These service contracts guidelines are appropriate for large organisations and will be too detailed and formal for many self-employed, freelance suppliers and small businesses. Adapt the level of detail and formality according to your situation.
Contracts and services agreements are essential business tools for professional trading and business relationships. Without clearly defined and agreed contracts, misunderstandings can develop, expectations of client and provider (customer and supplier) fail to match, and all sorts of problems can occur.
While the tradition and spirit of shaking hands on a verbal deal between two friends in business is helpful in underpinning a good trading relationship, it is sensible for significant supply arrangements to documented and agreed, usually by signatures.
Aside from the process of clearly agreeing and understanding the expectations between supplier and client, contracts or agreements also help if one or both of the original deal-makers one day move on, which can then give other people the problem of how to make sense of what might or might not have been agreed between the two parties.
The need to use formal signed trading agreements is markedly greater when you are managing supply on behalf of a company or employer. If you run your own business, are self-employed or freelance, then you have arguably more freedom to work with less formal controls - it's your business after all - and in many cases very detailed supply agreements can be an obstacle for small businesses, so adapt and interpret these guidelines according to your business size and level of liability.
These guidelines represent a prudent and safe approach. You can reduce the formality and detail according to your own situation, but be aware of the risks if you leave potentially contentious matters vague and open to dispute.
Formal signed agreements or contracts are also useful, and can be essential, for when service problems or failures occur, or for when the customer's or client's requirements change one way or another. Proper contracts and agreements provide an essential reference point upon which to discuss and negotiate effective outcomes whenever situations change, in terms of the client's requirements and the provider's capability.
Of course, a detailed contract will rarely enable the recovery of a lost relationship or break of trust, but in such situations it's helpful not to face added problems of litigation (prosecution or defence) without having the back-up of decent contract.
Trading and services relationships can be tricky at the best of times, so it's important to do all you can to clarify and agree the detailed expectations and obligations for both sides at the beginning of any supply arrangement. Suppliers and customers are each extremely vulnerable to expensive and distracting disputes if there is no written agreement to refer to when and if necessary.
A well-designed service contract provides a really useful platform and constant reference point for good positive mutually beneficial trading relations, so it's worth thinking about it and getting it right at the outset. It's often said that contracts and agreements are usually shut away in a drawer and never looked at again after they are signed, and in many cases this is true, but the supplier's and client's freedom to get on with the business is largely enabled because they've properly considered each other's position, and agreed the basis of supply in the form of a proper contract. They've no need to look at the agreement because the trading relationship has been properly established, which is enabled by the process of drawing up and agreeing a sound and suitable contract.
The process of agreeing a contract is therefore, aside from anything else, an excellent way to flush out and make transparent all aspects of the supply or service arrangement, much of which is otherwise commonly 'taken for granted', usually including many wrong or mismatched assumptions on both sides. A good trading contract enables such risks to be averted.
Trading and supply contracts come in all sorts of shapes and sizes, but essentially they contain the same fundamental elements, which are summarised in the listing below.
Trading contracts are called many different things; including: supply agreements, service agreements, services agreements, management contracts, service contracts, trading agreements, supply contracts, details of supply, details of services, schedule of services, services schedules, and just about any other permutation of these words that you care to construct.
What matters is not what the contract is called - it is what the contract contains, and how the contents are worded, that count most. This is why for large important contracts, which carry significant legal responsibilities and potential liabilities, it is sensible to involve a solicitor or lawyer in producing the contractual documents.
Service contracts and supply agreements are used for all manner of trading and commercial arrangements and relationships, for example:
- provision of services from one organisation to another
- provision of services from an organisation to a private consumer
- management of services by an organisation or provider on behalf of a client organisation
- direct contracting of services
- sub-contracting of services
- licensing arrangements between two organisations or bodies
- franchising arrangements between a franchisor and franchisee or franchisees
- rental supply of products and/or services by a services provider to clients, either corporations or private individuals
- provision of equipment in conjunction with leasing or other financing arrangements
- and many other types of supply agreements and commercial trading arrangements
Trading and supply arrangements of these sorts apply in all industry sectors, and can involve any type of service or product supply.
It is very important to distinguish and recognise the difference between supply to a commercial or institutional organisation, compared to the supply of services to private consumers:
Private consumers (which in many cases can include commercial partnerships and sole traders) generally enjoy a far greater level of legal protection in the area of contracts and obligations than corporations and institutions. The supply of services to private individuals is governed by different laws (for example the UK Consumer Credit Act), which hold significant implications for 'consumer' contracts and agreements that do not apply in the supply to corporations and other large formally constituted bodies. Therefore particularly special care and qualified advice is required in establishing contractual terms and documentation for the supply to private individuals and consumers. The broad principles on this webpage do not explain these detailed implications, but they do provide a broad practical structure for creating a basic supply contract, which must then be interpreted and appropriately formulated by suitably qualified advisors.
The responsibility for establishing a good professional supply agreement can lie with the supplier or the customer, although in the case of service agreements with private consumers there is a clear responsibility for the supplier to operate within the relevant consumer law, which stipulates that certain contractual obligations rest firmly with the supplier.
Generally the supplier instigates the contractual process, but (especially if you are considering these principles from the customer's perspective where the customer is a business or institutional body), if the supplier does not instigate the contract process, then the customer must do so, if only for the customer's own protection. In this situation the recommendation is for practical rather than legal reasons.
Many customers have fallen foul of a situation whereby the supplier fails to provide a proper services contract, which can then leave the customer terribly vulnerable should service fail in any way.
Here is a basic structure for a service contract. I repeat: you must get qualified advice in drawing up the detail and wording of the contract document, especially if the services contract is of a substantial nature, or carries potentially large liabilities, and also especially if the supply is to private individuals, who as already explained, enjoy certain additional legal protections which need to be reflected in the contract or agreement document.
That said, service contracts and agreements should be simple and fit for purpose - you will perhaps not need to include all the points shown below if the business is relatively small and if you have a good level of trust with the clients.
If you are self-employed and need a simple trading agreement please don't be intimidated by the apparent scale of this subject, which necessarily becomes quite complex for large suppliers. Many service contracts for freelancers and self-employed suppliers can fit onto a table napkin, so don't make a mountain out of this if you don't need to, and/or if your clients and business simply needs a short exchange of emails or letters to agree expectations. I've highlighted the essential points below which would apply for a small low-liability service business, and for these situations you will notice that I do not even regard signatures as essential. A simple exchange of emails or letters - and the fact that you are actually delivering the service - often provides all the contractual security you need.
- description/purpose/the service (basically the product/service description)
- parties (supplier and client - including addresses)
- territory/geographical coverage
- definitions - essential glossary 'root' of frequently occurring items in the document
- term - period of agreement
- pricing (refer if appropriate to attached schedule)
- pricing adjustment (for example annual increases linked to suitable index)
- responsibilities of provider - include or append details of services and SLA's (service level agreements)
- responsibilities of client
- payment terms
- dispute and arbitration process
- termination and force majeure
- prevailing laws
- signatures and witnesses
N.B. Items in bold are the typical essential or minimum points required in the most simple and basic small business trading agreements. Note that it is often possible to establish workable service agreements for small businesses without the need for actual signatures on a dotted line. Laws vary of course around the world, but in many situations an exchange of letters or even emails is deemed to be sufficient legal agreement for certain types of supply, especially for self-employed, freelance, or small businesses supplying other larger businesses. Generally the level of contractual detail and 'legal correctness' required increases when services entail financial services, products or services which carry potentially high liabilities (e.g., safety, environmental, financial, etc), and especially when supplying consumers with financial services; services which carry significant financial implications; and any other services of a strongly regulated nature, e.g., healthcare, property, childcare, etc.
Where necessary append to the contract any detailed schedules (which be can changed over time, subject to the agreement as a whole), for example SLA's (service level agreements). SLA's are basically detailed standards of performance for individual service aspects, e.g., response times, reporting and monitoring, liaison with other suppliers, and specific detailed deliverables. Large complex agreements might have many pages of complicated SLA's appended, which would be referenced in the service description section and responsibilities of the provider. Such an agreement would also need to state the terms governing the alteration of SLA's, which is where the whole thing can potentially disappear up its own backside if you fail to keep a clear head, and a tight rein on the lawyers.
In any event a decent corporate solicitor will help (and is usually sensible to consult anyway for anything beyond relatively small business supply situations) to draft the final document, and will probably have all sorts of sample templates and contract examples, although do not engage a solicitor to work too early in the process of drafting the contract: you should first consider and write down the basic supply arrangements before asking a solicitor to get involved in the detail; the solicitor is responsible for the legal wording, not for the operational aspects of the supply arrangements or the basic business proposition (unless the proposition is such that it requires legal input and approval anyway).
The solicitor is responsible for wording and legal structure of contracts. You are responsible for deciding your terms of trading.
Certain supply arrangements can involve a supplementary contract or agreement, notably in the case of leasing or financing where another party provides funding, in which case the main service or supply contract must make appropriate reference to the supplementary agreement, and must integrate relevant terms with it, and not conflict with anything contained within it.
As already indicated, for small supply arrangements, which carry minimal liabilities, especially where a small provider is supplying a larger corporation, it is perfectly acceptable to administer the contract documentation in the shape of a simple 'exchange of letters'. In this process, one party, normally the supplier, simply writes to the prospective customer, stating the terms and details of the supply. The structured list of headings above can be used as a basis for an exchange of letters or as a check-list in creating a letter. The prospective customer is then able to suggest amendments to the letter, and so this process continues until agreement is reached, which is finally reflected in a simple exchange of two identical letters, each signed by both parties. This contractual process is a lot less formal, and generally a lot less expensive and time-consuming than involving solicitors, which many small providers usually prefer to avoid if they can.
Small providers can commonly save a lot of time and effort by asking large prospective customers if they already have a standard supply agreement, which many do and are happy to extend to new suppliers for adaptation.
Finally, when and if you use a solicitor or lawyer to help draft a service contract or agreement, you will save a huge amount of time and expense if you first think about and write down the essential workings and expectations of the supply arrangement.
The solicitor's job is to formulate an effective legal document - not to design the supply arrangement. You must therefore involve the solicitor after you have thought through and written down the supply arrangement.
The more work you can do in completing the section headings shown in this guide, then the less you will end up paying your solicitor, and the quicker your solicitor will be able to produce a final version.
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