Understanding Service Agreements: Key Terms

A Service Agreement is a legally binding document between you (as the service provider) and your client (who is receiving the services). A Service Agreement sets out the terms of the engagement and determines each party’s rights and responsibilities. In particular, it defines the nature of the services provided, any service levels or deliverables, the payment mechanism, the terms of the agreement and the method(s) of termination. These are the basic commercial terms that make up a Service Agreement and accordingly it is of vital importance that they are drafted correctly and are a true reflection of the agreement between the parties. When reviewing the terms of a Service Agreement, apart from the clauses that go to the basic mechanisms of the engagement, consider the following important clauses.

Engagement Clause

Under a Service Agreement, the service provider can be engaged as a contractor or as an employee. The legal obligations of a service recipient differ depending on whether they engage someone as an employee or as a contractor. Employees have a legal entitlement to minimum employment standards, to be paid superannuation contributions by their employer, and the right to have their PAYG tax contributions withheld and paid on their behalf. A contractor, on the other hand, is regarded as being independent and in business for themselves, accordingly, they have no such employee entitlements. Consider which type of engagement mechanism is right for you.

Indemnities Clause

A contractual indemnity is a form of security or protection against loss or burden. The clause is included to cover a situation where loss or damage is incurred during the provision of service, including legal fees sustained by another (usually the other contracting party or a third party). The main objective and effect of a contractual indemnity clause is to alter the otherwise standard common law or statutory rights of the parties. When reviewing indemnity provisions, it is essential to tailor the clause to the particular circumstances of the engagement, ensure that you can meet the obligations imposed upon you under the indemnity clause and take out insurance to cover you.

Limitation of Liability Clause

Liability clauses limit or exclude the parties’ liability under the contract. Liability clauses can be drafted to limit or exclude the liability of one, some or all of the parties under the agreement. Where such clauses purport to limit rather than exclude liability, they often do so by reference to a cap, usually in the form of a maximum dollar amount that can be claimed in compensation. Again, consider whether you can meet the obligations imposed upon you under a limitation of liability clause and what you need to do to protect yourself as well.

Insurance Clause

You should be aware of any insurance you may be required to obtain under the contract and whether the contract requires any parties to be noted down as interested third parties on the policies, and whether this is possible under your policy. Ultimately, it is important to ensure that you are adequately covered.

Key Takeaways

When engaging someone to perform services, ensure that you have a comprehensive Service Agreement. Ensure that you are aware of the employee or contractor status of the service provider, and think about including clauses that will limit your liability, as well as cover you in case of loss or damage.

If you would like a Service Agreement reviewed, drafted or simply want more information regarding the same, why not contact our team of LegalVision contract lawyers to see how we can be of assistance.