April 10, 2021

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Where are service contracts used and what is the procedure for drafting service contracts?

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This article is written by Pratha Kotecha who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

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A service contract is a written agreement between a service provider or any person who will be providing services or doing some business and a customer or a client. It enlists the obligations and the responsibilities of both the parties in getting the work done and the payment made for the same. Service contracts are sometimes referred to as professional services agreements, client services agreements, consulting services agreements, or service level agreements. 

A service contract requires one party to provide a service for another for some monetary compensation. It also demarcates the arrangement between the customer/client and the service provider/business, including sketching out the issues relating to the duties of the service provider, compensation due to the service provider, and any possible confidentiality requirements. For example, a service contract might be used between a contractor and a homeowner or between a business and a freelance web designer. The contractors would use a service agreement to detail all the renovations they are doing to a client’s home and how they will be compensated for it.

A service contract promises both the parties that their work will be done for the fees they bargained for and in the time frame they agreed. It also manages the expectations while the work is underway. However, not all services require agreements. For example, when you take a vehicle for a quickie oil change, the chances are that the owner and you agree orally about the price, what will be done, how, and when. However, when work is performed over a long period of time, both parties need to have the protection of written standards, goals, and pricing.

Service contracts are used for all types of trading and commercial arrangements and relationships. Listed below are some of the businesses and professionals who rely on service contracts:

  • Management and other client consultants.
  • website developers and IT service providers.
  • graphic designers and illustrators.
  • photographers and videographers.
  • real estate brokers.
  • general contractors and sub-contractors including the construction companies.
  • accountants and lawyers.
  • advertising and marketing professionals.
  • caterers.
  • licensing and franchising between organizations.

Service Agreements or Contracts are at times written as a formal contract with the customers/consumers/ clients to be signed from both sides. However, it’s often easier to have the Service Agreement written in a way so that they can just be attached to the back of an invoice, form, or a proposal, and are drafted in a manner that the other party accepts the terms without needing to sign it.

For example, rather than having a signing block, the contracts relating to services often include a sentence that says something like: “You will be taken to have to have accepted these terms and conditions if you order, accept or pay for any services provided by us after receiving or becoming aware of these terms.” – which amounts to a valid contract.

Using a Service Contract benefits both contractors in the business and the customers or the clients by clearly demarcating the terms of their working arrangement. A written agreement provides transparency and accountability for both parties and also helps in preventing disputes that could arise without a formal written agreement between the parties.

Now that we know what a service contract entails, let’s see the elements required for creating one. The basic template and structure of the contract shall include: 

  • heading/title.
  • description/purpose/scope.
  • parties details (including addresses, and the types of business).
  • date.
  • definitions.
  • term – period of the agreement.
  • payment terms- pricing and pricing adjustment.
  • responsibilities of provider – include or append details of services and service level agreements.
  • responsibilities of client.
  • confidentiality.
  • dispute resolution and arbitration process.
  • termination.
  • force majeure.
  • modification/amendment.
  • signatures.

Heading/Title: The heading or the title of the service contract should consist of the company name and “service agreement,” or “client agreement,” or “customer agreement,” or any other title that best describes the situation. For instance, the term used by real estate brokers is “listing agreement,” for contracts to represent properties for sale. Similarly, an accountant might use the term “tax preparation agreement,” and so on.

Purpose: The purpose of the agreement should be clearly mentioned at the beginning of the agreement. The main objective of entering into a service agreement is to enlist the scope of services a service provider will be offering. This clause must be drafted as per the nature of services provided by the party to the contract.

Parties: The names and addresses of the parties involved and if one or both parties is a business, then the type of entity, whether they are a corporation or limited liability company should be mentioned. 

Date: The date of the agreement and the place where it is made should be specified. Further, the territory or the geographical coverage as to which laws shall be applicable in case of any dispute should be decided between the parties. 

Definitions: The next important clause is that of definitions, also referred to as glossary in some contracts. The terms and their meaning used in the contract are defined in this clause. 

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Term: All service contracts should clearly state the term of the contract, when the contract begins and when it ends. This clause is necessary because it makes clear when the contract will be effective.  

Payment: Determining payment is a little more complicated, as it requires negotiating several different factors. Firstly, determine the rate for the services provided and decide whether any taxes shall be included. Next, whether the payments will be made in part or lump sum, a payment schedule needs to be determined. And lastly, decide the penalties in an event of late payments. 

Responsibilities: A clause that clearly explains the obligations, responsibilities, and duties of each party to the contract is one of the most important contract terms to include in the entire contract. This clause requires attention to detail and will be very specific to the nature of the services to be performed. Even if you have had prior discussions with the other party about the services that will be performed, it is important to spell out the responsibilities in detail in the contract. 

Confidentiality: The confidentiality section protects trade secrets and all or any confidential information obtained during the course of the contractual relationship and beyond. Consultants, web developers, and other service providers typically use this clause to keep sensitive information from reaching competitors. For example, a consultant who has developed a special process for streamlining workflow might use a confidentiality clause to prevent the client from sharing it with another consultant. Similarly, the parties may also add a non-compete clause.

Dispute Resolution: In an event of a dispute, the clause relating to how the dispute will get resolved and what law will apply must be specified. Typically, the parties will keep it close to home. The most common process of dispute resolution includes arbitration, mediation, and the use of the common law courts. Some contracts contain a “Choice of Law” or “Prevailing Law” provision which makes clear that the laws of a certain state, county, or municipality will govern the dispute. But it is important to note that a “Choice of Law” provision will not be given effect in certain situations where parties cannot contract around the law of a given state for public policy reasons.

Termination: In certain cases, the defaults and damages are of such grave nature that they would seriously affect the value of the service. In such circumstances, including a termination clause allows either of the parties to terminate the contract with a specified period of notice. Conversely, it also provides each party with the right to terminate the contract without any reason, but with an adequate written notice which often extends from 30-60 days.

Force Majeure: The force majeure clause needs to be included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent the parties from fulfilling their obligations.

Modifications or Amendments: There often arises a need to amend or modify certain terms of the contract. The amendment or modification clause makes it easier to determine the manner in which such modifications can be made. It also helps in preventing disputes at a later stage between the parties as a result of any changes enforced in the contract. The amendments should be made only on the written agreement between the parties as is stated in the modification clause. 

Signatures: Service contracts must always be signed and dated by both the involved parties. It’s a good idea to also have the signatures notarized to prevent any party from claiming later that it did not sign the agreement. Ensure that both parties have a copy of it to refer to throughout the course of your arrangement.

Service contracts for certain types of jobs and businesses might also need to include provisions or clauses that deal with specialized situations. A few of these clauses can be – hold harmless clause, indemnity clause, warranty clause, intellectual property rights clause, legal expenses clause, liability clause, etc.

In the event the service provider or the customer breaches the service contract, the first step is to contact the offending party and request them to oblige by their part of the contract, pointing out the clauses where they are not meeting the terms.  Secondly, communicate with the other party in a civil and non-offensive manner to ensure a better chance of compliance. Providing a notice period to them in order to rectify their actions is a good way. If the offending party doesn’t rectify the situation even then, legal action can be initiated for breach of contract. Having a witness sign a service contract can help the document gain more credibility when it comes to upholding it in the court of law.

The parties entering into a service contract is a common business scenario but ensuring comprehensive service clauses in it is important. Always remember to understand the key terms to be included in a service contract before drafting or signing one. 


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