By most measures, over three-quarters of the U.S. economy is service based. Chances are high that you or your company are in the business of providing intangible products. If that applies to you, take a second look at these provisions before you enter into your next agreement:
Description of the Services
A. It may be stating the obvious, but you must make sure the description of the services is narrowly drafted to cover only what you intend to provide and what you are capable of providing and ensuring. The description of services in many service agreements are left to an exhibit and are often not drafted by attorneys. As a result, they often contain informal and sometimes hyperbolic language that may provide a greater burden on your delivery obligations.
B. You also need to be sure that the description of the services does not inadvertently contain a representation or warranty about how the deliverable will perform or what results the customer can expect – the warranties you are offering with respect to the services (if any) should be carefully considered and set forth with specificity elsewhere.
C. Lastly, make sure that the description of services does not contain language that allows the recipient to reject the services or any deliverables in their sole discretion. I’ve come across many informal service descriptions that will state that the deliverable is subject to approval by the recipient, without any information as to what that approval should be based on and what standards the service provider is aiming to meet.
Limitation of Liability
A. When you are entering into a business relationship, you have to consider what is an acceptable level of risk you can take on.
In a typical, run-of-the-mill business arrangement, both parties generally understand (whether they acknowledge it directly or not) that there is always some level of risk when entering into a relationship and that one party should not have the right to shutter the other party in the event the relationship does not unfold as expected. Accordingly, parties will often agree to a limitation of liability that caps the parties’ maximum exposure.
By doing so, the parties acknowledge that although there is a small possibility the damages may exceed the cap, that risk is inherent in in the operation of business generally, may be insured against, and is a fair allocation of risk to get the likely benefit of the arrangement.
If you are the party that is performing the services (as opposed to the party simply paying for services), moving forward without a limitation of liability is riskier because the level of damages you may cause are potentially wider and more unknowable. Potentially, you could be exposed to a world of liability, including all the liabilities that result from the failure of your services and the consequences that may follow.
B. Be aware of exclusions to limitations of liability. The concept that certain liabilities should be excluded from a liability cap is easy to understand.
For example, if a service provider damages the other party in a malicious or willful manner, it seems only fair that there would be no cap in such event. However, some service recipients will try to make broader exclusions, including, for example, for indemnification obligations – i.e., the service provider’s indemnification obligations are not subject to the liability cap or other limitations.
Depending on the extent of the service provider’s indemnification obligations, this exclusion could render the limitation of liability provision nearly meaningless, especially if the service provider is agreeing to indemnify the recipient for all damages that arise in the event of a breach of the agreement.
Ownership of Underlying Intellectual Property
A. Typically and understandably, the party contracting for the services will include language that all work product created as a part of the services will be owned by the party seeking the services.
Service providers need to be careful to ensure that any underlying intellectual property that it has independently developed and that it may have used in providing the services or even incorporated into the services will remain the intellectual property of the service provider. For example, this includes:
- Proprietary processes;
- Methodologies; and
- Other trade secrets
B. If you are concerned about title to the work product passing to the recipient before they have paid you in full for the services, consider including a provision that ownership of the work product will not transfer until all outstanding invoices related to the work product have been paid in full, or that the ownership will revert back to you in the event payment isn’t made by a certain date. Provisions like this may be particularly important where the value of your work product is particularly high and involved a high degree of originality or ingenuity.
This article only highlights a few items you should pay attention to when entering into an agreement to perform services. If you have questions about anything mentioned here, or any other provision in your service agreement, please feel free to reach out to me directly to see if we can help.