Contracting for Services – Pitfalls
Businesses will commonly need to engage the services or others to obtain the benefit of their expertise. Ideally, that is best done on the businesses’ own template contract, with terms that benefit itself. For example, if the business is engaging a creative person, a key required outcome is that the business obtains the desired intellectual property rights (and preferably ownership) to what is created (otherwise, for example, the creative will retain copyright).
Some service providers present their own contract. Often, this will be ok, particularly if the contract is to be performed over the short term and with a very specific outcome/deliverable. However, such contracts should nonetheless be reviewed, both commercially and legally.
Where I have recently seen businesses run into trouble is for longer term service contracts with a more amorphous outcome. Such as engaging a service provider to run your SEO over time. SEO, to me, is like a hidden black box: who knows what goes on in there and outcomes are hard to judge (unless obviously successful).
The risk is if you become dissatisfied with the service provider’s performance, but perhaps can’t point to a breach, you will still be contractually liable for the fee payable for the entire term of the contract even if you purport to terminate it. So they get paid for doing nothing! For example, a two year SEO contract for a fixed monthly fee, if it isn’t working after 6 months you are still up for 18 months’ worth of fees.
Problem terms of such contracts include:
- No warranties about the quality of the services provided;
- No KPIs, no promised outcomes and no deadlines (not promised in the contract anyway, regardless of what you were promised verbally);
- An entire agreement clause, meaning if it isn’t written in the contract it doesn’t count;
- A fixed minimum fee payable every month;
- For a fixed minimum period, often one to three years;
- Automatic renewal for another period unless one party notifies the other they want out, usually with notice required well before expiry of the current term;
- No right to terminate without cause;
- A limitation of liability in favour of the service provider, but no reciprocal limitation for the benefit of the business; and
- The business provides an indemnity to the service provider, but this is not reciprocated.
To minimise your risks in this regard, in descending order of preference:
- Contract based on your own template contractor’s agreement; or
- Thoroughly review their contract with support from a commercial lawyer; or
- Insert one clause, to minimise the loss: “Notwithstanding any other term of this Agreement, the Customer may at any time terminate this Agreement without cause and without penalty on one month’s written notice to the other party and payment after that period of all fees due and accrued up to the end of that notice period (but no fees payable thereafter)”. (This may need slight adaptation for each contract e.g. is the business called “Customer”, “Client” or “Company”?)