At the beginning of a project we never really think about what would happen if the relationship goes bad and the client threatens you with legal action (or you have to threaten them with legal action). That’s human nature, we want to assume everything is going to go well, and for the most part it does. However anyone freelancing for more than a couple of years will have horror stories of projects gone horribly wrong.

Non-payment, dispute over copyright ownership, they can all come up in any project; having an agreement you can refer back to will help you if you need to get a lawyer involved.

Furthermore a service agreement is a great way to weed out shady and unrepeatable clients. If a client refuses or is hesitant to commit the working relationship to a signed legal document, you know that you’re not dealing with a professional. If they question basic terms of the agreement you know that’s probably a sign to walk away. It’s so much easier to walk away at the beginning of the project than in the middle of it.

What’s in a typical service agreement? I’m going to review the service agreement we use at Anecka and go over the sections and give a brief layperson overview of what each section does and why it’s important in the scope of freelancing.

Preamble

This is the beginning of the document, it outlines who the parties are and where their businesses are located. It also defines the effective date of the agreement and the overall type of service that will be provided (such as “software development”).

Scope of Services

This is going into the type of service you will provide. Since software projects usually pretty large I attach a “Statement of Work” document to my agreements and refer to that in the section for the scope. The Statement of Work document is extremely important and I try to be as precise as I can when defining the aspects of the project. This helps if a client wants something later that is “out of scope.”

Price and Payment Terms

This section basically says the client will agree to pay me the flat amount or the hourly rate I’m billing for the project and within a set number of days after I invoice them. The payment terms and price are also set in the Statement of Work. I think payment term is something a lot of freelancers need to pay attention to especially. Thirty days is average, although I encourage freelancers to get shorter terms if possible. The longer it takes to get paid, the greater of a risk you’ll run into cash flow problems.

Term and Termination

This is a very important section. It helps outline how the project can be terminated and the notices each party must provide before the agreement is terminated. I define that clients can terminate the project without cause and they’re required to give 30 days notice. They also must pay me for the work done up to the termination. Both of us can terminate the agreement for a material breach in the contract. Usually as a freelancer you would terminate the agreement for non-payment. But we have to give the other party 21 days notice and a chance to fix the error.

Ownership of Intellectual Property

As I’ve covered in a previous article, just because a client has paid for design or coding work doesn’t mean they own the copyright or intellectual property by default. It’s important to outline in the contract clearly who will own the copyright. Some companies, such as startups, want to keep the intellectual property in house. Likewise if you develop an add-on or library you may want to sell in the future or re-use, you must make sure that that code remains under your ownership.

Finally, if you assign the intellectual property rights over to the client, make sure the language states that the transfer is dependent on you getting fully paid for the project (or after the final payment).

Confidential Information

In the course of the project both parties may be in possession of information that may be kept confidential. This section acts as a mutual non-disclosure agreement to make sure the info remains private during the project and after. One year after the project is done is typical.

Warranty and Disclaimer

This section states that I warrant the work will be performed in a “workmanlike manner.” This is a legal term borrowed from architects and engineers and it refers to the desired and acceptable standard of quality of work for the project. Basically “workmanlike manner” has been defined as the way work is customarily done by other contractors in the community.

Limitations of Remedies

If there’s a material defect in the code, the client’s only recourse is to ask to the work to be fixed by the consultant. This prevents the client from suing based on any issues in the code. The client has 90 days to give written notice, otherwise the quality of work (legally speaking) is considered acceptable.

Limitation of Liability

I think this is probably the most important section of the contact when it comes to protecting consultants from legal issues. This section states that the consultant is not responsible for any loss of profit or economic damages as a result of the work. It also states that the client cannot seek damages more than the cost of the project.

Some clients will try to blame the failure of their business on the web project, or they may use the threat of a lawsuit to avoid paying your invoice. This section draws a clear line in the sand that whether they make money from the project is irrelevant to paying you for your work.

Relation of Parties

It’s important to define that you’re an Independent Contractor and not in joint venture or relationship with the client. This prevents any issues arising with the client from blowing back on your business. You don’t want to be named in a lawsuit because from your client’s customers.

Employee Solicitation or Hiring

This section prevents both parties from hiring employees from either business for up to one year after the project has been finished. If you’re a freelancer this isn’t a huge concern, but it’s important to have in there anyway.

Arbitration

If there’s a dispute I make sure that an Arbitrator settles it first by the laws according to the state of Ohio (where I live). I also make sure the Arbitrator is in Ohio as well. This ensures that if there’s a disagreement the client and I can’t resolve, we have to work it out through arbitration first. By insisting arbitration happens first we can keep the dispute out of the court system. This helps prevent frivolous lawsuits as the client is forced to sit down with us through arbitration before trying to file a suit.

Finally making sure everything stays in Ohio makes sure I can have my attorney represent me and I don’t have to travel out of state. Since my clients are all over, flying out last minute to meet a court date in a different state with potentially different laws governing technical consulting is a huge cost and could present real legal risk.

For more about service agreements and hiring an attorney to work out contracts with clients see this great talk from Mike Monteiro “F*ck you pay me” (it’s NSFW for language obviously). Mike Monterio goes over the terms he uses in his contracts and brings up some interesting additions (such as “kill fees”) that are pretty interesting.

A service agreement is more than simply the scope of the project (and it’s more than a proposal with a signature line). As you can see from my explanation of the sections in a typical service agreement, there are a lot of things to consider. Make sure you work with a qualified attorney (especially one familiar with technology consulting) to draft your standard service agreement. Believe me, its money well spent.

This article was originally published at http://www.patpohler.com/need-service-agreements/.

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