Negotiating services agreements

Third-party service providers can play a critical role in helping an organization successfully develop and grow its business. An organization might outsource work ranging from simple administrative tasks to complex manufacturing duties.

The services agreements governing these relationships can vary in length and complexity depending on the nature of the services, the industry in which the parties operate, the size of the transaction, and the parties' respective bargaining power. Regardless of these factors, however, services agreements share key provisions that tend to be heavily negotiated, including:

• Ownership of deliverables. The allocation of rights in deliverables can be the most difficult aspect of a services agreement to negotiate. The customer wants to own the deliverables so it can use them for its business and prevent its competitors from having the same deliverables. The service provider, on the other hand, often wants to own the deliverables and its existing know-how or materials that may be incorporated in such deliverables, so it can re-use them in performing services for other customers.
• Representations and warranties. The customer seeks broad representations and warranties from the service provider relating to the quality of the services and deliverables. The service provider tries to offer only a limited warranty with the sole remedy being re-performance of any inadequate services.
• Indemnification. Each party seeks to allocate as much risk as possible to the other party by requesting broad indemnities from the other party.
• Limitations on liability. The service provider wants to exclude most consequential, incidental, and special damages and cap its monetary liability to the customer (usually to the amount of fees it received from the customer). The customer prefers to have no contractual exclusions or limitations on liability.
• Assignment. Each party wants to have the flexibility to assign its rights and obligations, especially to affiliates or successors, while restricting the other party's ability to do so.

Counsel should discuss these provisions with their business teams as early as possible in the negotiation process so they can effectively and efficiently protect their organizations' interests and minimize risk. The Standard Document Professional Services Agreement, available with a free trial to Practical Law, can help your organization understand these provisions and additional issues to consider when drafting or reviewing a services agreement.