What type of service contract is best for my business

ONE-OFF SERVICE AGREEMENTS, STANDARD TERMS AND CONDITIONS, AND MASTER SERVICES AGREEMENTS

What are service contracts?

Service contracts set out the details of the relationship between the business and its clients, and are key documents for any business. They should include the scope of service being provided to clients, pricing, and contractual protections such as limitation of liability.

What are the different types of service contracts?

Services contracts can take any of the following forms:

  • One-off service agreement with a client.
  • Standard terms and conditions with all clients.
  • Master services agreement (sometimes called a framework agreement) where different services are provided through work orders.

Would one-off service agreements be the best?

Service contracts are often prepared as one-off service agreements. As they are usually negotiated, they tend to be balanced between the business and its client. As such, one-off service agreements may be most appropriate for long-term or high-value contracts.

Can standard terms and conditions be used so that all clients have exactly the same service contract?

The business might want to use standard terms and conditions with all its clients. This means then that the business does not need to negotiate separate agreements each time.

Your business might like standard terms and conditions for the following reasons:

  • Save time and expense - There is no need to draw up specific contracts for each individual transaction.
  • Favourable terms - The format of standard terms and conditions discourages negotiation. This enables the business to have terms in its service contract which are favourable to itself, for example, terms limiting liability.
  • Certainty - A business using its standard terms and conditions knows it’s trading on the same legal basis with all of its clients.

There are disadvantages such as:

  • ‘Battle of forms’ - A client might still insist on trying to negotiate the standard terms and conditions, or the client might in turn try to impose their standard terms and conditions – so called the ‘battle of the forms’.
  • Restrictions on limiting liability - There are greater legal restrictions on the extent to which a business can limit its liability when trading on standard terms and conditions than on one-off agreements. For instance, terms by which the business restricts its liability for breach of contract may only be enforceable if they are reasonable.
  • Inappropriate use - Standard terms and conditions might be used for transactions for which they are not appropriate. The business would want to establish additional procedures, for example, proposed contracts over a certain value are always reviewed before they are issued.
  • Need for regular review - Standard terms and conditions should be regularly reviewed to make sure they reflect the changes to the business and law.
  • Might need more than one set of standard terms and conditions - The business may need more than one set of standard terms and conditions for its different services, which can complicate matters.

Would master services agreements provide most flexibility for services contracts?

Master services agreements (or framework agreements) provide a framework for the business to fulfil different orders for its clients. The master services agreement might be negotiated between the business and its clients initially, but after that, each order uses that same contractual framework. The master service agreement and the order together make up the legal contract for a particular transaction.

They might be useful to the business because:

  • Helpful with similar transactions - Agreeing a process and a set of standard contractual terms makes it easier and faster for the business to reach agreement where there are likely to be a series of similar orders.
  • Consistency and economies of scale - Where different companies within the client’s group enter into similar transactions with the business, the use of a master services agreement brings consistency to the terms on which the transactions are made. This assists in the management of the contracts and the associated transactional risks. The aggregation of orders with the same contractual framework may also have other benefits such as economies of scale.

The disadvantages of using master services agreements include:

  • Complexity - If there are only likely to be few similar orders, it might be better to use a one-off service agreement. The one-off service agreement can then contract for all orders at the outset (with perhaps an option to terminate for the later orders); or agree the terms which apply to the later transactions, with only a limited number of matters that can be changed in the later orders.
  • Uncertainty - Inconsistencies might arise if individuals negotiating future orders have not been involved in setting up the master services agreement.
  • Impractical - If the future orders are going to be very different from the original order, a master services agreement may not be practical.

What next?

To determine which type of service contract is best for your business, you need to consider the nature of your services, the number and complexity of transactions, and the potential risks and liabilities. You will also need advice to ensure that your contracts provide adequate protections and comply with applicable laws and regulations.

If you need assistance with service contracts, we can help you create and negotiate contracts that are tailored to your specific needs. Get in touch.

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