I need a Contract.  What do I need to think about?

How do I scope a Services Contract?

The introduction to the contract should set out the tone and ‘spirit’ of the agreement.  The introduction is important in framing the entire agreement and setting out the purpose of the ‘deal’.  You will often find the purpose of the agreement in your initial meeting notes.

How exclusive should the agreement be?

Exclusivity provides greater degree of certainty and commitment for all parties. It suits specialist services and solutions that require a very close working relationship.  A non-exclusive agreement tends to reduce commitment and suits generic services, with little business dependency. 

Who decides when the implementation phase is over?

As business services usually require some adaptation, customising or interfacing, you may need some form of functionality sign-off.  This approval to go-ahead acts as a condition precedent to services commencing.  Most customers prefer the sign-off to be subjectively determined.  However, pre-set objective standards work best.  Using a subjective test tends to open up negotiations again.

What operating standards should we adopt?

As with a sign-off, performance standards should be agreed and written up.  These are known as: SLA’s (Service Level Agreement), KPI’s (Key Performance Indicators) and KRA’s (Key Result Areas).  These performance standards are based on priorities and need tailoring for each contract.  Any failure to meet performance standards then triggers a ‘cost’ or default consequence.

What reporting is required?

Some contracts require reporting to customers.  These reports give customers relevant accounting, financial and transactional information, and assist in making the contract run more efficiently.

When and how should payments be made?

Progress payments are often used, that is until expectations are not met, for example in the case of a long series of minor technical failures.  In these situations: customers prefer to stop payment, whilst service providers prefer offering technical fixes.  You need to find a balance.

Who owns the Intellectual Property (I.P.)?

Although the customer owns the ‘idea’ for developing a product or service (like software technology), the underlying code and structure of the I.P. usually already exists or is created by the service provider.  The different I.P. claims should be clarified during contract formation, not at the end of the contract.

Are financial or performance guarantees necessary?

Yes, if the other contracting party goes broke or stops work.  By then it is too late.  The answer should come from the due diligence on your counter-party during pre-contract negotiations, and from within your business contingency plans.

What about disputes & defaults?

Dispute resolution focuses on the current dispute or default, and aims at fixing the problem dispute as soon as possible.  The resolution process usually escalates from inexpensive to complicated and costly: from party-to-party talks, through some form of mediation and finally to Court.

What happens on termination?

A well written contract, deals with finishing the agreement with a smooth exit and/or handover of services.  The sudden termination by one party, often because of a breach or cash-flow problems, may be quite dramatic, because of the loss of a supply or service.  The lesson here is to be prepared and draft the contract in anticipation of the unexpected.