Why do I need a Service Agreement and what should it include?

Service Agreements, also sometimes known as “Consulting Agreements” or “Freelancer” or “Service Provider” Agreements, are essential when providing your services, or purchasing services from a company or freelancer – however, they can be daunting.

At Gerrish Legal, we want to remove the stress associated with Service Agreements, and breakdown any legal jargon. Here are some practical tips on why, when and how to use Service Agreements.

Is a Service Agreement even needed and if so, why?

When you are providing services as a service provider, or whenever you hire a consultant, such as a freelancer developer, you need to ensure you agree the terms setting out how you will collaborate. Such terms are often called a Service Agreement, a Consulting or Consultancy Agreement or a Service Provider Agreement.

Having an appropriate contract in place will help you to provide and/or receive services efficiently and will help to avoid any disputes that may occur later down the line. It will also help to ensure that both parties are on the same page (literally) right from the get-go.

A Service Agreement has 3 key benefits:

• Legal protection: A Service Agreement is a contract that creates a legally binding obligation, and in the case of a breach by one party, for example, if the service provider does not provide the services or deliverables as agreed, or the recipient of the services does not pay for the services, the affected party may be entitled to redress.

• Align on expectations and working rules: a Service Agreement allows the parties to align on key issues before the services are commenced. This can include agreeing upon:

• whether payment is for the services, the deliverables, or both;

• if any intellectual property rights are transferred or licensed;
• when and how the relevant fees are to be paid;
• if there are any specifications to be met, including issuing a Statement of Works with the Service Agreement;
• any deadlines or limit on hours to be spent by the service provider;
• independent freelancer status determinations (this is usually assessed on a per assignment basis and should be checked with an accountant).

• The parties mean business: Often, startups or freelancers are afraid to issue a Service Agreement, but by requiring such a contract, a party is showing maturity and seriousness; signing a Service Agreement gives weight and gravitas to your business. Conversely, if you are receiving services, providing a Service Agreement shows that the services to be provided are important to you.

What is a Service Agreement worth in practice?

It is always better to have a Service Agreement in place than to not have one.

However, if a Service Agreement is vaguely drafted or if key clauses are missing, e.g., it is not clear if payment is for the services or the deliverables, or how fees are calculated, then there is arguably little weight in the Service Agreement.

Indeed, badly drafted Service Agreements can do more harm than good – such as where a client refuses to pay for the work provided, or the service provider refuses to hand over the deliverables despite payment, and the Service Agreement does not provide for any solutions. In such a scenario, the affected parties would have to either rely on lengthy legal proceedings, incurring significant legal fees in the process, or worse, lose out by doing nothing.

Real Life Case Studies:

• Where things went wrong for a company purchasing services:

A startup in London engaged a freelance developer to build their product over several months - with no agreement in place. Eventually, the relationship turned sour and the freelancer disappeared with the code he had developed and the money the startup had paid him.

The startup, despite having paid for the code, and therefore the copyright in it, did not own this copyright. The law states that copyright always belongs to the creator (which in this case was the developer) unless there is a provision expressly transferring it to the person ordering the works in an agreed contract. If the parties had executed a Service Agreement before the company commissioned the works, including a clause on transferring intellectual property rights – for example, transferring upon payment – then the startup would have avoided such problems.

• Where things went wrong for a freelancer or services provider company:

It is common knowledge that by not having a Services Agreement in place, or having a subpar agreement in place, it is usually the freelancer or services provider that is most at risk. As such, there have been so many examples of things going wrong for these parties.

This has included:

• a freelancer from Italy whose liability was not capped under a subpar agreement, which left the freelancer open to pay substantial amounts in damages when a claim was bought against them;
• fees not being agreed in writing, so the service provider was not able to be adequately compensated for the work completed;

• payment being contingent on client accepting deliverables, which meant the UK-based freelancer was not able to be paid until the client accepted the end product, after numerous rounds of amendments – despite the freelancer being a specialist in her field; and
• a freelancer who signed an agreement containing a non-compete clause, which meant that she could not work with any of her client’s competitors for a certain period of time – which significantly restricted her business.

However, it is true that not having a Service Agreement in place does not necessarily mean that a freelancer or service provider providing services in the UK cannot be paid for their work. In this scenario, they can rely on an English law concept called quantum meruit.

Quantum meruit allows you to make claims for the amount you deserve in return for the services rendered. However, in practice, you would only receive a “reasonable” sum, so may miss out on the entire sum, and this would only be after a long and costly legal claim, which can sometimes mean it does not make commercial sense to pursue such a claim.

As such – you should always ensure you have a Service Agreement with these provisions in the first place!

Next Steps – understanding Service Agreements

The importance of a well-drafted Service Agreement goes without saying.

The next step is to understand what the relevant provisions in a Service Agreement mean and importantly, how to negotiate them.

The best way of ensuring you get more favourable terms in any Service Agreement - regardless of whether you are providing or receiving services – is to provide your own Service Agreement up front, or as we say in the business: “provide your paper”.

This way you can ensure all of your Service Agreements are aligned, and that you have a good basis on which to negotiate, and ultimately conclude them.

Of course, your Service Agreement will have to be amended and adapted according to your specific use case, such as by setting out details of the other party, the duration and nature of the services, the governing law (if things go wrong), and last but not least - the fees for the services rendered, i.e., are these fixed-fee, or based on an hourly or daily rate? Are fees contingent on successfully providing deliverables?

Depending on the nature of the services and the parties involved, you should have a Service Agreement which covers areas such as:

• the extent of the assignment, such as including a statement or schedule of works;
• how the services will be provided;
• the right to any substitutes;

• fees, expenses and payment terms;
• who will pay tax and any social security contributions;
• the duration;
• the parties obligations, such as respecting health and safety, provision of equipment or access to premises;
• setting out liability, any indemnities and any required insurance policies;

• competition and exclusivity;
• which information is confidential and for how long;
• who owns or licenses intellectual property rights;
• how is personal data processed, if any;
• how the agreement is terminated;

• whether acts of God or force majeure can affect the services; and
• last but not least, which country’s law will apply to the agreement and where will disputes be heard.

Luckily, Gerrish Legal has created an automation tool to help you prepare your own bespoke Service Agreements, by breaking down these provisions to ensure you and your contracting party have a secure and coherent agreement.

You can access our tool here and can book in a 30-minute consultation with one of our human lawyers if you need any bespoke advice!