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A Service Agreement is a contract that governs the provision of services in lieu of payment or other consideration. It can be used by any person or organisation which provides services. Some examples include people or entities engaged in the business of building and construction, and electrical work as well as coaching, personal training, consulting, and professional services.
The Service Agreement will set out the exact scope of work, as well as timeframes for completion of work, payment terms and dispute resolution mechanisms.
While Service Agreements simplify the process for resolving disputes, they also prevent many disputes from arising in the first place. They do this by forcing the parties to discuss and record the key elements of the arrangement upfront, which is why it is pertinent to enter into a written service agreement. If a written agreement for services is not entered into and parties work on oral arrangements, they may miss out on crucial terms such as when payment is due, where materials are to be purchased, or who is to pay for materials. If these issues are not addressed upfront, they can lead to costly legal disputes when they are eventually discovered.
Contractor v Employee
People or businesses using this document may need to consider the difference between a contractor and an employee. This Service Agreement enables a service provider to be hired as a contractor. This is different from an employment contract, which would enable the service provider to be hired as an employee and would require the provision of all kinds of benefits under labour laws.
The difference between an employee and a contractor is based on many factors such as the extent of control, whether the contractor is permitted to work with other clients, whether it chooses its own equipment to provide the services and whether the work can be sub-delegated, and no single factor is determinative. Simply using this Service Agreement is not enough to convert an employee into a contractor. Instead, the courts will look at the entire arrangement, and decide whether the service provider is working within the business, as part of the business (like an employee with very little control) or whether the contractor is running their own business (like a contractor).
How to Use This Document?
This Service Agreement can be set up to deal with either an ongoing arrangement for the provision of services or a one-off project.
In either case, the more details that can be provided regarding the various details of the arrangement, the more likely it is that disputes will be prevented. Some important details to be considered include:
- description of the work to be performed
- how it will be determined that the work is complete and whether there are any milestones
- when payment will be released
- how the agreement may be terminated
- what parties should do in the case of disputes
Service providers should provide a new Service Agreement every time they undertake a new project, although a "project" may be ongoing indefinitely, (e.g. maintenance services). A separate Service Agreement will also need to be provided to every different client.
The Service Agreement will be legally binding when it has been printed on non-judicial stamp paper or e-stamp paper and signed by both the service provider and the client, and has been dated. The value of the stamp paper would depend on the state in which it is executed. Each state in India has provisions in respect of the amount of stamp duty payable on such agreements. Information regarding the stamp duty payable can be found on the State government websites. For instance, the website of the state of Karnataka provides details of stamp duty payable on agreements, as does the website of Delhi.
Both the service provider and the client should keep a signed copy of the Service Agreement. In order to do this, two different copies can be signed, or if only one copy is signed, it can be photocopied and then distributed between the parties.
The principles of the contract under the Contract Act, 1872 would govern these agreements. Further, the Consumer Protection Act, 2019, also applies to all goods and services, excluding goods for resale or for commercial purposes and services rendered free of charge and under a contract for personal service. It protects the rights of customers such as the right to be informed, the right to safety etc.
Goods and Services Tax (GST) is applicable to the supply of services at different rates for different categories of services, other than a few services which are exempt. More information can be found on the website of the Central Board of Excise and Customs.
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