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No doubt you will be aware of the alarming number of high-profile Federal Court proceedings commenced this year that deal with AFSL holders monitoring and supervising their service providers (or not) in some shape or form.
Monitoring your service providers becomes challenging when you don't have the right agreements in place.
Now is really the perfect time for you to think about what to look out for when negotiating these kinds of arrangements.
What are Services Agreements?
If you're looking for a legal definition as such, a services agreement is really a legally binding contract between two or more parties, where one party agrees to provide a specific service in return for compensation. In the highly-regulated financial services industry, services agreements are more than just formalities. They are legally binding contracts which define the rights, responsibilities, and expectations between the parties to the agreement.
Within the financial services industry, services agreements are frequently the appropriate type of agreement to govern the relationship between Australian financial service licence ("AFSL") holders and their Authorised Representatives, where those Authorised Representatives are not employees of the AFSL holder. Services agreements can also be the appropriate type of agreement for other contractor or consultant style relationships, such as the relationship between a financial services business and compliance consultants and auditors. The agreement between client and financial services provider is also typically a type of services agreement.
As we have seen again recently, services agreements are extremely important when supervising your service providers.
Why do I need one?
A typical services agreement sets out the scope of services, fees, service standards, timelines, and legal protections for all parties. A services agreement defines what is expected from each party to reduce misunderstandings and should ensure that both parties know what services will be delivered, when and how. The services agreement thereby serves as a framework for the relationship, helps to prevent disputes and offers recourse if things go wrong.
In terms of a rule to live by, you need to ensure that your services agreement is drafted in such a way so that anybody who picks up the agreement, years from now, with no background on your transaction, will be able to understand exactly what is expected of each party, without any misunderstanding. So it's important that you go into the right level of detail and make sure you don't introduce any ambiguities. Sometimes, the best way to make sure of this is to ask a colleague with no background on the transaction to consider your draft agreement for you.
In highly-regulated industries like financial services, these agreements also play a critical role in ensuring regulatory compliance - for example, with anti-money laundering (AML) related rules and obligations, duties advisers owe to clients, and setting out how highly-prescriptive and highly-regulated services will be provided.
They are also essential to manage and allocate risk between the parties to the professional relationship, and to ensure that the professional relationship is conducted in a manner which is consistent with the financial services laws.
What should a services agreement include?
The content of a services agreement chiefly depends on the nature of the relationship that it relates to, the nature of the services being provided, and the regulatory environment.
As a bare minimum, services agreements should typically cover the following.
a) Scope of services
A detailed description of the services to be provided, including deliverables, timelines, and, if relevant and appropriate, service level agreements (SLAs). As noted above, ambiguity in the scope and nature of the services and their delivery are a common cause of disputes and, so, clarity here is key.
b) Fees and payment terms
The services agreement should specify what fees are payable in exchange for the provision of the services, how they are calculated (e.g. flat fee, hourly, performance-based), when they are due, how payment must be made and any other conditions for payment.
c) Term and termination
How long the agreement lasts (and whether it should have a fixed term, renewal or extension periods, or whether the agreement should simply continue until it is terminated) and under what conditions it can be terminated early, should be addressed.
d) Consequences of termination
In certain cases, it is important to one or both of the parties to specify certain things that must happen after the services agreement terminates.
e) Regulatory obligations
Clauses specifying certain laws and regulations that one or both parties will comply with, can in some circumstances be appropriate to include in a services agreement.
f) Confidentiality and data ownership, protection and privacy
These provisions are especially important where personal or financial data is involved. It may be appropriate to address how data is stored, processed, protected and who owns it, in the services agreement.
g) Limitation of liability
It may be appropriate to include caps on damages and exclusions for indirect or consequential losses. Whether these inclusions are appropriate and lawful depends on the nature of the services agreement, the characteristics of the parties to the agreement and the circumstances of the agreement.
h) Dispute resolution
If a dispute arises, the agreement provides a legal foundation to resolve it - ideally without litigation. Well-drafted contracts may include dispute resolution clauses (e.g. arbitration or mediation).
i) Nature of the relationship
Frequently a services agreement should articulate the nature of the relationship between the parties, including the type of relationship that the agreement does not create. It may be appropriate to expressly state that the agreement does not give rise to an employment relationship, a joint venture, a partnership, or an agency relationship. For these types of provisions to carry any weight, the services agreement as a whole must be consistent with the nature of the relationship as specified. For example, a provision that states the services agreement does not give rise to an employment relationship, may count for very little if in substance the rest of the services agreement reflects an employment relationship.
Can I just use a template, or use ChatGPT to write the services agreement?
ChatGPT can produce what might look and feel like a first draft of an agreement on first glance, but doing so can be incredibly risky. Large language models (LLMs) and untrained AI can be helpful for understanding general legal concepts or exploring what's typically included in a services agreement, but it is important to understand their limitations - especially when it comes to legal documents in a highly-regulated space, such as the financial services industry.
LLMs cannot tell you exactly what should be included in a services agreement that's specific to your business, services, risks, and regulatory environment. Every business is different, and those differences bring their own legal, operational, and regulatory risks.
We hope the above list is helpful and as always, reach out if you need any assistance.
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.
