Is Your Service Contract Protecting Your Company? 9 Essential Clauses that Limit Fallout Damage

Let’s face it, head-to-head negotiations are no fun, especially at the start of a fresh and exciting new business relationship. Even so, it’s vital to get things right in order to keep that relationship going, and a rock-solid service contract is the best way to protect everyone from potential fallout if things go wrong.

As lawyers, we constantly encounter less than ideal scenarios day in and day out when parties – for whatever their reasons – fail to sign a good contract, or even sign a contract at all. However, having a good service contract that is tailored to the particular situation can be one of the best decisions that a company can make.

Contracts can protect assets, protect deals, protect reputation, and, importantly, can determine how litigation or a dispute will be resolved. It’s also good practice for extending the life of the relationship with the other side.

When building your contract and agreeing on terms with the other party, there are a number of key standard clauses that should be included to make it strong and reliable.

Recitals

This is the “Whereas,” “Now, Therefore” section. It is normally used to introduce context to the transaction and it is good practice to have this section when there are several different documents that an interrelated, such as when this document refers to another, external document.

Payment Terms and Timing

The details in this section are, and should be, negotiated carefully. Both parties should be clear about when the work is invoiced and when it is paid. Terms of interest can be also addressed in this part of the contract.

Getting this section clear and concise will give both parties the peace of mind to focus on the project at hand rather than the financial elements, allowing space to build a heathy business relationship.

Commissions

Lack of good commission language can lead to unnecessary headaches early on in the relationship. Important questions to address include: when is a commission earned? What triggers their payment? What will be the percentage/amount of the commission? What happens if the relationship ends and commission amounts are unpaid?

Law and Venue

For Nearshore contracts, this is a big section to get right. What law will apply to the dispute? Who will resolve the dispute (a court or an arbitrator?) If the service contract is international, what country law will apply and what country’s court will decide a dispute?

Work Product

This is particularly relevant for software vendors, as they are creating a final product at the end of a project’s development run. Normally, that product would become property of the client, but you would be surprised the various ways this can be negotiated. In this section, it’s good to include terms that determine who owns the work product created pursuant to the agreement.

Confidential information

If the parties will be dealing with highly confidential information, then this section needs to be negotiated clearly. For instance, who will have access to confidential information, and what happens to the confidential information when the service contract ends?

If a party is showing novel technology or ideas, then trade secrets (a form of intellectual property) must be negotiated with utmost care.

Termination

No one wants to sour the start an exciting agreement by negotiating termination terms, but, as painful as it is, it is very necessary.

Parties should look into their operations to determine how much advance notice is necessary prior to termination. Furthermore, what are the parties’ obligations upon termination? Is there a transition clause where one party (generally the vendor) must help the other transition to new vendor? If so, under what terms and who pays for transition?

Assignment

This refers to the act of assigning or giving the contract to another party for fulfillment. Many contracts have an anti-assignment clause, but these clauses can significantly impair a party’s growth. An anti-assignment clause may even prohibit a party from selling the company to another without notifying the other party, creating unnecessary delay.

Modification and amendment

These clauses generally say that the contract cannot be modified or amended except in writing signed by both parties. This is great, but, in my experience, parties rarely follow these details and change the course of the service contract without formally amending or modifying it, only to encounter problems later when questions arise.

When parties sign good contracts and engage in “undesirable” negotiations, they end up getting along better and doing business together longer. Clearly written terms will more likely than not result in longer relationships.