Service Agreements: Common Contractual Errors

  • 24 février 2021
  • Anjana Bhaskaran, General Counsel, Box of Crayons, Inc.

Reviewing and negotiating service agreements is a work of art. There are important nuances to a service agreement that may not be immediately obvious. Most contractual non-compliance issues arise as a result of the parties not understanding the nature and kind of services provided thereunder. Accordingly, understanding these nuances is important if the parties to a contract wish to maintain positive relationships with each other.

Many large organizations choose vendors based on a strict selection process.  These organizations often require the vendors to accept their contractual terms “as is” as a pre-condition to entering into a contract. These terms are typically drafted based on a set of “catch-all” clauses that should apply to a majority of that company’s vendors who are assumed to all come from a particular industry. What goes unnoticed by both the large organization and the vendor is the lack of distinction between the services provided by different vendors. Terms that would normally apply for a service provider providing information technology services, for example, would be unlikely to sit well with a vendor providing physical raw materials or other similar goods. Unfortunately, this disconnect may not addressed by the negotiating parties and the large companies with greater clout can impose such terms on a smaller vendor.  This poor practice in drafting can often be to the detriment of all parties.

Companies who adopt this practice often argue through their non-legal procurement teams that sphere-head these selection processes, that the vendor should not delete or edit a specific provision and should leave it “as is” since the provision does not apply to a particular “service”. This argument is unreasonable for a few reasons. Firstly, if a particular provision is irrelevant to the services, allowing it to remain in a contract could cause interpretational issues when there is a conflict between the parties after the agreement has been executed. Recall that as a common law principle, a contract is looked at “as a whole” to determine the purpose and intent of the parties and not removing inapplicable terms may dilute the intent of the parties. The gap created by inapplicable and/or irrelevant terms being left in or not properly edited can also lead to long and unnecessary negotiations around typical operational clauses like warranties, warranty period, acceptance and delivery processes under the same agreement. When time, effort, and manpower are the most valued assets of a company, spending several hours on inapplicable terms can be detrimental to all parties and can lead to an unpleasant vendor / client experience.

With that in mind, here are some examples of common errors that are likely to be overlooked while reviewing and negotiating a service agreement and some possible solutions for the same: