Everything you Need to Know About Service Contracts

Everything you Need to Know About Service Contracts

This guide covers everything you need to know about service agreement contracts. At the end of your reading, you should be able to know the ins and outs of creating and executing this kind of contract. This is the only exhaustive guide you will need.

A service agreement contract is a legally binding agreement between two parties. Having service contracts for all your engagements is a best practice. It ensures that both parties understand their obligations and what should be done in case any party defaults. Contracts can be verbal or written and both are enforceable. However, a written contract is much better and easier to enforce since it outlines what was agreed upon. Drafting a service contract requires both parties to come into an understanding of the terms of the contract. By reading on, we will familiarize ourselves better with service agreement contracts. If this type of contract is already familiar to you, we invite you to download our template at the end of this guide.

Types of Contracts

As part of running a business, you’ll be dealing with contracts of many types. It is important to understand all these contracts and what they mean for your business. Ideally, each business relationship you have with another entity should be defined by a contract.

In this guide, we shall be dealing with different types of service agreement contracts. This is a type of agreement where one party provides service to another party for consideration. The contract defines the entities involved, the level of service to be offered, the payment terms, intellectual property, and confidentiality, how to terminate the agreement, among many other aspects we shall be looking at.

General Service Contract

This is an agreement that defines the terms of work between a contractor offering general serves. These can include general repairs, plumbing, gardening etc.

Product Service Contract

This is sometimes referred to as an extended warranty. It covers more than the basic or limited warranty covers but an additional cost.

Freelancer Contract

This is a legal agreement between the freelancer and a client where they agree on the scope and terms of a project. It protects both the client and the freelancer and clearly defines the work to be completed and delivered and the consideration for the work.

To give you an idea of how to write a freelancer contract in a way that can save you a lot of mental anguish, check out this neat guide from Frank Olivo. Frank talks about how web design contracts should be drafted from the perspective of someone rendering a service. This guide takes what Frank is suggesting and applies it to the broader world of service agreement contracts, regardless of whether you are a service provider, or a client hiring someone to perform a needed service.

According to Frank, the review and approval process for different milestones should also be streamlined, apart from agreeing on the scope and terms of a project. Frank mentions in his guide that milestones ought to have approval windows which protect the freelancer and ensure that he gets paid on time. An approval window forces a client to get back to a freelancer about a submission within a set time. If the client doesn’t the output submitted is considered fit for the client’s needs.

When preparing a service agreement contract, you want to ensure that the project moves forward, regardless of whether you are the freelancer or a client seeking to hire one. There is much merit to what Frank said. From a client’s perspective however, it is not always easy to find a milestone submission in a swamp of emails. You need to make sure that your contractor goes through lengths to ensure that you are aware that there is a submission. In your contract, specify the channels you wish for your contractor to contact you through before a milestone can be considered submitted. Apart from email, identify 2 to 3 other lines of communication where you are likely able to acknowledge receipt of a milestone submission. This will not be met with pushback from a contractor. You can expect that upon completion of a milestone, they will run through the checklist of means to contact you quickly in order for the approval window to begin and for them to get paid sooner. Agreeing to an acknowledgement window might be useful here as well.

Learning about the specifics of Freelancer Contracts helps you develop a heightened understanding for other contracts for a piece of work or a defined service. Spend 5 minutes of your time to go through an excellent example with this video with Open Door Creative:

Residential Service Contracts and Vehicle Service Contracts

A residential service contract is a type of contract that offers to repair or replace major mechanical systems in a home in case of damage. This is also known as a home warranty.

A vehicle service contract (VSC) is a type of contract that offers service for your vehicle for a specified period of time after purchase. Alternatively, coverage for a set number of miles traveled may be stipulated as well. There are 3 kinds of VSCs: dealer-backed, aftermarket and manufacturer-backed. Understanding what kind of VSC you have enables you to ascertain what sort of service to expect. Here are a few key differences about VSC types:

Dealer-Backed VSC

  1. Your contract is only honored at the dealership you bought it from
  2. You cannot take your vehicle to other repair facilities
  • Aftermarket VSC
  1. A contract is easily purchased from aftermarket companies after your vehicle’s manufacturer warranty expires.
  2. Your contract is honored at every dealership that is accredited by the aftermarket company.
  • Manufacturer-Backed VSC
  1. Your contract is honored at every dealership that is accredited by the manufacturer of your vehicle that sold you the warranty.
  2. Any repairs and replacements to parts of your vehicle are done with original equipment manufacturer (OEM) parts.
  3. Your contract provider pays the dealership’s labor rates.

Check out this 5-minute video by Will Benedicts of The Proctor Dealerships to instantly improve your understanding of how VSCs work:

For both home warranties and VSCs, knowing whether your service contract provides stated coverage or exclusionary coverage is critical. Warranties with stated coverage mention exactly what will be covered in the contract. Conversely, warranties with exclusionary coverage cover everything that is not stated in the contract. Knowing which type of coverage you are getting will let you gauge whether your warranty provides satisfactory coverage for the cost.

Consultant Service Agreement Contract

A consultant service agreement contract is an agreement detailing the terms between a client and a consultant. It is at times referred to as a consulting contract.

The Need for a Service Contract

Service agreement contracts clearly define what is expected of the person/business providing the service and the person/business paying for the service. The contract benefits both parties since the party providing the service is assured that the client cannot claim that work was not performed or delivered. Payment terms are also clearly defined in the agreement. The person paying for the service benefits in that they get to pay for work to the standard that was agreed in the contract.

Important Terms for Service Contracts

Before signing any contract, it is important to understand a few terms commonly used in service contracts. If you are the one drafting the contract, you are most likely to use these terms.

Authority to Enter into Contract

A company has typically different people working for it. Before entering into a contract, first determine that the representative of the company you are dealing with has the authority to enter into a contract on behalf of the company. Managers, heads of departments, the CEO, the owner, or a person with a high position will generally have the authority to contract. Even though you are negotiating with the person, the contract is between you and the company.

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Parties and Entities

These are the people or organizations entering into the contract. They should be correctly defined by their names and other identifying information.

Duration

Every contract has a set duration. This means when the contract begins and when it should end. It can also be referred to as the term of the contract. This should be clearly stated in the contract. Some contracts go ahead and define the duration of each deliverable. What will happen when the duration agreed is breached should be defined.  If fines, penalties, or damages are involved in case of breach, they should be defined and understood by all parties. This seems simple, but many parties have gone to court because of this.

Scope of Work

This is the clause that defines the obligations or responsibilities of the person providing the service. This is one of the most important parts of the contract. It requires attention to detail as this is where you define what each party should deliver. If you ever get into a dispute regarding the provision of services, the arbitrator of the dispute will refer to this part to determine which party has not met its end of the bargain.

Payment Terms

This defines the amount of money to be paid and when. If any condition has to be met before some money is paid, it should clearly be defined here.

Dispute Resolution

No party ever wishes to get to this point, but you have to have a clause detailing what steps should be taken if ever a dispute arises. It is good practice to first consider mediation and arbitration before going to court. In case the entities are located in different jurisdictions, it should be determined which jurisdiction’s law will govern the contract.

Intellectual Property Rights

Service contracts will likely result in the provision of services that require intellectual property rights. Normal practice is that the rights are fully transferred upon payment from the contractor to the entity paying for the services. Confidentiality or a Non-Disclosure Agreement may need to be signed.

Essential Elements of an Valid Contract

For contracts to be enforceable and legally binding, several elements must be present. It is important to ensure that they are present to protect you in case of a dispute. This diagram outlines the key elements of a valid contract and gives an overview of what is discussed in the subsequent section

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BurgieLaw offers a very casual snippet on each of the elements in their blog. Check this link for a brief overview or read on for a more detailed discussion on each of the elements.

Offer and Acceptance

An offer has to be made by one party and accepted by the other. If these two do not happen, then there is no contract. The offer is made after the negotiations have taken place and an agreement of the terms in principle has been reached. Once the offer is made, the other party goes through this offer and decides to either accept it or reject it. If they accept, then the contract becomes valid. If there are any reservations on some clauses, ten further negotiations may take place. An offer can be withdrawn before it is accepted.

Consideration

A contract has to involve some form of consideration. It could be money or some other benefit. One party has to obtain a benefit for their services, and the other party has to pay for it. It should be noted that when it comes to dispute, the arbitrator or the courts will not look for the adequacy of the consideration but rather its existence.

For a contract to be valid, the parties entering it must have the legal capacity to do so. Some groups of people whose legal capacity to enter into a contract may be challenged include:

  • Bankrupts
  • Mental impaired people
  • Minors (varies with jurisdiction)
  • Intoxicated people (alcohol, prescription drugs, and other substances)
  • Prisoners
  • Legality

You may not enter into contracts to provide services that are illegal in your jurisdiction.

Mutual Obligations

In service contracts, both parties must perform their obligations, which should be clearly defined. This means that one party may not decide not to perform its obligations and expect the other party to uphold its obligations. One party may not have the power to cancel the contract or perform its obligations at will. This would be a one-sided agreement that will not pass the test of a contract.

Factors that Can Void a Contract

A contract can be voided, partly or wholly due to any of the following reasons:

  • The contract involves committing a crime, defraud someone, or doing something corrupt.
  • The contract affects the public good, public safety, and international relations.
  • The contract affects justice or limits the jurisdiction of the courts.
  • The contract affects the status of a marriage.
  • The contract restrains one party from trading.
  • The contract misrepresents facts, is deceptive or unconscionable.
  • The contract allows only one party to alter the terms or terminate the contract.
  • The contract penalizes only one party for breach or limits the obligations of only one party.

Basic Structure of a Service Contract

There is no definite structure of a contract. You may frame the contract however you want. The critical thing to note is to include certain terms, clauses, conditions, and obligations to protect both parties and make the contract enforceable. These terms should be clearly stated in simple language.

The following items are important to include in the structure of the contract

  • Parties-should be clearly identified
  • Duration of the contract
  • Definitions of technical terms
  • A detailed description of the services to be offered
  • Milestones and the dates they are due
  • Payment details, including amounts and dates. Penalties, fines, interest, if any, should be stated
  • Indemnity clauses
  • Warranties
  • Dispute resolution mechanisms
  • Termination conditions

Tips for making a Solid Contract

Put it in Writing

Contracts can be both in writing and verbal. Both are enforceable in a court of law. However, written contracts are much better than verbal ones.

Correctly Identify Each Party

Many contracts have been voided due to incorrectly identified parties. An organization should be identified in its full name and address. An individual, too, should be identified with their name and other identifying information such as an ID number.

Gavel on black background with copy space. Concept for legal, lawyer, judge, law, auction and attorney.

Use Simple Language

Write your contracts written in easy to understand language. Lawyers prefer a lot of legal jargon, but this doesn’t make the contract any more enforceable. It only adds to the ambiguity. Paragraphs should be numbered for ease of reference.

Negotiate with the Person Signing

At times, a junior employee will talk to you and refer to the boss every time they are not sure about something. This back and forth will waste time and bring in uncertainty. The party that will sign the contract on behalf of the organization is preferred

Agree on Dispute Resolution Procedures

Solid contracts have a clause that specifies the steps to be taken in case of a dispute. It is good practice to avoid the courts in the first instance and try arbitration. This should be clearly stated. Where dispute resolution will take place should also be specified.

Agree on Confidentiality and Non Disclosure

One party is likely to come across the other party’s privileged information. Confidentiality clauses ensure this information doesn’t find its way to the wrong hands.

Contract Etiquette/Language Guide

  1. Effective contracts make use of simple, clear language. Business language is preferred rather than legal jargon.
  2. Each clause or paragraph within the contract should address just one thing. They should be numbered for ease of reference.
  3. If there is a technical term used, make sure to define it. It doesn’t matter that both parties understand what it means. It should be clear to any other person reading the contract.
  4. Read the contract and revise it as many times as possible. A misplaced comma can change the entire meaning of a sentence.
  5. Avoid the temptation to use archaic terms such as hereto, ab initio, ad hominem, etc. These terms can bring in ambiguity. Use clear, simple language instead.
  6. Use active language.
  7. Keep your sentences short. A good rule of thumb is to keep them less than 15 words.
  8. Don’t leave any blank spaces in the contract. Cross out such spaces to avoid any additions.

Negotiating and Drafting the Contract

Contract negotiation skills are critical to have and refine. As an entrepreneur/service provider, you will find yourself in numerous situations that require a contract. Some people don’t like negotiating and would rather go about their work. However, you will need to do it to look after your interests when working with other parties. Do not just sign any contract that is placed before you for fear of avoiding negotiations. Do not be hurried to sign. Instead, take your time to read and understand what the contract stipulates. Take the extra time to understand what your obligations are and what will happen if you do not deliver on them. If anything is not clear, always seek legal advice.

Before entering any negotiations, you need to prepare adequately. Preparation includes learning more about the other party and the individuals you are likely to negotiate with. Prepare your side as well. Identify what you can accept and what can be a deal-breaker. Know what concessions you are willing to offer. Negotiations are not about winning or losing but finding a middle ground where all parties feel comfortable.

All details should be clear to both parties. The obligations, scope of work, responsibilities, payment terms should all be clearly understood. Rather than negotiating the contract as a whole, negotiate clause by clause.

When you have agreed on every detail, one party should draft the contract and send it to the other to verify if it contains what they agreed upon. Before you commit to signing the contract read it once more. If anything was not agreed upon, highlight it, and send back the contract. Never feel pressured to sign on anything you have not agreed on.

Ending a Contract

There are various ways a contract can end.

●  Once work has been completed and payment has been made

●  By agreement of all parties

●  By breach of contract

●  By frustration – where one party feels it is not in a position to continue due to circumstances beyond their control

FAQs

Does a contract have to be written to be enforceable?

No, a contract doesn’t have to be written. Oral contracts are enforceable too. However, in certain conditions, the law requires a written contract. If the services offered are more than $500, most states will require the contract to be written.

It is good practice to have written contracts for all your work engagements. It ensures that you and the other party engaging your services fully understand your obligations as outlined in the contract.

I am a freelancer working remotely, do I still need a contract?

Yes, having a contract is very important. More and more businesses are engaging freelancers for remote work. You can negotiate, draft, and sign a contract remotely. Contracts can be signed electronically. This will be a valid contract enforceable in a court of law.

What makes a contract null and void?

A court may declare a contract null and void due to many reasons. Some of these are illegality, fraud, corruption, lack of capacity of the parties to enter into a contract or lack of consideration.

Can a contract be amended once signed?

Once both parties have signed the contract, it is generally not amendable unless both parties agree to make any changes.

The Bottomline

Small business owners, entrepreneurs, freelancers, contractors need to acquire contract drafting skills. In the course of your work, you will need to enter into contracts with people you provide your services to. Knowing how to negotiate and draft a contract is very important. You will know what your rights are and how best to protect your interests. You will not always need to hire a lawyer to draft simple contracts. You can draft these yourself. However, if you feel at any time you require the services of a lawyer, do not hesitate to contact one.

To get your free template for service contracts, just put in your name and email below to receive a download link.

Cited Resources

https://www.businessdictionary.com/definition/service-agreement.html

https://www.nolo.com/legal-encyclopedia/how-to-draft-a-service-agreement.html

https://definitions.uslegal.com/s/service-agreement/

https://www.consumer.ftc.gov/blog/2015/01/warranties-and-service-contracts-101

s://www.legalmatch.com/law-library/article/what-is-a-service-agreement.html

https://treasury.gov.au/publication/working-with-contracts-guide/

https://docs.microsoft.com/en-us/dynamics365/business-central/service-how-to-create-service-contracts-and-service-contract-quotes

https://smallbusiness.findlaw.com/business-contracts-forms/contracts-basics.html

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