Supplying a service is different from selling goods and requires a supply of services agreement that is industry or sector-specific to manage the contractual relationship between supplier and purchaser. The agreement is the first step to the successful supply of services and helps to reduce the risk of service-related contract disputes.
If you need help to ensure your service provider arrangements deliver protection and reassurance then speak to our friendly team of knowledgeable commercial solicitors. Using our technical expertise and market knowledge to draft and review your service provider arrangements will give you peace of mind that they are competitive, legally enforceable and offer robust protection for your business.
- When do you need a services agreement?
- What is a supply of services agreement?
- The law on the supply of services or goods
- What clauses should be included in a supply of services agreement?
- The use of schedules and appendixes in supply of services agreements
- Example considerations for service agreements
When do you need a services agreement?
You need a services agreement in any scenario where a business is supplying services. Supply of services agreements are not the preserve of professionals, such as lawyers or accountants. Whether your business is a utility company, bathroom fitter, or software developer, you need a services agreement to regulate your relationship in either a B2B or B2C situation. That’s because the amount paid to supply a service doesn’t necessarily reflect the risk if an element in the supply of the service goes wrong. You do not want to accept unrestricted liability as you didn’t negotiate a carefully worded supply of services agreement or end up in commercial litigation arguing over the quality of the service provided.
What is a supply of services agreement?
It isn’t always easy to distinguish between supplying services and goods. For example, if you are supplying software, is the main focus of your contractual relationship the supply of the software or the services provided to make the software work for the consumer? For example, if your company fits bathrooms are you providing a plumbing service or supplying sanitary ware?
For those businesses that supply both services and goods, there is the middle ground of a ‘work and materials contract’. However, you still need to be able to categorise the contract so both parties to the agreement are clear on whether the law on the supply of goods or services applies to the contract.
If there is a dispute over the nature of the contract, and the law applicable to it, the court will consider if the materials are the substance of the contract and, if so, conclude the contract is for the sale of goods. If the service is more important than the supply of the goods, it is a supply of services agreement. Whilst this test is helpful, it is still tricky to work out if a supplier is providing goods or services where the two aspects are almost indistinguishable.
In some situations, there may be two contracts, one for the sale of goods and one for fitting and servicing the supplied goods. This isn’t just a technical point as the definition of the contract depends on whether The Supply of Goods And Services Act 1982 (SGSA) applies or The Sale of Goods Act 1979.
The law on the supply of services or goods
The law on the supply of services and goods is different. Here is a quick summary of the implied terms in the supply of services agreement and supply of goods contracts that apply unless specifically excluded:
|Supply of services - The supply of Goods and Services Act 1982||Supply of goods – The Sale of Goods Act 1979|
|The implied quality standard in the supply of services agreements is ‘satisfactory quality and fitness for purpose’. Liability under the implied terms is limited to using defective materials or not using reasonable care and skill in workmanship. A supplier may be liable under common law if the product used is not reasonably fit for purpose and is not of good quality||The implied quality standards to goods supplied under a supply of goods contract are that they are of satisfactory quality and fitness for purpose, and correspond with their description and sample. If a product is faulty the buyer does not have to show that the supplier failed to take reasonable care|
|There are no statutory implied terms on acceptance, time of transfer of title in the goods, or delivery||There are implied terms on acceptance, time of transfer of title, and delivery|
If you try to limit your liability by making express provisions in a supply of services agreement you may fall foul of the Unfair Contract Terms Act 1977 (UCTA).
What clauses should be included in a supply of services agreement?
Supply of services agreements should cover:
|Scope or specification of the service||Ensuring all parties are clear on the scope and limitations of the service offering. For example, in a construction contract does the service include groundworks?|
|Condition precedent||Does a condition precedent have to be fulfilled before the contract comes into operation? For example, in a construction contract, is the contract subject to the commissioning party securing planning permission?|
|The parties||Who is the service supplier and who are the service recipient/s? Is the supplier able to subcontract the service or only able to do so with the agreement of the service recipient?|
|Service standard||The Supply of Goods and Services Act 1982 implies a term in B2B service contracts that the supplier will carry out the services with reasonable care and skill. Some contracts are excluded from the implied term of reasonable care and skill, such as the services of an advocate in court or at a tribunal hearing. Depending on the nature of the service and bargaining positions a customer may want to include an enhanced service standard in the contract, such as sector-specific regulatory or technical standards or in accordance with generally accepted industry practice|
|The price||Is the contract for a fixed price or is the price based on time spent and materials? Does the contract provide for price escalation to cover rising material costs or wage inflation? What is the mechanism for calculating or agreeing on the price variation and resolving disputes? Is the price based on delivering to a deadline with bonus provisions? Price variation clauses may be subject to the reasonableness test in section 3 of the Unfair Contract Terms Act. If payment is staged this needs to be recorded. If payment is by instalment does the supplier have the right to terminate the contract early if payment is made late?|
|Time for provision of the service||Is the contract for a fixed period or until the project is completed? If there is no fixed contractual end date there is an implied term that the supplier will carry the work out within a reasonable time. What is a reasonable time is a question of fact. In B2B contracts on standard terms, clauses that allow a supplier to limit or exclude liability for no or late performance are subject to the reasonableness test. Does the contract say if time is of the essence? If not, the courts could imply a term that delay in delivery entitles the customer to terminate the contract. If timing is crucial, time should be made of the essence in the contract and give a clear right to terminate and seek damages or deduct a specified amount from the contract price for each day or week of the late performance|
|Limiting liability||A supplier may want to limit their liability in the services agreement. Whilst a supplier can try to vary the implied term that they will exercise reasonable care and skill, a supplier cannot limit all liability under UCTA, such as liability for death or personal injury caused by negligence. Any provision attempting to do so is void. For more information on limiting liability take a look at Limiting liability in contracts | Clauses to minimise risk|
|Termination||Whether a termination clause is required and the detail needed depends on the nature of the services agreement. A one-off contract for services may not need the same careful consideration of termination clauses as a long-term services agreement where advance payment for materials may have been made or where, given the complexity of the services, there is a greater risk that there will be a dispute over the quality or the timing of the service. For more information on contract termination read our guide to terminating a contract|
When it comes to the clauses in a supply of services agreement it is important that the terms are periodically reviewed to ensure that the service specification, price review, and termination or liability provisions remain fit for purpose.
For more information on contract reviews and contract life cycle management have a look at:
- Contract lifecycle management: what you should be doing
- Why you should regularly update your commercial contracts
- How to successfully negotiate a commercial contact | Best practice tips
The use of schedules and appendixes in supply of services agreements
Some service contracts are a simple terms of business but brevity is not always wise or cost-effective. If the service being provided is expensive or complex or is being provided on an ongoing basis then the use of a schedule or appendix in a supply of services agreement can be very helpful. A schedule keeps the contract concise whilst including the necessary level of detail to minimise the risk of a commercial contract dispute.
One of the most common grounds for complaints over services is the scope of the work. It is a familiar story to hear a supplier complain that the customer wants more than the original scope of the contract. That’s why it is important that the scope is carefully defined and that any complex payment structure, such as advance or bonus payments, is contained in the contract or a separate appendix.
Example considerations for service agreements
Service agreements for SaaS/software developers
With a software as a service agreement, the recipient’s major concern may be continuity of cover and performance support and monitoring. For example, the provision of IT helpdesk services with an agreed service level ( such as response times) with provision for escalation if a problem is not resolved within agreed service delivery times and a graduated system of service credits when key performance indicators are not met.
Other example considerations in service agreements used by SaaS/ software developers include:
- Data protection and GDPR
- Disaster recovery and business continuity
Service agreements for professional service providers
In a contract for professional services, it is vital to get the scope and specification right. Failure to invest the time in detailing the scope and specification in the supply of services agreement can lead to complaints and litigation that could have been avoided with a clear contract to manage expectations.
For example, with a financial services supply contract, the agreement needs to make it clear if the service supplier takes any responsibility for the information it is provided with and on which their financial services are based. If a customer has made internal accounting and bookkeeping errors is the supplier’s scope limited to the provision of financial advice based on the information provided, or is their scope wider; to conduct an audit, discover the company error and advise accordingly? The extent of the scope needs to be considered in conjunction with the price structure; has a fixed fee been agreed or has an escape clause been included to include an additional fee based on a time-charged basis for work that is outside the preparation of the planned financial advice?
Service agreements for creative agencies
With creative agency service agreements, intellectual property rights (IPRs) are a consideration if the supplier is working on material owned by the creative agency or if the supplier is developing new material. Ownership of intellectual property needs to be carefully considered. If the supplier is developing new IP who will own the IP on termination of the supply of services agreement? Will the services agreement give the consumer the right to use the IP under a licence? If so, will this be an exclusive and irrevocable IP licence? Each type of supply of services agreement needs to be both sector-specific and tailored to the needs of the individual supplier of services and recipient.