cost to the client, on top of the service provider's fees?

Final takeaway: If materials are being provided in connection with the services, make sure the contract is clear about who is required to pay for the materials.


4. Termination

Usually, in any contract, the termination provision is very important. This clause will talk about when either party can terminate the contract (which they can often do if the other party breaches the contract). In some cases the parties may have a right to terminate by providing a certain amount of notice, even if there has not been a breach.

Final takeaway: Review the termination clause to see what rights you (and the other party) have to terminate the contract.


5. Ownership of intellectual property

If applicable, you'll want a clause that discusses who owns the intellectual property ("IP") that comes out of the parties' relationship. This type of clause will be very important for service contracts that involve the actual creation of IP (such as for web design, software development, graphic design, writing, or audio or visual media services). If the client intends to actually own the IP once the work is complete, then they will need to make sure this is set out in the contract. In some cases, the service provider might retain ownership, but grant the client a licence to use the IP.

If the service provider is retaining ownership, but is providing the client with a licence to use the IP, then it is important to review the terms of the licence as well. Can the client make copies of the IP, or sell the IP? And what about the service provider, if they're retaining ownership of the IP, can they reuse it by selling copies of it to other clients? In some cases, the parties might use a separate Intellectual Property Licence Agreement or an Intellectual Property Assignment Agreement to deal with intellectual property.

For some types of service (such as lawn mowing or dog walking services), the IP may not be relevant.

Final takeaway: If IP is relevant to the contract, check who owns the IP, and the terms of any licences in relation to the IP.


6. Client obligations

What are the client's specific obligations? Usually, in a service-based contract, there will be certain things the client is required to do. If the client does not do these specific things, the service provider may have an excuse for not doing the work they promised. This might involve preparing the area or facilities where the services are to be performed, or providing some kind of support. Inevitably, the client would also need to pay for the services at certain specified times.

Final takeaway: Check the client obligations clause to see what is expected of the client.


7. Subcontractor permissions

Is the service provider allowed to use subcontractors? In some service-based contracts, this might make sense. In others, such as more personal service-based contracts, it won't make sense. Make sure you look over this clause before signing.

Final takeaway: Decide whether the service provider should be allowed to use subcontractors. Then, review the agreement to ensure it conforms to your wishes.


8. Confidentiality

If the parties are dealing with confidential information, then they will want to make sure that the contract contains a good confidentiality clause. This clause should clearly identify the confidential information, and should specify how it can (and cannot) be used. If the parties fail to address this issue, then they risk having their confidential information misused or released to the public.

If confidentiality is particularly important, then the parties may also consider using a separate Confidentiality Agreement which goes into more detail than most Service Agreements do.

Final takeaway: If dealing with confidential information, carefully review the confidentiality clause in the contract. If further protection is required, use a separate Confidentiality Agreement.


9. Limitation of liability

Service providers often want to include a limitation of liability clause, which limits the extent of their liability to the client, in the event that the client suffers some kind of loss. If the Australian Consumer Law ("ACL") applies, and the services are not up to standard, then the ACL may require the service provider to provide a refund or to perform the services again, as a bare minimum.

However, in some cases, service providers may be required to provide compensation that goes beyond this. Therefore, many service providers like to include a limitation of liability clause to reduce any additional liabilities beyond what they are required to provide under the ACL.

On the other hand, clients often want to make sure that they have some protection against loses caused by the service provider.

Therefore, this limitation of liability clause is often a point that needs to be negotiated between the parties. It is important that both parties review it carefully to make sure that it conforms to their requirements.

Final takeaway: Carefully go over the limitation of liability provision, to make sure it meets your requirements.


10. Indemnity

This is another important clause for both parties to consider. It confirms which party would be liable for certain losses that may occur in connection with the services. For example, if the service provider is performing the services on the client's property, and is worried about injuries that the service provider might suffer as a result of the client's poorly maintained facilities, then the service provider might seek an indemnity from the client, to cover losses that the service provider incurs while performing the services.

Both parties will have their own circumstances to consider in relation to an indemnity clause, so it is another point that may need to be negotiated between the parties.

Final takeaway: Carefully review the indemnity clause to see who is liable certain losses under the contract.


In Conclusion

Keep in mind that all of the contract terms in a Service Agreement should be negotiable. In other words, if anything seems off to you, you should be able to have a conversation with the other party to get your wishes heard. If it seems like you are getting bullied into signing something that isn't acceptable, you may want to rethink your business relationship.

Regardless, reviewing your Service Agreement carefully is an important first step in any successful contractual relationship.

If either party has any concerns about the Service Agreement, then they should seek legal advice.


Templates and examples to download in Word and PDF formats

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