• 26 Nov 2024
• •
• 3 min read

Contract Focus On: Supply of services agreements

Who is this article intended for?

This article series is aimed at new or junior lawyers and can also be shared by in-house legal teams with their commercial colleagues who deal with contracts. The aim of the series is to provide a foundational understanding of common contracts businesses will enter into, offering insights into why they are important and what key legal aspects need to be considered. Whether you are just starting in the legal field or need to ensure that your commercial colleagues are well-informed about contract essentials, this guide will help with navigating the complexities of commercial agreements effectively.

What are supply of services agreements and why are they important?

Supply of services agreements are formal contracts between a customer and supplier that outline the agreed-upon commercial terms. For instance, the contract may specify a fixed term during which the supplier provides specified services to the customer at an agreed price, with possible exclusivity for the supplier. The agreement should clearly define the nature of the services, along with any expected deliverables. For example, a market research company might be contracted to conduct research and deliver a report detailing its findings.

In contrast, standard terms and conditions for the supply of services are often used by suppliers to standardise customer contract terms. These terms generally don’t require amendments and are not signed by the parties. However, standard terms may not be suitable for all contracts, especially for larger customers or higher volume supply, where customised agreements allow for greater flexibility.

Supplier perspective

For suppliers, a well-drafted supply of services agreement is crucial, as it allows them to:

1. Define obligations. The agreement can detail the supplier’s specific responsibilities, setting clear expectations for the customer regarding what the services include, along with any milestones and timelines.
2. Clarify warranties. The supplier can specify any warranties provided in respect of the services supplied and, equally important, clarify what it is not responsible for. For instance, if a customer requires services to be performed in a specific way, the supplier may want to limit its responsibility for potential issues related to those requirements.
3. Limit liability. Limiting liability is essential for suppliers. Two key clauses are commonly used: (a) excluding the customer’s ability to claim for certain types of loss (e.g. indirect and consequential losses and loss of profits) and (b) capping the supplier’s total liability to a certain amount, such as the price paid for the services.
4. Define pricing and ability to adjust it. Clear pricing and payment terms benefit both parties, but suppliers may also wish to allow for price adjustments if their costs increase due to customer delays, increased material or labour costs, or changes in service scope. For long-term agreements, annual price reviews or increases may be included.

Customer perspective

On the other hand, what is important to a customer when entering into a supply of services agreement:

1. Supplier obligations. The agreement should outline the supplier’s obligations, detailing the services to be provided and any customer expectations around how and when these are to be delivered.
2. Comprehensive warranties. Customers typically seek warranties which require the services to be provided with reasonable care, by skilled personnel and in compliance with applicable laws.
3. Sufficient supplier liability. Ideally the customer wants the ability to recover any losses it suffers due to breaches of the agreement by the supplier, particularly for issues related to the quality and timeliness of the services. Generally supplier’s wish to limit their liability so it is important for the customer to ensure the agreement provides the customer with sufficient recourse against the supplier, including suitable caps on the supplier’s liability.
4. Performance timelines. The customer will want to establish timelines for when services or specific milestones should be completed, along with remedies if services are delayed or not fully delivered.
5. Intellectual property ownership. If the supplier creates new intellectual property (e.g. by designing a new logo or website), and the customer wishes to own those rights, this must be stated in the agreement, as otherwise the rights will remain with the supplier.

Risks for all involved

It is essential for both parties to have an agreement tailored to the specific supply of services and commercial terms. While template agreements can provide a useful starting point, they may not fully protect the parties if not adapted appropriately for the particular arrangement.

A litigation perspective

A well-drafted contract provides clarity and serves as a guide for both parties. In contrast we see in practice, for example, that “cut and paste” agreements from online templates often have conflicting terms or unintended legal implications. Similarly, contracts tailored for one supplier may not be suitable for another even if they are in the same sector, and ought to be considered carefully.

Considerations should also be made for the end of a fixed term contract. Services may still be needed after a contract expires, and it’s common for parties to continue working together for years or even decades after the written contract has ended due to the expiry of its fixed term which creates legal uncertainty.