Important Contract Terms

Important Contract Terms for Service Agreements

A contract for services serves several important purposes. It establishes legal rights and obligations of each party to the contract, sets out the expectations for each party, and addresses how issues that may arise will be handled. But in order for the contract to effectively serve these goals, it must include the appropriate terms (also known as clauses, sections, provisions, etc.). Below is a list of ten important contract terms that should be considered in every contract for services. Note that this list is not in not in any particular order, and it is not an exhaustive list of contract terms to be included in a service contract. In addition, some terms may go by different names; what is important is not the name used for the contract term but its legal effect.

Ten Important Contract Terms

1.  Term/Duration:  

All service contracts should clearly state the term of the contract (when the contract begins and when it ends). This seems obvious, but it is one of the most important contract terms that can easily be overlooked. This clause is necessary because it makes clear when the contract will be effective. Although it seems simple enough, if you forget to include an explicit provision defining the effective term of the contract, you could find yourself in a dispute on the issue.

2.  Responsibilities/Scope of Work:

A clause that clearly explains the obligations and duties of each party to the contract is one of the most important contract terms to include in your entire contract. This clause requires attention to detail and will be very specific to the nature of the services to be performed. Often times, businesses and organizations will have “boilerplate” terms that they pull from other contracts but will then glaze over the actual responsibilities for each of the parties. Even if you have had prior discussions with the other party about the services that will be performed, it is important to spell out the responsibilities in detail in the contract. In the event that a judge, arbitrator, mediator, or other person resolving a dispute needs to figure out whether a party to the contract fulfilled its obligations, a well-drafted “Responsibilities” section can help efficiently resolve the situation. A good rule of thumb is to imagine being a third party (such as a judge) reading the contract without knowing anything about the parties or the situation and think about whether the responsibilities of each party would be clear based solely on the language in the contract.Of course, there are times where the responsibilities need to be open-ended as it may not yet be clear what the responsibilities of each party will be in the future, but the agreement should specify the details that are known and use terms that a court can enforce. Note that a detailed scope of work can be attached as a separate exhibit to the contract.

3.  Payment Terms: 

If the nature of the contract is an exchange of money for services (as opposed to a contract for an exchange of services, or some other arrangement), the contract should have a clear term explaining how much the contractor will receive and when the contractor will receive the payment. As is important with all contract terms, the more detail provided, the more clarity there will be for the parties and for a judge or other person interpreting the contract. The payment term can include any necessary approvals or other steps that must be met prior to payment and should provide a process for how the contractor will invoice your business for the services. The payment term should also specify the party that will be responsible for costs incurred in furtherance of the services. If the payment schedule becomes too detailed for the body of the contract, you can attach an exhibit to the contract with the necessary information.

4.  Dispute Resolution Terms: 

This can be a tricky clause in a contract because it expressly recognizes that a dispute may arise. After all, who wants to talk about dealing with future problems when the relationship is just getting established? Although this may seem awkward, it can save a lot of time and money in the unfortunate event that a dispute does arise. The most common contract terms dealing with dispute resolution are “Mediation” and “Arbitration.” Mediation requires the parties to attempt to resolve a dispute through mediation, which is not binding on the parties, whereas arbitration requires the parties to resolve the dispute through binding arbitration. Some contracts contain a “Choice of Law” or “Prevailing Law” provision which makes clear that the laws of a certain state, county, or municipality will govern the dispute. But it is important to note that a “Choice of Law” provision will not be given effect in certain situations where parties cannot contract around the law of a given state for public policy reasons. For example, California law will govern a dispute over wages for work done by a contractor in California for an entity doing business in California, even if the contract says that another state’s laws should govern.

5.  Intellectual Property Rights:

A service contract often results in a contractor providing some sort of work product for the company, or bringing some sort of work product to the company. In this situation, a provision stating clearly who owns the intellectual property rights in the work product is one of the most important contract terms to include in your contract. In many circumstances, the intellectual property rights at issue are complex and are the subject of an entirely separate agreement, which may be incorporated into the service agreement by attaching the IP agreement as an exhibit.

6.  Liabilities/Indemnification: 

Sometimes accidents and mistakes happen during the course of a contract. A business may want to state that it will not be responsible for any liabilities that result from a contractor’s acts in the course of the agreement. By compensating the business for any loss suffered as a result of a contractor’s acts, the contractor is said to “indemnify” the business. There are many variations of indemnification clauses (with varying strength) that may be used in different circumstances, but a well-drafted indemnification clause can be used to shield your business from significant costs and liabilities.

7.  Modifications/Amendments:

As the services under a contract are performed, there is often a need to modify, or amend, the terms of the contract. A clause that makes clear how such a modification may occur will help resolve any later dispute about whether a subsequent discussion between the parties resulted in a change in the terms of a contract. The best practice is to require that any modifications be made by written agreement between the parties. This is one of the most important contract terms in the unfortunate event that a dispute arises over any alleged changes to the contract.

8.  Waiver:

If you choose not to enforce some term in your contract at one point in time, you do not want to lose the ability to enforce that term (or other terms) in the future. The way to prevent this result from happening is to include a clause that states that your business does not waive any rights under the contract based on the fact that you did not enforce a term in a given situation. This is a very important contract term when the contract allows for oversight or enforcement by your business.

9.  Representations/Warranties:

Contractors are frequently hired because of their purported expertise, credentials, and claimed abilities. What happens if the contractor is unable to achieve the result he or she promised? A well-drafted provision stating that your business relied on the representation or warranty by the contractor as a “material inducement” to entering into the contract will provide backing to demonstrate that the failure to achieve the result is a material breach of the contract and that your business should be adequately compensated for the breach.

10. Relationship/Status of the Parties:

Services for your business will often be performed by an “independent contractor” as opposed to an employee of your business (see this article for a discussion on the difference between an employee and an independent contractor). In this situation, it is necessary to have a provision in the service contract stating that the contractor will serve as an independent contractor. The term should do more than simply call him or her an independent contractor by name. It should describe the relationship in such a way that it is clear that he or she is not an employee. For example, the clause should include a statement that the contractor will be responsible for paying their own taxes for the compensation received under the service contract, will not be covered by unemployment or workers’ compensation insurance, will have the ability to decide the day-to-day work to be done to achieve the business’ desired results, and that the contractor is free to pursue other work that is not in conflict with the scope of the service contract.


DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.

Ryan Shaening Pokrasso

Ryan is an attorney who believes that business can be a powerful tool for social change. Ryan's practice focuses on assisting entrepreneurs with entity formation, startup financing, securities regulation, employment issues, business transactions, intellectual property, non-profit organizations, data privacy, and governance.

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