Taking a proactive and considered approach when developing service agreements ensures the parties involved save time and cost, while also limiting the likelihood of disputes. It’s also key to setting the foundation for clear and fair governance in business relationships.
Service agreement disputes can be costly and time-consuming, which is why it’s important to get this right off the bat. Read on to learn more about the common pitfalls in agreements that can lead to disputes and how to avoid them, so you can focus on fostering positive business relationships rather than legalities.
Common service agreement disputes and how to prevent them
Issue: Ambiguity in terms and conditions
Unfortunately, ambiguity is a common issue in service agreements, particularly where one party understands a concept that the other party doesn’t, or when clauses contradict each other, as attention has been given to negotiating Clause A, but the parties have overlooked how changes to Clause A might impact Clause F.
How to prevent it: Use clear and precise language
Businesses should ensure the language used in their service agreement is clear and precise while also resonating with the intended reader. Industry specific or legal jargon should be well defined so that the customer has a clear understanding of expectations and obligations. You can also leverage standard contracts as a base while adapting to specific needs.
Issue: Scope of services (or scope creep)
When you are selling services, clearly defining those services in a service agreement seems simple. However, often service agreements do not provide well defined scope, inclusions and exclusions in the Services definitions or schedules. A customer’s expectations of the scope of services can differ significantly from a business’s. Without clearly defined terms, scope creep over time can lead to misunderstandings between the parties.
How to prevent it: Define the scope of services rigorously
Be pedantic. Set out an inclusions and exclusions list. Set out your deliverables, timelines, and expectations in a high level of detail so that there can be no misunderstanding about the scope of the services. If the customer or the business wants to change the scope of services, have a variation or change process plainly set out in the service agreement.
Issue: Payment disputes
As with language and scope of services, if you do not have well defined provisions for the fees or rates, the payment terms and what happens when a customer misses a payment deadline, then you may run into billing issues. Also, failure to clarify payment milestones in larger service agreements can lead to disputes as to when payments are due and whether a party can cease or suspend works until such time as the payments have been made.
How to prevent it: Set clear payment terms
Your service agreement should outline rates, deadlines, and clear and concise consequences of late payments. Use schedules and tables to create milestones for phased payments tied to project progress.
Issue: Key performance indicators (KPIs) and quality expectations
Service agreement disputes commonly involve a party complaining that the service standards have not been met, and this is often a result of miscommunication about expected quality or timelines.
How to prevent it: Set KPIs, benchmarks and metrics
Use schedules and tables to define and set out the KPIs and how they are met or use service-level agreements (SLAs). Ensure your service agreement includes provision for performance reviews and how to address deficiencies or failings.
Issue: Intellectual property rights and ownership
Depending on the deliverables or services outlined in the agreement, disputes over intellectual property ownership can arise when a party develops IP during the service. For example, if you are creating a new website for a customer, who owns the code? Is it custom-built for the client, or is it part of a standard framework you use across multiple projects and need to retain ownership of?
How to prevent it: Specify intellectual property ownership
Ensure you clearly communicate to your customer what intellectual property will be created under the service agreement. Outline who owns the work product and specify the rights each party retains, whether through assignment rights or licensing terms, if applicable.
Issue: Termination and exit clauses
Often, parties fail to clearly communicate the terms for terminating a service agreement. While termination for breach or insolvency is typically outlined, what happens if one party wishes to end the agreement due to a business pivot, a shift in focus, or the need to pause the project because of staffing or financial changes? Additionally, many service agreements include automatic renewal clauses that customers may not be aware of. If they miss a renewal or termination deadline, they may unintentionally become locked into a longer commitment, including the obligation to pay fees.
How to prevent it: Draft a fair and transparent termination clause
While it may not always be appropriate for parties to terminate a service agreement for convenience, you should ensure that there are very clear and fair clauses which state the conditions under which either party can terminate the agreement. If you include an automatic renewal clause in your service agreement, make sure the customer is fully aware of it and has a fair and reasonable opportunity to terminate the agreement if necessary. Automatically renewing a service agreement with a customer who fairly and reasonably wants to terminate is surefire way to spark a dispute. Always include a fair and reasonable notice period and obligations during termination.
Issue: Confidentiality and data security
Protecting confidential information and data is very important and disputes will quickly arise when a party breaches or misunderstands what they can and cannot do with another party’s sensitive information. Because a disclosure of confidential information can cause significant damage to a party, it is common that there will be severe legal consequences for confidential information leaks and data mishandling
How to prevent it: Establish strong confidentiality provisions
You can minimise disputes in this area by clearly defining what constitutes confidential information and outlining what each party can and cannot do with that information. This should include specifying who within their business or organisation can access it. Establishing practical, transparent protocols for handling data, along with clear consequences for breaches, will also help prevent issues.
Issue: Indemnity and liability
If a customer breaches a clause in the service agreement, consider whether you are clear on what the customer is liable for and whether the agreement accurately reflects your understanding and expectations. It’s common for parties to misunderstand liability or indemnity clauses, or for such clauses to be drafted in a way that causes confusion or even contradicts themselves!
How to prevent it: Agree on liability and indemnity provisions
Ensure your service agreement clarifies each party’s liabilities and indemnities in case of loss or damage. Your service agreement should also clarify any maximum liability caps (e.g. the most you want to be liable for) in the event of a breach. Additionally, with the current unfair contract terms legislation, these liability & indemnity provisions and caps need to be fair and reasonable to both parties. You may also need to specify insurance requirements and how insurance claims and proceeds will be handled in the event of a claim.
Handling disputes
If you find yourself in a dispute, then ensure you have clear and concise Dispute Resolution Mechanisms in your service agreements. Alternative dispute resolution mechanisms, such as negotiation, mediation and arbitration can assist parties to resolve a dispute without the significant costs of legal proceedings.
Negotiation, mediation, and arbitration are all alternative dispute resolution mechanisms that can be used in the event of a dispute. These methods tend to be cost-effective, so including a requirement in the service agreement for parties to follow one or more of these mechanisms (in a stepped order) can reduce the likelihood of a customer initiating legal proceedings against your business. Your dispute resolution clauses should outline structured steps to resolve disputes without resorting to immediate litigation.
Governing Law and Jurisdiction: It’s essential to clearly define which laws will govern the contract and which courts will have jurisdiction, especially if your service agreement involves parties outside of New Zealand or Australia.
Clear, well-defined service agreements are essential for preventing disputes. By establishing transparent terms and precise clauses, you build a strong foundation for trust, smoother partnerships, and long-lasting business relationships free of unnecessary conflicts.
Should a dispute arise that cannot be avoided, establishing early communication channels and holding regular check-ins during service delivery will help ensure both parties remain aligned on expectations.
Additionally, given the ever-changing legal and industry landscape, your service agreements should be treated as ‘living’ documents. We recommend periodic reviews to ensure they remain relevant and reflective of current laws, industry standards, and best practices.
If you need help ensuring your service agreements include these critical clauses, our team is ready to assist. With Source, access an in-house style legal team that can support you with day-to-day legal needs, such as reviewing and drafting service agreements – all within a fixed monthly retainer. Reach out to learn more.
