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Service Agreements: Common Considerations

Caveat Legal

Millions of agreements are concluded every hour, globally. Often, the provisions of some agreements are overlooked or glanced over in pursuit of getting the deal done. Given that the devil regularly lies in the detail, an agreement could quite easily save or break a business – as a consequence, you would want to ensure that you are the party on the safer side of that equation.

Business representatives may at times be tempted to simply pass agreements on to their legal counsel for review, without getting too involved in the review process themselves. While having a legal eye run over the agreement is always the prudent approach, it is also important for business representatives to have a good grasp of agreements and how to read them so that the commercial terms are carefully assessed and negotiated. I have found that the most solid transactions are those where both business and legal representatives have worked closely on the transaction with the business-person being fully familiar with, and contributing to, its provisions.  An agreement reviewed by a lawyer only may not fully and practically deal with the commercial considerations, whereas one reviewed by only a business-person may lack the protection which a lawyer would ordinarily contribute.

The opportunity of working closely with a lawyer on agreements whenever possible should be embraced as this will provide better legal-related insight. Reviewing an agreement during those times when it’s not practically possible or feasible to have a lawyer review the agreement, can be stressful. Below is a list of eleven aspects to consider when attempting a “lawyerless” review of an agreement for the supply of services by a service provider:

  1. Purpose of Agreement– Consider the introductory clause/s of the agreement. Do you feel that the purpose of the agreement and what it is aimed at regulating come across clearly?
  2. Parties– Check to see whether the parties are correctly detailed in the document.
  3. Duration and Termination– Check the rights available to you for exiting the agreement:
    1. Are you tied into the agreement for an unreasonably long period of time? You ideally want the ability to exit through the provision of notice to the service provider (for example 30, 60 or 90 days’ notice), without needing to provide reasons for terminating and without a penalty/early termination fee being imposed on you by the service provider.
    2. At the same time consider whether the nature of the agreement warrants tying the service provider in for a certain defined period. This may be important if they are providing an intricate service offering that would require big changes before an alternative service provider can be brought onboard. You would also want to ensure that there are provisions allowing for a satisfactory handover from that service provider to another party if necessary.
  4. Exclusivity– Are you bound by any exclusivity obligations (ie to only work with the service provider in respect of the services concerned)? This can be unduly onerous. It is best to be able to keep your options open and not restrict yourself to one service provider. On the other hand, is there a need for you to propose clauses that protect you should the service provider provide services to your competitors?
  5. Scope of Services– Are you comfortable that the scope of services is correctly detailed? Do you want to impose any service levels for provision of the services (and penalties/credits for failure to meet those service levels)?
  6. Rights of Recourse– Consider whether sufficient recourse is provided in the agreement for defective supply of services.
  7. Pricing– Ensure that you are completely in agreement with the pricing/costs listed in the agreement, and that they are clearly detailed in one section in the agreement, and that there are no hidden costs. Ask the service provider to include a provision to the effect that the costs listed in the agreement are the total costs contemplated and that no other costs may be charged without your prior written consent. As for pricing increases, ensure that any increases will not be imposed more than once annually, that the date of increase is specified, and that your prior agreement is required for increases above whatever percentage you are happy to commit to in advance.
  8. Warranties– Check that the service provider provides warranties in relation to the services to be provided by it (ie that they are fit for purpose and use; that their provision of the services is lawful and not prohibited; that the services are lawful; that suitably skilled personnel will be used for the supply; that no rights of third parties are affected etc), and that the agreement includes an indemnity for any breach of those warranties.
  9. Ownership of Intellectual Property (“IP”)– If you want to ensure that you own the intellectual property over any deliverables being created for you (particularly if your business has contributed to the creation of the deliverable in any way, whether intellectually or through its proprietary information), ensure that this is reflected in the provision dealing with intellectual property. Often companies provide that they will always own the IP in respect of any deliverable and simply grant you a license to use it.
  10. Protection of IP and Confidential Information– If your IP and confidential information will be provided during, and for purposes of, the contractual relationship, ensure that you are comfortable that there are provisions in the agreement to protect and guard against unauthorised use or disclosure thereof by the service provider.
  11. Limitations of liability:
    • If obligations (other than payment obligations) are imposed on you, check that your potential liability under the agreement is satisfactorily capped.
    • Has the service provider limited its liability towards you if they breach any term of the agreement? Check their cap on liability. Be sure you are comfortable with the amount you can recover from them if things go wrong. You may want to include provisions around them having appropriate insurance cover and you having the right to be provided with satisfactory proof of their insurance cover from time to time.
    • You may want to exclude the liability cap applying to a breach of the confidentiality and intellectual property provisions (ie to ensure that the service provider will be fully liable, with no cap on liability, if they breach the clauses that protect your confidential information and intellectual property).

As all agreements are different, their terms should be carefully assessed on each occasion. The above is therefore not intended to be binding legal advice or a complete checklist for the review of an agreement but merely serves as a guide on the types of aspects to consider. I have found them to be common considerations when it comes to agreement reviews.

It is impossible to have full control over the terms and conditions another entity will send your way when you engage with them for their services. For this reason, it is worth having your own approved internal agreement template for the supply of any products or services by other parties. Through this you will ensure that the terms and conditions are readily acceptable to you. The scope of service, fees and any other conditions required by the service provider can be added in schedules to the agreement.  Your approach would then be to start the contracting process by requesting that the service provider, or product supplier, signs your agreement (as opposed to the one submitted by them).  In my experience, most companies are happy to accept this approach while larger ones may insist on the use of their template (especially where their services are heavily regulated).

For all agreements that you feel warrant more than a “lawyerless” review, we at Caveat are here to assist. We are available on an ad hoc basis or on call for retainer clients, and can provide assistance with the drafting of standard templates to be used by your business with confidence and peace of mind.

Shaylyn McDonald

Shaylyn has an LLB (cum laude) from Wits and was admitted as an attorney in 2008 after having completed her articles at Werksmans where she rose to the level of senior associate. After joining Bell Dewar (now Fasken) she took up an in-house position where she rose to the level of general counsel. Shaylyn joined Caveat in 2018 focusing on corporate and commercial work.

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