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Management And Training

Weak Service Contracts Are A Disservice

September 19, 2010
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How strong are your company''s service contracts?

In the cleaning and maintenance industries, strong service contracts, with specific language defining performance expectations, matter a great deal to the integrity and stability of the business — and can even help thwart potential litigation.

Typically, when a new customer contracts with a maintenance company or other service vendor, the company treats the event as a sale.

But, if the new customer engages the service company under a "weak" service contract, the sale may be compromised, resulting in projections and expectations that may lead the service company to make faulty decisions that jeopardize the company''s financial health.

A weak service contract is one not drafted to maximize the service company''s rights to receive the full economic benefit of the contract.

Notably, a weak contract''s language does not enable the service company to enforce its rights under the contract in the event of a customer dispute or payment problem.

With current financial pressures to stretch business dollars to the limit, managing customer disputes and payment problems are becoming a more consistent part of doing business.

As a result, service companies must ensure that they are protected in the event that a customer tries to avoid or delay payment or otherwise reduce the benefit of the sale.

A "strong" service contract expressly sets forth each party''s rights and obligations, as well as dispute resolution mechanics, which significantly reduces the likelihood of a relationship-ending dispute.

Mismatched expectations and inadequate communications are often catalysts for lost business and litigation.

So, how do you draft a strong service contract? An attorney experienced in contract law should be able to efficiently create a form that contains provisions and protections on which a service company may rely.

If the fundamental contract will be used in numerous relationships, spending a little money to ensure that the form is in good order and applies in different customer relationships is a good investment.

You and your attorney should review your fundamental service contract to ensure that the following issues are addressed.

Contract Basics

In general, all service contracts must reflect an offer and an acceptance.

The service company must agree to provide its services and the customer must agree to accept those services, all on terms and conditions set forth in the contract.

A simple "scope of work" statement is useful in clarifying those services but, on its own, is insufficient for creating a strong service contract.

Mutual Consideration And Consent

Defining a mutual exchange of value is crucial in the context of a long-term service contract.

The service company provides its value in services; in return, the customer provides payment for those services.

Both parties must consent to the contract, and consent is typically indicated by signing the contract.

It is very important, however, that the contract reflect the full, legal name of all parties and the contract be signed by an authorized person.

Sales agents in the field and office personnel who finalize contracts for execution often fail to note all the proper parties to the agreement, which can result in more difficult — and therefore more expensive — litigation should a problem arise with the customer relationship.

It is advisable to centralize the process of finalizing customer contracts for execution and to ensure that personnel involved in that process know how to confirm the accuracy of entity names required and whether the person signing is authorized to do so.

Termination And Amendments

It is wise to consider at the outset of a relationship the manner in which it should or might end.

The contract must be specific as to who may terminate the relationship, circumstances under which it may be terminated and the result of termination.

A service company can protect itself from claims by requiring the customer to follow very specific steps if it has a complaint with respect to the services.

It is also important to clearly delineate in the contract the obligations of the customer upon breach or early termination.

Consider whether there are any circumstances under which your service company will need to terminate or modify the relationship.

For example, if it is possible that the costs of providing services will substantially increase, the service provider may want to include a provision for adjusting the contract price or terminating the contract.

Indemnification

A service company may desire to include a provision, called an indemnification, which specifies that, if it is required to go to court to enforce the contract and it wins, the customer must pay the service company''s legal fees and expenses.

Please keep in mind, however, that an indemnification provision is only as good as the financial health of the company giving it: An out-of-business customer likely will not be able to make good on an indemnification obligation.

Liquidated Damages

The law allows parties to agree upon compensation that will be owed if a party fails to perform under a contract or terminates a contact before its expiration.

When stipulated in a contract, these damages are called "liquidated damages."

Including liquidated damages in a service contract can be very effective in encouraging customers to settle disputes — or to avoid a breach in the first place — in order to avoid paying the liquidated damages.

These are just a few key issues to consider when preparing fundamental service contracts to help protect you and your business.

Your attorney can provide additional insights into these issues and others that may impact your specific industry or business.

Most service companies assign tremendous value to their customer contracts, and by investing a little time and money in the company''s form of service contract, the company can better ensure that the value assigned to that contract is protected and that the company''s financial benefit is maximized.


Attorney Robert D. Cantwell of the law firm Gallop, Johnson & Neuman LC focuses his legal practice in areas of business contracting, financing, mergers and acquisitions, franchising, gaming and federal, state and local licensing. He has represented clients ranging from " start-up" entities to large, publicly traded and private companies. Mr. Cantwell can be reached at (314) 615-6000. Gallop, Johnson & Neuman LC, a full-service law firm of 80 attorneys, serves public corporations, privately held companies, entrepreneurs and start-up enterprises, individuals and families, trustees and trust beneficiaries, charities and non-profit entities. For more information, please see www.gjn.com.

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