Service Contract Essential Clauses You Should Have In Your Agreement

When it comes to your outsourcing service contract, getting nine essential terms right at the outset is the best way to protect your company if things go awry.

Service Contract Essential Clauses

Everyone knows that head-to-head negotiations are no fun, especially at the start of a new and exciting business relationship. Therefore, it’s vital to get things started out right to keep that relationship going.  A rock-solid service contract is the best way to protect both sides 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 fail to sign a contract at all.  However, it is important to know that 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 should protect assets, deals, reputation, and, importantly, should help determine how litigation or a dispute will be resolved.  A good contract is also good practice for extending the life of the relationship between the parties.

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.

The 9 Essential Clauses for Service Contracts

Recitals

The recitals clause 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 in service contracts. 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 clause clear and concise in service contracts is essential to help give both parties the peace of mind to focus on the project at hand rather than the financial elements, allowing space to build a healthy business relationship.

Commissions

Another service contract essential clause is the commissions section.  Lack of good commission language can lead to unnecessary headaches early on in the relationship. Important questions to address in service contracts 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 very important clause 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?  These are essential questions to clearly answer in this section of the service contract. 

Work Product

This contract clause is particularly essential and 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 of the contract, 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 is an essential contract section that 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 it is a necessary and essential clause of a service contract.

Parties should look into their operations to determine how much advance notice is necessary prior to termination. Furthermore, answer questions such as: 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 contract section 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 address these nine service contract essential clauses, they end up getting along better and doing business together longer. Clearly written terms will more likely than not result in longer relationships.

Key Takeaways on the 9 Essential Clauses for Service Contracts

Service contracts should include clauses that will help the parties understand the agreement terms and enjoy the business relationship by:

• Being clear about the parties and the work product;

• Providing details on timing of the various obligations for each party;

• Covering expectations regarding confidentiality and intellectual property; and 

• Including provisions for termination, law, and venue.

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