Canada: Top Ten Tips In Negotiating Service Agreements

Last Updated: August 1 2013
Article by Ted Maduri and David Spratley

There is little doubt that the landscape for IT service providers is quickly changing. Demand for their services has continued to grow as client organizations streamline their operations and look to leverage technology's capacity for innovative solutions. The result is a dynamic business climate with challenges and opportunity. In these conditions, there is considerable value for service providers in the protection afforded by a well-drafted service agreement.

This is important for two reasons. First, those agreements help the service provider in its day-to-day business of providing services and getting paid. Second, agreements that protect the service provider's business and assets make it a more desirable target for investment or acquisition.

Like any contract, the service agreement should be clear on the fundamental business terms: who is doing what, and when, where and how are they doing it? These terms may be directly addressed in a single-purpose services contract, or may be addressed in a master services agreement with multiple project-specific work orders or statements of work entered into from time to time. Regardless of the contract structure, however, all service agreements should address the ten important issues discussed below. Note that this article is written from the service provider's point of view – customers reviewing service agreements may be concerned about different issues, and may have different perspectives on the issues discussed below.

1. Define the scope, specifications and service levels. Clearly identify the services that the service provider will provide and any specific deliverables or end results, as well as any interim or final timetable or delivery schedule. If necessary, clarify whether the service provider will be creating or developing all of the deliverables, or whether some deliverables will be third-party equipment or software. Also clearly identify all applicable specifications, metrics, key performance indicators and service levels, so that deliverables and performance can be measured against objective goals.

2. Have a clear and workable acceptance mechanism. There should be a clear mechanism for addressing how deliverables will be tested and accepted. Acceptance should be tied to the objective specifications, so that a failure to meet those specifications is the only basis for rejecting a deliverable. The customer should have a limited period in which to reject a deliverable, and should have to give detailed reasons for any rejection. If the customer does not reject a deliverable within the applicable period, the deliverable should be deemed accepted.

3. Be clear about payment. Clearly set out the invoicing and payment terms. The service provider should not wait until the end of the assignment or agreement to invoice the customer, but should bill on a monthly basis or upon achieving certain milestones. Billing on a timely basis will help cash flow and establish expectations. Requiring an up-front deposit will also help with cash flow, and will help screen out customers who are unlikely to pay in the end. Also, be clear about what additional expenses (third-party assistance, travel, accommodation, etc.) the customer is expected to bear. The service provider should require payment within, for example, 30 days following the invoice date.

4. Include protection in case the customer does not pay. Include contractual protections to help the service provider if the customer doesn't pay. For example:  

a. Reserve the right to charge interest on overdue payments. Under the Interest Act, the right to charge greater than 5% interest must be specified in the invoice or contract, and interest rates must be stated as an annual rate. Typical interest will be charged at 6-12% annually, calculated daily, and will accrue from the date that the payment was due until the date that all outstanding amounts (including interest) are paid in full.

b. Make the customer responsible for repaying collection expenses (such as legal fees).

c. Reserve the right to suspend services if payments are late, and clarify that any such suspension does not breach the agreement. If the agreement doesn't address this point, the service provider could be forced to continue to provide services even while not being paid.

d. Obtain security where appropriate and possible. For example, if the customer takes possession of property before paying for it (e.g., because the customer can pay in arrears), the service provider should take security in that property in case the customer does not pay.

e. If the customer is a shell company with few assets or is thinly capitalized, consider requiring a guarantee from its parent company or another shareholder. Guarantees may be difficult to obtain, but the benefit of having one warrants exploring the possibility, especially for substantial contracts.

5. Keep an eye on the clock. A missed deadline can have important consequences. Build in some protection by clarifying that the service provider is not responsible and not in breach for missed deadlines caused by the customer (for example, by the customer's failure to provide timely information or instructions or necessary access to facilities or equipment, or to communicate in a timely manner or to otherwise not cooperate under the agreement).

6. Clarify who can terminate, for what, and what happens on termination. Both parties should be able to terminate for a material breach that is not cured within a specified period (usually 30 days). It is also common to allow one party to terminate if the other party becomes bankrupt or insolvent. Termination for convenience is more problematic, and may not always be appropriate. If the customer can terminate for convenience, consider whether there should be a cancellation fee to compensate for the loss of the bargain or to at least cover out-of-pocket expenses, or whether the customer forfeits any pre-paid amounts. Finally, clarify what obligations apply on termination – for example, the customer should immediately pay for services performed up to termination for which the service provider has not been paid.

7. Limit representations and warranties. Carefully review any representations and warranties requested by the customer to make sure the service provider can provide each one. Where appropriate, add knowledge, materiality, or other qualifiers to appropriately limit the scope of a representation and warranty. Only give limited performance warranties regarding the products or software provided (that originate from the service provider – the original supplier's warranty should apply to third-party products).

8. Consider liability issues carefully. One of a contract's most important functions is to allocate risk and liability between the parties. Disclaimers, indemnities, insurance and limitations of liability all relate to risk allocation, as follows:

a. Disclaimers: Representations and warranties can be deemed or implied by statute or at common law, even if they are not expressly set out in a contract. It is good practice to set out whatever representations or warranties the service provider wishes to give with respect to its products or services, and expressly disclaim all other representations or warranties so that they cannot be imputed into the contract.

It is also good practice to limit the service provider's monetary liability for breach to direct damages by expressly excluding indirect, special, incidental or consequential damages arising from breach (for example, business interruptions, lost profits, etc.). Customers may try to carve out exceptions – for example, damages flowing from breach of confidentiality are likely to be mostly or all consequential, and so a customer concerned about confidentiality would want to exempt those breaches from the disclaimer.

b. Indemnities: An indemnity is a contractual obligation by one party to be responsible for certain loss, damage or liability incurred by the other party. Indemnities are often heavily negotiated, and as matter of course the service provider should try give as few indemnities as possible (the customer will always be able to try to sue at common law for losses suffered even if there is no indemnity). Try to limit any indemnity that the service provider does give by carving out liability arising from the customer's own negligence or intentional misconduct.

Customers will often expect an indemnity against claims that its use of the service provider's services or deliverables infringes third-party IP. This is not unreasonable, but limit exposure by reserving the right to address the issue (e.g., by procuring the right for the customer to continue using the impugned deliverable or by modifying the impugned deliverable so it is not infringing) and by carving out liability that should not be attributed to the service provider (e.g., the customer's failure to use the impugned deliverable in accordance with the service provider's instructions or applicable documentation). Also clarify that the specified remedies are the customer's exclusive remedies with respect to IP infringement matters, so that if the infringement claim is fully addressed the customer cannot still seek other remedies for breach.

c. LOL – limitation of liability (no laughing matter): The service provider should cap its total liability under the agreement. Cap mechanisms vary – it can be a fixed amount, a variable amount (e.g., total fees paid under the agreement, or fees paid in a specific period or under a specific statement of work), the insurance maximum, etc. If possible, make the limitation of liability apply to all liability arising under the agreement, including indemnity obligations. However, some customers may push for uncapped liability for certain situations such as IP infringement claims and confidentiality breaches, and for personal injury and tangible property damage.

d. Insurance: Insurance clauses are not necessarily standard, but they are not unusual. Customers may wish to specify what insurance is required, and in what amounts, for comfort that the service provider can meet its indemnity obligations. If the agreement requires insurance, make sure the specified coverage and amounts are reasonable ($1-2 million general liability and errors and omissions should be sufficient in most circumstances). Review the insurance provisions carefully, and seek feedback from the insurer.

9. Protect the business. Intellectual property, confidential information, personnel and business relationships are important parts of a business, and the service provider should protect them all.

a. IP ownership: Depending on the nature of the parties and the services, IP ownership can be a touchy subject. Each party will want to retain its existing IP (and the service provider should make sure that it specifically carves out its pre-existing IP and residual knowledge from anything owned by the customer), but what about new IP created during the relationship? If the customer is paying for the IP to be developed, it may expect to own the IP (though its ownership should only vest once the service provider has been paid in full). On the other hand, if the new IP relates primarily to the service provider's business then perhaps the service provider should own it (and may have priced the project on the expectation that it would be able to use the IP with other customers in the future). These issues, among others, should be considered and addressed from the outset, and there is no one-size-fits-all solution. That said, avoid joint ownership of IP if at all possible, as it creates a host of complex issues.

b. Confidential information: If the parties will be exchanging or will have access to confidential business information, include provisions about the protection and use of that confidential information, the types of information that are excluded from those obligations, what happens if the recipient is compelled to disclose the other party's confidential information, and the term of the applicable obligations. If the services may also involve the disclosure or use of personal information, then the agreement should address applicable privacy laws.

c. Personnel and business relationships: Consider a non-solicit provision that prohibits the customer from hiring away the service provider's employees, contractors or agents during the agreement or for a given period after termination. Also consider broader provisions prohibiting the customer from soliciting the service provider's customers or potential customers for the purpose of competing with the service provider's business. Customers may ask that these sort of restrictive covenants be mutual.

10. Mind the boilerplate. Standard legal provisions (i.e., the "boilerplate") are important but are sometimes overlooked. Some key standard provisions to consider are:

a. Entire agreement: This clause forestalls claims that promises, representations and warranties were provided outside of the written agreement.

b. Assignment and change of control: Resist assignment and change of control restrictions, as they affect the service provider's marketability and ability to reorganize its corporate structure. If the customer insists on an assignment restriction, sometimes the concern is that the service provider will simply outsource its obligations; if so, clarify that the customer will not unreasonably withhold consent to an assignment, and include an exception allowing the service provider to assign the agreement without consent in association with the sale of all or substantially all of its business.

c. Law and jurisdiction: To avoid the customer raising defences not known to the service provider, and to ensure that judgment can be obtained and recognized in a known manner, clearly specify that the laws of the service provider's jurisdiction apply to the contract and that the parties submit to the jurisdiction of its home courts. That said, clarify that either party can apply to any court for any equitable relief such as injunctions.

d. Dispute resolution: Consider whether a dispute resolution clause is appropriate. This can be as simple as stating that the parties will try to resolve any disputes amicably and in good faith before escalating to court, or as complex as requiring non-binding mediation to be followed by binding arbitration, if necessary.

e. Force majeure: This clause specifies that the parties are not responsible for their failures to perform due to causes beyond their reasonable control. Carve out the customer's payment obligations so that the customer cannot try to rely on the force majeure clause to excuse missed payments.

Service agreements do not have to be complex documents, but considering the various issues discussed above will help service providers make sure that their service agreements are thorough and provide the necessary protection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions