When you enter into a contract with a service provider – from an internet provider, event caterer, to a digital marketing agency – you will receive a service agreement from the provider. The service agreement outlines the relationship between your company and the provider. For the most part, these agreements have standard language and provisions. Although the contract with a big provider is probably not negotiable, a contract with a small to medium size business is likely negotiable. The following list includes the key provisions to look for when entering into a service agreement, including: payment, scope of services, amendment, termination, liability insurance, confidentiality, IP ownership, and choice of law/dispute resolution.
The section that defines the payment terms is important and should include how much, when, and how the provider will receive compensation. Typically, the provider will require a deposit to secure the services, and include a balloon payment or series of payments over the course of the service. Make note of the payment schedule, otherwise you will likely owe late fees or be in violation of the agreement. For best practices and to ensure you receive the all services requested, ask for an itemized statement that explains the total cost. This itemized statement should be included as an exhibit to the service agreement.
Scope of Services
The scope of services section defines what services your company will receive. For example, if an apparel provider is creating swag for your startup, you will want this section to include an itemized list of products, any additional services (i.e. warehouse storage, delivery costs, etc). This section should be detailed and precise.
The amendment section details how the parties can change the agreement if the circumstances (i.e. scope of services) change over the course of the relationship. Typically, written consent of both parties is required to amend the agreement.
This section describes how the parties can terminate the relationship and who is responsible in such an incident. For example, if either party commits any illegal act, that act can constitute a breach of the agreement. Or, if the service provider does not fully execute the promised services, it may be in breach of the agreement. Also, if the client does not pay for the services provided, then the client is in breach of the agreement. Or, if both parties agree by written consent to terminate the relationship without any strings attached. Basically, this section details how the parties can exit when sh*t hits the fan.
This provision will typically require both parties to obtain a minimum amount of liability insurance. It is important to weigh the cost of insuring at the minimum requirement versus receiving the services. If the cost is too high, you might decide to shop for a different service provider or try to negotiate the minimum down to something more reasonable.
This section protects trade secrets and any confidential information obtained during the course of the contractual relationship and beyond.
This provision outlines who owns the intellectual property (IP) created from the service. Typically, the parties keep any IP that they contribute. For example, the service provider keeps the IP to its process, and the client keeps its IP used to complete the service (i.e. company’s logo used to make t-shirts). Also, the client typically gets an exclusive revocable license to use/sell the IP during the term of the relationship. It is important to ensure that your company doesn’t transfer any IP to the service provider by accident.
Choice of Law and Dispute Resolution
In the event of a dispute, this provision details how the dispute will get resolved and what law applies. Typically, the parties will keep it close to home (i.e. in the service providers state). This creates a benefit for doing business with local service providers! The most common types of dispute resolution includes: arbitration, mediation, and use of the common law courts.
We hope this improved your understanding of some of the most important provisions in a service agreement!