This article is written by Hemal Shah, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Table of Contents
Introduction
A Service Agreement requires at least one entity, in return for goods, facilities or financial benefits, to provide a service for another.[1]
Information including timelines and billing agreements are most commonly used with service contracts. Usually, contracts often specify the job to be done and what process needs to take place if adjustments are to be made. These are legal arrangements which, if necessary, may be contested.
In order to make a service agreement legally tenable following parameters are duly required which are:[2]
Offer and acceptance: The deal shall contain a proposal made by one side and the acceptance by the other party of the same offer. Any changes made in the contract must be agreed by both sides, and no one should be compelled to consent to the terms. The provisions mean that the arrangement is meant to be binding for both parties. If one party isn’t serious, a contract can’t be created.
Mutual consent: Without intimidation or coercion, the offer and approval must be accepted by all sides. The precise terms must be agreed to by all.
Consideration: Something of worth must pass between the two parties in order to be true. Consideration mostly takes the form of currency, but it may be products or services as well. There is something the sides have to share, such as money traded for a service. If compensation is given by only one party, the deal is a gift rather than a contract.
Competence: No individual should be a minor or someone who is unable to grasp what they commit to. Both parties must comprehend what is specified in the agreement. The contract is rendered invalid if any side is considered incompetent.
Legal purpose: No criminal acts should be included in a contractual deal and both sides must be able to secure it plausibly. If the arrangement is based on something that is unlikely, the provisions will be changed by any side as they see fit.
Important indicators to be included in the agreement
In drafting a good service agreement, there are a range of measures involved, including, but not necessarily limited to, the following:
- Defining the groups involved.
- Defining the services to be carried out.
- Describe the fees and expenses associated with the deal.
- Define the length of the contract and the termination thereof.
- Outline classified information.
- Outline any rights to possession.
- Defining the planned collaboration.
- Defines reimbursement.
- Outline addendums of job order.
- Outline any miscellaneous clauses.
Key provisions in a service agreement
The partnership between the Parties. These deals, for the most part, have generic framework and clauses. While a contract with a major supplier is not likely to be negotiable, a contract with a small to medium-sized firm is likely to be negotiable. The following list comprises the major conditions to be considered before entering into a service agreement, including: payment, scope of facilities, alteration, termination, liability protection, secrecy.[3]
Scope of services
A service agreement scope is a clause that determines what services the party should receive. The contract is often referred to as a scope of work or work document.[4] The Party often needs to deal with third parties to complete tasks, select suppliers, receive assistance and customer service, and conduct several other things, regardless of the existence of the party’s business. The scope of the service agreement provides the party and the provider with a complete description of the specifications of a project such that the parties are on the same page. Certain parties in the future face the heat due to the poorly drafted scope of services. A clear demarcation of the services to be offered by either party along with their expertise, saves the time of the parties and reduces the chances of dispute due to the agreed set of terms and conditions in the Agreement.
Payment terms
Payment terms indicate when and how to provide considerations in exchange of the services offered. It is the most negotiated clause in the service agreement since either party is being drawn into this agreement to offer their level of expertise. Payment terms may not only include the types of the payment made or the amount but also whether the payment is inclusive of the GST and who shall bear the burden of the charges involved during international transaction or failure of any transaction.
The Payment terms between the parties can be in either of the following modes:
- Advance Payments
They arise where the sides agree that a proportion of the amount of services will be paid by the payer before the services are offered. This reflects a promise by the payer in the future to pay the entire sum. This also reflects a promise by the service provider to fulfil the services agreed between the parties. Prepayments are usually agreed in the services related to the software development or mobile app development or any kinds of transaction where the service provider might need to invest a certain amount of money to purchase the applications or decentralise such work to other associates for the fulfilment of such services.
- Monthly/Quarterly Payments
This arises on the fixed date decided between the payments which can be either monthly or quarterly. In such transactions the payment is usually processed automatically and can be negotiated in circumstances the service provider fails to deliver the services. However, these payments are halted beforehand, if the parties come to an understanding that they wish to rescind the services beforehand.
- Payment Milestones
Partial Milestones refer to the alternative of several payments. The distinction between partial and periodic payments is that it is only within the completion of the certain service that the payment is made. For example, five quarterly instalments of INR 10,000 will pay for a piece of equipment. Usually, partial instalments are paired with prepayments. In the above example, 20 percent (INR 2,000) in advance and the rest in monthly instalments can be charged by the service provider.
Roles and responsibilities of the parties
Contract responsibilities are those tasks on which each party in a contract relationship is lawfully liable. Each party shares something of value in a deal, whether it is a commodity, equipment, resources, etc. Each party has separate responsibilities on both sides of the arrangement in accordance with this trade. Sales of a good, such as a car, are an example of contract obligations. One party has the duty to transfer ownership of the car, while the other has the duty to pay for it. The terms governing the obligations, such as the form and amount of payment and the time/ place of delivery, will be specified in the contract.
If any side fails to meet its contractual obligations pursuant to the terms of the contract, a breach of contract will typically occur. This may result in a monetary payment to compensate the non-infringing party for their economic damages. As cited above, a clear demarcation of the scope of services will reduce the disputes amongst the parties. In the parallel lines, each party should ideally list the responsibilities and the damages to be paid in case of failure of such responsibilities.
Confidentiality
In several agreements, a confidentiality clause is usually set out. From time to time, depending on the situation and situations, sensitive information can warrant disclosure. For three years after the end of the Agreement, each party to the Agreement shall make fair attempts to prohibit the dissemination of any details specified in the Agreement. However, if it is appropriate to reveal the details, the party must disclose to the other party that the information is being revealed, and to whom. The disclosing party must also state whether, whether for legal or regulatory purposes, he or she is disclosing such details.
There are two types of obligations namely:
Unilateral obligations
These forms of commitments are used as material is revealed to another person, i.e. a prospective investor in a new invention, by one party.
Mutual obligations
These forms of responsibilities are used where the parties to the arrangement reveal details about each other, i.e. when a corporation employs a third-party provider to build a company’s internet distribution portal, through which the supplier often shares proprietary information about the software itself.
The ideal confidentiality clause should include a general summary. Sometimes, the more descriptive the parties are, the more it will get troublesome. It would protect all things in the arrangement if parties keep the provision broad. However, in shorter-term arrangements, such as between a contractual independent consulting position between a tech firm and a computer contractor, a particular explanation may be useful. This provision is not a smart option when entering into a long-term arrangement, because the confidential information can change over time. The primary concept of a confidentiality clause is to ensure that anything in its entirety is specified.
An exclusion clause might be a smart idea, in addition to a secrecy clause. For the receiving party, this is important because it removes such details from the concept of confidential information.
Representations and warranties
A representation is an assertion as to a fact, true on the date the representation is made, that is given to induce another party to enter into a contract or take some other action. A warranty is a promise of indemnity if the assertion is false. The terms “representation” and “warranty” are often used together in practice. If a representation is not true it is “inaccurate.” If a warranty is not true it is “breached.”[5]
The concept ‘Representation’ is not defined by the Indian Contract Act, 1872 (‘ICA’); however, it does describe what a misrepresentation is. It classifies misrepresentation into two categories: deceptive misrepresentation (intention to deceive) and innocent misrepresentation (no intention to receive). As the solutions available are distinct for both, this classification is important.[6]
The counterparty has the opportunity to seek liability in a misrepresentation if there is no attempt to mislead, although the right to repudiate the contract is conditional to whether the misrepresentation may not have been found through ordinary caution. On the other hand, dishonest misrepresentation gives the right to seek damages and repudiate the deal to the innocent party. While, among other items, the ICA describes fraud as the deliberate concealment of a truth by one who has knowledge or conviction of the fact, the ICA also notes quite oddly that simple silence is not fraud, unless there is an obligation to speak. Therefore, since a legitimate requirement to report occurs, there is no obligation on the parties to disclose.
While, among other items, the ICA describes fraud as the deliberate concealment of a truth by one who has knowledge or conviction of the fact, the ICA also notes quite oddly that simple silence is not fraud, unless there is an obligation to speak. Therefore, since a legitimate requirement to report occurs, there is no obligation on the parties to disclose. In reality, the statute puts the duty on the consumer to be conscious of and execute ordinary due diligence, i.e. the concept of caveat emptor-buyer beware. The Supreme Court of India confirmed, in the case of Shri Krishnan v. Kurukshetra University, the principle that simple silence is not theft. It should be remembered, though, that the ICA distinguishes between ‘mere silence (passive concealment)’ and ‘active concealment’ that can be decided by the courts on the basis of a factual inquiry.
Termination
Contract termination is to bring an end to a contract until all those involved have completely manifested their results. Before all the obligations stipulated by the arrangement can be met by the parties, their willingness to satisfy the obligations is cut short.[7]
Basically, the dissolution clears the parties pursuant to the deal from their unresolved commitments. Although the arrangement was ended, that would not indicate that a breach of the agreement was not committed by either of the parties and it may have been the explanation for the termination.
Despite the fact that future duties to comply with the provisions of the arrangement have expired, parties may still file lawsuits for restitution under common law and any termination benefits provided for in the agreement.
The common types of termination are as follows:
1) Voluntarily Termination;
2) Termination on occurrence of default/breach; and
3) Termination due to frustration.
Voluntary Termination
Some contracts provide that, at their discretion, either party can terminate the arrangement. It might be necessary to simply email the other side to tell them that you plan to break the deal, based on the terms of the arrangement. Additionally, once the sides intend to do so, it is often necessary to cancel a contract. The parties to make sure the reciprocal understanding is received in writing. This termination can be with or without cause. However, termination without assigning reason shall not be deemed to be a valid termination in certain other agreements and hence, the parties should make this in writing that the Agreement without assigning the valid clause.
Termination on occurrence of breach/default
What counts as a material violation or default of the agreement can be decided by what is specified in the agreement itself, and an infringement is deemed to be negligence in the execution of the term of the contract. Major penalties may be awarded because of a material violation and it entitles the non-infringing party to treat the material infringement as an infringement of the whole arrangement.
If a substantive violation has arisen depends on the severity of it and the likelihood of achieving what he or she was assured in the arrangement by the wounded participant. The degree of financial injury incurred to the non-infringing participant is not inherently representative of content infringement. It is appropriate to determine the validity of the violation on a case-by-case basis and on the basis of the intent by which the party entered into the agreement.
Termination by Frustration
Section 56 of the Indian Contracts Act, 1872 starts by setting down a simple premise that “an undertaking in itself to perform an act that is impossible is invalid.” For example, because of the impossibility of success, an arrangement to find treasure through magic is invalid. An undertaking to perform an act that is unlikely from the very outset, whether or not the parties were aware of the impossibility, would be invalid.
What if the parties enter into a contract and it was necessary to execute the contract at that time of entering, but the execution of the contract becomes difficult or unconstitutional due to a supervening cause or circumstances beyond the control of any of the parties. Agreements of this type are thwarted and thus invalid. A decides, for instance, to sell a tract of land to B, but the government has taken this tract of land for some official reason because of some government policy. As the execution of A’s obligation has become unlikely, the deal is frustrated and B will not sue A for non-performance of his duty.
Force majeure
What better example than the COVID-19 Pandemic to explain the importance of the Force Majeure clause in the Agreement. The importance of the terms Pandemic and Epidemic proved to be crucial in almost all the circumstances, Delhi High Court along with the Bombay High Court explaining the anticipation of the unfortunate circumstance by adding the required terms tested waters of the Agreement in all forms. However, this clause stands to be an extremely crucial clause in the Service Agreement as it enables the parties to decide as to when to cease the services at the occurrence of such instance and the payment to be received by the service provider on occurrence of such instance.
The Force Majeure clause should ideally consist of the following points:
Usually, a force majeure clause of a contract may contain an exhaustive description of incidents such as acts of God, war , terrorism, disasters, floods, political acts, explosions, fires, plagues or epidemics or a non-exhaustive list in which the parties merely narrate what normally constitutes force majeure events and then add “and other occurrences or events beyond the scope of force majeure events.”[8]
This must also require provisions which would have been met to appeal to the contract under the force majeure provision and the implications of the occurrence of the force majeure incident. Consequences would require the termination of the parties’ commitments after a force majeure case happens.
Indemnity
Simply placed, it is a statutory provision in which a party agrees to pay a loss to another party. As the receiving party, there are major benefits of having an indemnity clause in an agreement, but these advantages can only be accomplished by express and unambiguous drafting. In drafting and securing an indemnity, this note would discuss some of the main themes to remember.
Indemnities may provide a group of remedies that are not usually recoverable when written up correctly. It is clear that it is important to get the language correct when writing an indemnity clause. It is also evident, however, that the remainder of the contract can be viewed in order to see how closely the indemnity provision, along with other applicable provisions, suits the protections offered. Of course, we will be very pleased to assist if you need some advice on writing an indemnity.[9]
Limitation of liability
A restriction of obligation provision provides that, under the terms of an arrangement, a party would be obliged to pay the other party in such a situation. This provision restricts the amount of harm a party will recover from the other, as well as the forms of damage. In service agreements, this provision is more common and usually benefits the service provider who wishes to control its visibility. The reason behind such a provision is to protect the service provider from accepting a risk that may not be commensurate with the limited fee that may be paid for a certain assignment or handling of an equipment or thing.
In certain situations, the profit margin of the service provider on projects or assignments may justify the taking of unlimited risk in relation to them. Several riders and disqualifications often come with insurance protection and even insurers rely on restricting liability provisions in deals.[10]
Ownership of intellectual property
Intellectual property is a creation of human intelligence and the privileges given to it cause its creator, by creating a monopoly on it, to prosper from the fruits of this intellectual endeavour. This advantage is not always an inherent right, although a statute needs acknowledgment. Intellectual property rights ( IPRs) play a vital role in all industries and have been the foundation of important investment choices. IPRs are proprietary rights, but the challenge is therefore to find a balance between the needs of innovators and the interests of society as a whole.
Conclusion
Service agreements are the most common forms of agreement between the parties and it is not only essential to limit the costs but also to prevent litigations or disputes between the parties. With the series of incidents being out there, it is pertinent for both the parties to understand that anticipation of the circumstances and their remedies are laid down and even if not, an exception to such obligations without attaching any liabilities is a must.
References
[1] https://www.upcounsel.com/provision-of-services-agreement
[2] https://www.upcounsel.com/difference-between-service-agreement-and-contract
[3] http://www.rubiconlaw.com/service-agreement-provisions/
[4] https://www.upcounsel.com/scope-of-services-agreement
[5] https://uk.practicallaw.thomsonreuters.com/8-382-3760?transitionType=Default&contextData=(sc.Default)&firstPage=true
[6] https://www.mondaq.com/india/contracts-and-commercial-law/955660/revisiting-representation-and-warranty-clauses
[7] https://www.upcounsel.com/termination-agreement-definition
[8] https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms
[9] https://www.mondaq.com/uk/contracts-and-commercial-law/715936/the-importance-of-getting-an-indemnity-right-in-a-commercial-agreement
[10] https://www.mondaq.com/india/contracts-and-commercial-law/613966/limitation-of-liability-clause-in-an-agreement#:~:text=A%20limitation%20of%20liability%20clause,can%20recover%20from%20the%20other.
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