Service Agreement

What is a service agreement?

A service agreement is used to hire an individual or an organization to provide specific services to the client. This contract is entered to provide some services in return for remuneration. This type of agreement is essential for establishing a clear understanding of the expectations and responsibilities of both parties involved.

A service agreement can be used in situations that involve the provision of services, including the provision of IT services, accounting and auditing, consulting services, etc. The service contract can be for a fixed term or an indefinite duration.

What is the difference between an employment agreement and a service agreement?

• The nature of the contract: In an employment agreement, the employer controls how the work is done. On the other hand, the service provider controls how they do their work. In employment contracts, the employer is liable for any acts or commissions committed by the employee in the course of employment, while the service provider is fully responsible for their acts or omissions during the course of the service agreement.
  
  
• Employment benefits: Employees receive statutory benefits and protections, such as insurance and pension benefits, annual holidays, etc. The service provider may not be entitled to employment benefits. However, the client may choose to grant these benefits.
  
  
• Skill/expertise: A service provider (being an independent contractor) is regarded as an expert in his/her industry and as a result, may not be entitled to any training. While an employee may undergo training during the period of employment;
  
  
• Hours of work: A service agreement is sometimes more flexible than an employment agreement as service providers often determine their work hours time to work.

For more information, see our legal guide "What's the Difference Between an Employee and an Independent Contractor?"

Is it mandatory to have a service agreement?

No, it is not mandatory to have a service agreement. However, it is advisable for proper documentation and to prevent conflicts. The service agreement can be used as a reference in court in case of any future disputes.

What must a service agreement contain?

A service agreement should have the following provisions:

• Information about the parties, including the full names and addresses of the client and service provider.
  
  
• The duration of the service agreement. It could be for a fixed period or an indefinite period.
  
  
• Designation of the service provider. The service provider could be hired as a virtual assistant, auditor, etc.
  
  
• Work schedule or hours of work. While the work schedule can be quite flexible, the service agreement will specify the client's expectations regarding work hours or schedule.
  
  
• The specific duties of the service provider, including the service provider's scope of work or responsibilities.
  
  
• The service provider's compensation or fees.

It can also include complex clauses, such as:

• Confidentiality obligations: Confidentiality obligations are included in service agreements to prevent the service provider from sharing the client's proprietary data, trade secrets, business strategies, and other non-public information exchanged during the service provider's work with the client.
  
  
• Non-compete clause: A non-compete clause restricts the service provider from engaging in activities that directly compete with the client's business during the term of the agreement and for a certain period thereafter.
  
  
• Termination clause: The termination clause outlines the conditions under which the client or service provider can end the agreement. It also defines the procedures for terminating the contract. It may include provisions such as the notice period, usually one-month notice. It also details the obligations of both parties upon termination, such as returning confidential information and property and paying outstanding fees.

What is not allowed in a service agreement?

It is not permitted to include an overly broad or unreasonable non-compete clause. That is, a non-compete that does not have a fixed period of validity or a geographic scope may not be enforceable.

An example of a reasonable non-compete clause is as follows: "The Service Provider agrees not to engage with any business within Lagos State that directly competes with the Client's business for one (1) year following the termination of this agreement."

Who is involved in a service agreement?

The parties to a service agreement are the client and the service provider. The client is a party who hires the service provider in exchange for some form of compensation. The service provider, on the other hand, is hired to work on a specific project or provide specific services to the client.

The service provider here can be an individual who has attained the age of majority (at least 18 years of age) or a registered organization.

Who cannot enter into a service agreement?

Individuals who are less than 18 years of age cannot enter into a valid service agreement as a service provider. Hence, Additionally, an unregistered organization cannot validly enter into a service agreement.

What can be the duration of a service agreement?

The duration of a service agreement can vary depending on the nature of the service agreement and the needs of the client. It could be for a short term (months) or a long term (2 or more years).

It can also be for an indefinite period to terminate upon the completion of the services.

What has to be done once the service agreement is ready?

The service agreement should be signed by both parties in two original copies. The service agreement can be signed in person or electronically.

If either of the parties is a company or a registered organization, the service agreement should be signed by a director or officer of the company or organization.

After signing, each party should keep one signed copy for their record.

Which documents should be attached to a service agreement?

In some cases, the following documents may be attached to the service agreement:

• Non-Disclosure Agreement;
• Non-Compete and Non-Solicitation Agreement.
  
  

Is it necessary to notarize a service agreement for it to be valid?

No, it is not necessary to notarize a service agreement.

Is it necessary to register the service agreement?

No, service agreements are not registered with any authority or agency in Nigeria.

Is it necessary to have witnesses for a service agreement?

Yes, the service agreement needs to be witnessed to be valid.

After the parties have signed, the document must be witnessed by at least one person. The witness is required to hand fill in their names, addresses, and occupations and also sign the document.

What are the costs involved in the finalization of a service agreement?

No costs are associated with the finalization of a service agreement.

How is the payment of the fees done in a service agreement?

In a service agreement, the client is responsible for paying the service provider's fees. However, unlike an employment contract, the service provider charges VAT for services provided and is responsible for filing their taxes.

There are different types of fees including hourly, monthly, annual payments, or one-time retainer fees, depending on the nature of the service agreement.

Which laws apply to a service agreement?

It is important to note that there is no specific law that regulates work-for-hire or service agreements. The agreement is largely regulated by the rules of general contract. The Value Added Tax Act, of 2004, also applies to the service agreement.

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