Every business relationship runs on trust, but it is not the only thing that can protect the profits of the business. There should be a written agreement for guarding every partnership that the business enters. Whether it is outsourcing of the support function, hiring a consultant or engaging a logistics provider, there should be a written agreement that defines the level of service that must be provided.
This is known as a Service Agreement, and it defines the ground rules that will keep the projects on track and prevent disputes from arising. In this guide, we will learn about service agreements and why they matter to a business.
What Is A Service Agreement?
A service agreement is a formal contract that formalises the relationship between a service provider and the client. It records the work that must be done, the quality standards to be met and the rights and duties of the client and the vendor. In other words, it ensures that everyone is aware of what is expected from them and how the success will be measured.
When the terms of the agreement are documented upfront, it can help in avoiding misunderstandings between the teams and make them focus on the outcomes. By outlining the scope of work, payments to be made, duration of the contract and dispute resolution mechanism, the service agreement reduces uncertainty and makes the parties accountable for the work.
In India the service agreements draw their enforceability from the Indian Contract Act 1872, which provides that such agreements are legally binding when they are made with clear terms and genuine consent from the parties involved.
A valid service agreement must include all the essential elements of a contract. These are:
- Offer
- Acceptance
- Lawful consideration, and
- Mutual consent
Service agreements can cover a one-time project or an ongoing arrangement for providing recurring services, such as maintenance, consulting or technical support. With the ever-increasing reliance of the enterprises on third-party vendors, digital partners and consultants, having well-drafted and legally valid service agreements has become absolutely necessary for improving their efficiency and compliance.
When is a service agreement needed?
A service agreement must be created whenever one party provides service to another in exchange for a fee or any other consideration. It brings clarity to what the deliverables are, delivery timelines, and the performance standards to be maintained. Without having a service agreement, these things can be interpreted by different people in various ways, resulting in unnecessary misunderstandings being created.
Enterprises create service agreements when they outsource work to third-party vendors, marketing agencies, consultants, facility managers, and maintenance partners. Another major area where service agreements are executed is technology. Large enterprises commonly use them while hiring cloud service vendors and firms that help in technology integrations.
Service agreements are also signed within an organisation. For example, the internal teams may offer service-level contracts regarding the usage of shared service units. These internal agreements help all the departments to define measurable outcomes and manage accountability.
Without having a service agreement, even the smallest disputes can quickly snowball into larger and costlier conflicts. Having a written contract ensures that search possibility is eliminated and everyone is aware of their roles and limits and the delivery expected from them.
Types of Service Agreement
There is no uniform service agreement that covers all types of engagements. The format of the service agreement and the level of detail it covers will depend on the type of work being outsourced, the duration of the engagement and the complexity of the deliverables. While each service agreement is customised, here are the main types that businesses commonly use.
- General Service Agreement
These are used as standard service agreements in outsourcing, where the tasks, timelines, and payment milestones are clearly defined. These are ideal for short-term projects and one-time assignments.
- Master Service Agreement (MSA)
These are executed when long-term business relationships are being developed. These are the umbrella contracts that provide the overall legal and commercial frameworks that will govern these ongoing assignments. As the work progresses, more projects and work orders are added to the MSAs to save time and maintain consistency.
- Consulting Agreement
These are commonly used for hiring professional and advisory services. like management consulting, HR, and technology advisory work. , where maintaining confidentiality and safeguarding the intellectual property rights of the client are critical.
- Maintenance or Support Agreement
These are executed while hiring ongoing technical or operational support, such as IT infrastructure maintenance and equipment servicing. They are most commonly found in management consulting, HR, and technology advisory work, where maintaining confidentiality and safeguarding the client’s intellectual property rights are critical.
- SaaS or Technology Service Agreement
IT companies that provide SaaS tools and software development services to clients execute these service agreements. These include clauses on the uptime guarantee, data security, access rights, and privacy safeguards that will be maintained in accordance with the privacy laws of the country.
Essential Clauses Every Service Agreement Should Include
A well drafted service agreement strikes a balance between clarity and protection for both the client and the service provider. Every clause in a service agreement helps in setting clear expectations and reducing risks. Hence, they must be drafted very carefully to avoid ambiguity and minimise the risks.
The following are some clauses that must be a part of every service agreement:
1. Scope of Work
This clause defines what services will be provided along with their expected timelines, quality standards to be maintained, and the exact deliverables. Any work that is done outside this scope of work must be approved in writing by the client to avoid exceeding the brief.
2. Payment Terms
All the information related to the project payment must be mentioned in this clause. Details of how the payment will be made, milestones, late payment penalties, etc. are some of the points to be included.
3. Confidentiality and Intellectual Property Rights
This section outlines the third-party vendor’s obligation to protect the client’s sensitive business information. It is a binding clause that the vendor must always adhere to.
4. Liability and Indemnity
This limits the amount of financial exposure of the parties in the event of a loss. It also defines who will bear the responsibility for losses that are caused by negligence, breach or third-party claims.
5. Termination and Renewal
As in every other contract, the service agreement must also mention when and how the agreement can end. It must also specify the notice to be given by either party for such a termination. If the parties want to continue with the agreement, there should be a provision for manual or automatic renewal as well.
6. Dispute Resolution
This clause specified the process of resolving any disagreements between the parties that may arise. Some acceptable methods for dispute resolution are mediation, arbitration, or court proceedings. The clause must also identify the laws that govern the agreement and the jurisdiction where the disputes will be settled.
In a strongly drafted service agreement, these clauses will provide a clear framework that will protect the business interests of both the parties and establish a smooth working relationship between them.
How To Draft An Effective Service Agreement
While drafting a service agreement you must strike a balance between the legal requirements and the needs of the business. The following is a checklist that will help you in drafting a strong service agreement.
1. Define the relationship clearly
Identify both parties correctly and describe the nature of the engagement, whether it is project-based, ongoing, or on retainer.
2. Detail the scope and deliverables
Write down what work will be done, by whom, and when. Vague descriptions often lead to disputes later.
3. Clarify the commercial terms
The service agreement must clearly mention the amount of payment that will be released upon completion of each milestone. It must also include details regarding the payment methods and taxes that will be deducted. Both sides must also agree on how any changes in the project cost or the delays will be handled.
4. Address ownership and confidentiality
Mention who will own the final product or the work done. The agreement must also have provisions related to the protection of sensitive information that may be shared during the work.
5. Plan for risk and disputes
You must also add some essential clauses for limitation of liability and indemnification of the parties if there are any losses. Provisions related to resolution of conflicts must be added as well.
6. Keep it adaptable
When the enterprise executing the service agreement operates across multiple regions or scales quickly, the service agreement must allow for modular changes to its terms. This will help the legal teams to update it without having to rewrite the entire agreement.
A well-structured service agreement drafted with these best practices in mind will set the foundation for good governance. It will act as a tool that the legal teams will be able to use to manage their vendor relationships confidently.
Next Steps
Once a service agreement is signed, it has to be managed efficiently to get the best benefits out of it. Unfortunately, many enterprise legal teams struggle with managing these manually. The agreements are often stored in different folders which are not shared among all the team members. This results in missed renewals, unclear ownership and even legal liabilities.
This problem can be solved with the help of modern contract life cycle management (CLM) software. It digitises the entire process of contract management and provides timely alerts and intelligent insights into upcoming renewals, provisions not being met, and laws getting changed. With most of the contract management process getting automated, the legal teams become more efficient, and they are left with extra time to do more strategic work.
Legistify’s Contract Life Cycle Management software integrates artificial intelligence into the entire contract management process. It gives the legal teams a unified view of their contract performance and their business impact.
If you want to see how it can strengthen your service agreement management and experience predictive CLM in action, book a demo now.
