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Allan is the cofounder of LessAccounting, loves his family more than breathing and builds weird lamps for fun.

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Understanding Service Contract Legal Jargon

Written by on Nov 4
service contracts

Before we get into the meat of things, it’s morally necessary for us to remind you that when you are in the service industry, try not to make too many life-changing work decisions sans a contract. Of course, you want to trust the guy you are doing business with, but don’t trust him too much!

What Should You Look for or Include in Your Service Contract

Price: It goes without saying that $$$ is the most important element in a contract. Make sure you clearly specify how much your services are going to cost. Tip: Have a provision for an upfront payment and a performance-based payout. For example, if 50% of the project is delivered, 50% becomes payable immediately and so on.

Side Note: What if your client files for bankruptcy? Should you still be paid for the services you provided? Never accept a project without guaranteeing the source of payment. Try to set an upfront payment that is due as soon as your start the project and then have periodic payments as you reach specific project milestones.

Don’t forget: If any additional costs could come up, you want to add that point under your price term. Mention how you want payment made–via check or PayPal. And if a third party tacks on any fees, you want to identify who is responsible for such fees.

One last thing…you want to include a penalty for late payment.

Dates: If any situation could delay delivery of your service (like the unexpected departure of a key employee) to the client, then identify those situations early on.

Termination: You don’t want to be stuck with a client who isn’t appreciative of your work. The termination clause helps you avoid such a situation. You can avoid being sued for breach of contract by including a “proper” termination clause.

By the way, look out for language that allows either party to terminate for any cause and without notice–this may give you the right to bounce whenever you like, but at the same time it lets the client terminate for any reason as well. Instead, have language that permits termination after 30 days’ notice and only “for cause.” You want to go into detail as to what events constitute “cause.”

Indemnification: Very very very important. Did we mention that it’s important? Basically, a service provider will want the indemnification clause to say that they can’t be sued for anything that goes wrong with the service they provide when a third party is injured. On the other hand, the hiring party will want to say the exact opposite. Show them who’s boss!!!

Warranties: Don’t sell your soul to the devil. Only guarantee what you can really provide. Just remember, every state has its own laws, but typically, implied warranties include a promise to provide a service that is fit for a particular purpose, if so stated. Huh? That basically means if you were supposed to design a website, DESIGN the website!

Changes: After your work product has been delivered, what if your client comes back to you for changes? How much are you paid then? This is something you want to discuss with your client.

Dispute resolution: Do you want to go to court or would you rather settle your dispute via arbitration? Arbitration is when you have a neutral party of your choosing settle your dispute with another party–rather informal and less scary! You have the right to go to court to settle any dispute but at the same time you may not have the money to do so. If you decide to use an arbitrator for your dispute, do you want one arbitrator or a panel of arbitrators? Would you rather have an industry expert or just some random dude you like? Either way, these are some of the decisions you make here.

Boilerplate Clauses and Why You Shouldn’t Avoid Them:

Keeping an eye out for boilerplate clauses is important because often lawyers don’t really think twice when they include boilerplate clauses in service contracts. However, it is important to review each of them in detail because you may be giving up more than you want.

Common Service Contract Terms

Governing Law: You probably want the law of your state to apply and not a state whose name you can’t spell (is it one or two S’s in Miss…ppi?). This clause defines which state’s laws apply if a case goes to court. It doesn’t matter if the parties are local but freelancers might want to keep an eye out for this.

Venue: If, for whatever reason, a dispute arises and you need to go court, pick the court closest to you. No one wants to have to drive to no man’s land!

Amendments: Don’t let any changes to the contract be automatic. You want the contract to be drafted such that both parties have to agree to changes and if one party doesn’t, then no change is allowed. However, this could be detrimental to you if you are the party proposing the change. Typically, language such as “consent shall not be unreasonably withheld” is added to reflect a fair negotiation between the parties.

Attorney’s fees: It’s harrowing enough that you have to pay your own attorney, now imagine paying for the other party’s attorney. That’s why you have this clause. It usually states something to the effect of “losing party pays everyone’s attorney,” but what’s important is that it reminds people that they probably should stay out of court. They might end up losing and paying more than they wanted to in the first place. (Read note on arbitration, above.)

Entire agreement: This clause basically says that if you or the client promised anything or discussed anything that hasn’t been included in the written contract, it means nothing to anyone. Any outside promises are ignored as a result of this clause. That means only one thing–if annual Disneyland passes were part of your payment and it’s not in the contract, say, “Bye Bye” to Mickey for me.

Acceptance Criteria: The issue of client satisfaction will come up. Clarify how deliverables will be accepted and tested and identify situations that will permit rejection of deliverables.

I know–a LOT is to be said about contracts and how confusing they are. Hopefully, we helped clear up some confusion. At the end of the day, the message is pretty straightforward–Always Read Your Service Contract!!

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