Generally, a service agreement is a formal written contract that establishes the terms and conditions agreed upon between a service provider and a customer.
The primary goal of having such an agreement in place is to ensure clarity and also, to facilitate mutual agreement between the service provider and the customer regarding the provision of services. This includes but not limited, to the scope of services, contract duration, payment terms, and other relevant terms and conditions related to the services required by the customer.
Key Terms to Include in a Service Agreement
While the specific terms may vary depending on the industry and jurisdiction, the following key terms should generally be included in a service agreement:
- a. The Parties – The service agreement should clearly identify the parties involved. It should include complete particulars of the parties, such as: the full names, addresses and contact details of the service provider and the customer.
- b. Scopes of Service – The scope of services required should be spelled out clearly i.e., a detailed description of the services to be rendered including the tasks required, deliverables and any limitations or exclusions.
- c. The Parties’ Obligations – It is also essential to clearly define the roles, responsibilities, and obligations of both the service provider and the customer in the service agreement. By providing a detailed description of the parties’ obligations and other relevant information that define the expectations required, both parties involved will have a clear understanding of their respective roles and duties.
- d. Contract Duration –Apart from the above, the duration of term of the service agreement should also be specified clearly (i.e. by stating the commencement and end dates of the agreement). Besides that, it should also outline the procedures and conditions for renewal, if applicable. This is to ensure that both parties are well aware of the timeframe and any possibilities for extending the agreement.
- e. Payment Terms – The service agreement should provide a detailed outline of the payment structure. This includes, the fees for the services rendered, billing cycle or frequency of invoicing and payment methods. In addition, the service agreement should also address any applicable late payment penalties in the event a customer fails to pay any amount due on time. This is to encourage timely payments.
- f. Intellectual Property – In situations where one party is providing its intellectual property to the other party for use, it is essential to include a comprehensive provision specifically addressing intellectual property rights. This clause serves to clearly define the terms surrounding the use and ownership of intellectual property. The clause should also outline whether the intellectual property is being transferred outright to the receiving party or if a license is being granted for its use. Further to that, the provision should address matters such as any royalty or compensation arrangements, and any obligations to protect the intellectual property rights, amongst others.
- g. Exclusions, Limitations of Liability, and/or Indemnities – It is important to thoroughly review any clauses in the service agreement in relation to exclusions or limitations of liability and/or indemnities. These clauses can have substantial financial implications on a party, if enforced. Hence, it is crucial to carefully scrutinize any provisions that seek to exclude or limit the party’s liability in the agreement. Apart from that, the parties involved would also need to be cautious of any clauses that require the party to compensate or indemnify the other for any losses they may incur. In this regard, it is essential to fully understand the extent and implications of these clauses to make an informed decision.
- h. Confidentiality – It is imperative to also incorporate a provision to safeguard any sensitive or confidential information shared between the parties. The confidentiality clause should clearly define the types of information that are considered confidential, including trade secrets, customers’ data, and any other sensitive information. It is crucial to outline the obligations of both parties to maintain the confidentiality of these information and specify the permitted use of the confidential information.
- i. Governing Law – The “governing law” clause should also be included in a service agreement and it should clearly specify which country’s law will be applicable to the service agreement. This will help to ensure that any disputes that arise between the parties will be resolved in accordance with the laws of the country. The parties should choose a governing law that is familiar to them.
- j. Dispute Resolution – Apart from the “governing law” clause, it is crucial for the parties to include a well-defined “dispute resolution” clause. This clause should specify the preferred method or forum for resolving any disputes that may arise between the parties in the service agreement. The chosen method could be litigation in court or alternative dispute resolution methods, such as, mediation and/or arbitration. It is also advisable to include details regarding the selection of the arbitrator or mediator, the procedural rules that will govern the dispute resolution process, and any other relevant considerations to facilitate a smooth resolution of the disputes.
- k. Termination – It is important to include a termination clause that clearly outlines the circumstances/conditions under which termination is permissible and the procedure for doing so. For instance, the parties might want to be given the liberty to terminate the agreement at any time, provided that, they provide sufficient written notice (and perhaps, with some sort of compensation to the other party for early termination) to the other party in advance. By explicitly defining the conditions and process for termination, potential disputes can be minimised, and both parties can have a clear understanding of their rights and obligations in the event of termination.
Please bear in mind that the list of clauses/provisions provided above is not exhaustive. While this article provides an overview of the key terms to be included in a service agreement, it is pertinent to note that, additional provisions may be necessary based on the nature of the services or legal requirements in the relevant jurisdiction. Therefore, it is highly recommended to seek legal advise from a legal professional when drafting or reviewing a service agreement in order to ensure that all the necessary aspects are covered properly.
This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.
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Dispute Resolution, Construction, Energy & Engineering, Information Technology & Employment, Contracts Drafting & Advisory
Harold & Lam Partnership