What is a Client Service Agreement?
A client service agreement is a document outlining the relationship between a service provider and their clients. A properly constructed agreement demonstrates that both parties have a clear understanding of the nature of the service to be provided and sets expectations regarding the context and scope of the engagement. A client service agreement can limit or eliminate future disagreements, misunderstandings, and disputes by establishing a foundation of trust and confidence from the beginning of the relationship .
In essence, an agreement provides a written record establishing the foundation and details upon which the service is based. Establishing this foundation is critical for both the service provider and the client. The service provider will want to ensure the terms are fair and equitable for themselves and their shareholders, while the client will want to ensure they feel they are getting the maximum possible benefit for their money.
The Essentials of a Service Agreement
Regardless of the type of client relationship, every service agreement should include the following essential elements:
Scope of Work – Lists and describes the work to be completed under the agreement in enough detail so that there is minimal risk of misunderstanding.
Payment Terms – Outlines the manner in which the client will pay you (either hourly or flat fees, payment upfront, or payment on a occurring basis), interest on any payments that are more than 15 days late, and whether any retainer is required and if so, how much.
Confidential Information – Provides that the consultant will not be provided with any confidential information (unless it is specifically defined in the agreement), or requires the client to acknowledge that certain information is confidential and therefore not shared.
Representations and Warranties – Conditions that each party has to the other at the time of entering into the agreement (for example, whether either party may have any pending legal actions).
Insurance – Requires the consultant to provide proof of insurance and that the client be named as an additional insured (although a high number of consultants may not necessarily have insurance).
Indemnification Provision – Protects one or both parties from providing legal or financial protection for the other’s actions.
Termination Clause – Spells out how the agreement can be terminated (i.e., whether a termination can be made for convenience or is limited to a material breach) and on how much notice (for example, more than 30-days notice is typically required).
Limitation of Liability – Provides that a party’s liability can only be limited in certain situations (i.e. negligence, misrepresentation, etc.) and to a negotiated amount (if any).
Dispute Resolution – Provides a process for resolving disputes (i.e., litigation or arbitration).
Writing an Engaging Scope of Work
A precise and comprehensive Scope of Work is arguably the most important term in a Client Services Agreement. The Scope of Work or Statement of Work ("SOW") identifies exactly which services will be delivered, when, and at what price. In some cases this SOW is known as a "Letter of Engagement." It is clearly important that a Client read the scope carefully to ensure that it accurately reflects the agreement between the parties and is not too broad. For example, in 2004 the Texas Court of Appeals held that an attorney’s failure to include the words "criminal and juvenile" in the scope of work in a contingent fee agreement allowing the attorney a piece of the recovery in a wrongful death action, did not entitle the attorney to the recovery of fees in the death case because "it is not reasonably susceptible to more than one interpretation." Evans v. Bells Police Dept., No. 11-04-448-CV, 2004 LEXIS 6650, at *7 (Tex. App. August 5, 2004).
It is equally important that the Scope of Work be precise in order to avoid unanticipated extra costs to the practitioner or, on occasion, unanticipated extra costs to the client. Consider the SOW in the case of Rodriguez v. Gunter, 532 S.W.2d 944 (Tex. Civ. App. 1976). In Rodriguez, a medical doctor brought an action for debt against his former employer, alleging that it had failed to pay him monthly amounts due to him under a written employment contract. 532 S.W.2d at 944. The SOW provided:
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- 2.1 – It is understood and agreed that there shall be no payment for services in excess of that specified above (except to the extent an extension of services becomes necessary due to a partner’s illness or other causes beyond his or her control), it being the intent of both parties that UNDERSTANDING THE COST OF PARTNERING IS AS IMPORTANT AS THE QUALITY OF TEACHING.
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Rodriguez at 948-49. In 1976 the Court of Appeals of Texas held that such clause prevented the attorney from billing the client on a time basis exceeding that agreed upon in the SOW. To avoid confusion, the agreement should also specify how staff or substantive assistance will be billed. For example, the incorporation of paralegals, research attorneys, or associates can create confusion about who is entitled to be paid for their services. In 2007, the Wisconsin Supreme Court held that a circuit court did not abuse its discretion in denying fees to an attorney who had billed his client for an associate’s services, despite the fact that the attorney had no formal written agreement with his client specifying that the associate’s fees would be charged (the actual fee arrangement between the attorney and his associate had been oral). Methvin Law Firm v. Stetson, 721 N.W. 2d 482 (Wis. May 11, 2007). A clear scope of work is essential in any client service agreement, thanks to its importance in avoiding conflicts over fees and in preventing misunderstandings about services. The scope should directly state, in a simple sentence designating the type of matter and the responsibilities, tasks, and services related to it, what work, if any, is to be done by specific attorneys, how the work will be divided between them, and how staff will be used.
Legal Aspects of Service Agreements
In addition to both general and custom relevant provisions contained in a client service agreement, there are also legal considerations that must be taken into account. In fact, an understanding of the basic legal principles and requirements for contract formation is necessary to reduce the risk of legal challenges, and to negate the need for costly negotiations after the fact about a service agreement that simply was not valid from the start.
While a service agreement can be written in any form (as brief as a simple handshake), there are specific legal requirements for a contract to be considered valid and enforceable. It must: Therefore, drafting a services agreement that contains unambiguous terms for the performance of service (including a reasonable description of the particular duties expected of the contractor), can be very important in minimizing exposure to legal liability. In addition, it is necessary for the services agreement to be in compliance with any applicable federal, state and local laws. To ensure the enforceability of a service agreement, it is also vital to confirm the absence of factors that might otherwise render it vulnerable to a legal challenge, such as a showing of fraud or duress, or if it is against public policy.
Resolving Disputes in Service Agreements
Dispute resolution strategies in a client service agreement come in a variety of packages. Mediation is one, arbitration is another. And, as noted in the first article of this series, a client service agreement should also include a framework—and time limits—for complying with the relevant rules, such as the House Rules of an arbitration forum, the Arbitration Act, or the International Arbitration Rules.
A facilitator is often the best place to begin. Informal discussions with a facilitator are useful in sorting out the problem: Is it a hostile communication issue that is preventing respect and civility—whether real, perceived or imagined? Is it real communication difficulties: cultural, generational, language, or other differences? Or is this simply regret for the agreement that was signed?
Facilitators can sometimes be used to work through these issues, or they can be as employed to move toward mediation or a full-blown arbitration process . The facilitator is there to find out how to resolve the problem without war first.
We rarely see a complicated litigation situation that has not involved some source of unhappiness, dissatisfaction or disrespect toward the other party. It is fairly common that the party who needs the facilitation or mediation is also that party who has an emotional issue or chip on their shoulder and is not interested in finding ways to settle the issue, much less be reasonable. So facilitators and mediators become the source through which the other party is engaged and another source to help move the issues forward to resolution without harmful litigation.
Negotiation Tactics for Service Agreements
In order to arrive at the mutually acceptable terms of a client services agreement, it is important that both parties actively listen to each party’s expectations and concerns regarding the agreement. At times, negotiations regarding the agreement may stall if dealing with an offshore service provider due to a lack of face-to-face interaction. Therefore, it is important to keep in mind that the goal of the negotiation process should always be to arrive at terms that are mutually beneficial to all parties involved. This entails both service providers and clients understanding the importance of tailoring the agreement to their specific needs, including expectations of engagement and the communication strategies that will be implemented throughout the course of the engagement. By thoroughly discussing such matters while remaining flexible during the negotiation process, the likelihood of the agreement being implemented successfully and increasing satisfaction on both sides will increase exponentially.
Common Errors in Client Service Agreements
While it is tempting to roll out a Service Agreement that you’ve prepared for several years, especially if it was prepared prior to January 1, 2018, it is likely that the Agreement does not comply with the new "NARS" requirements. Many of the requirements set forth in the NARS are not enforceable if they are not set forth in an agreement, and being able to prove proper disclosure to your clients is key for limitations on liabilities under the NARS contract. Make sure you have disclosed what disclosures you need to have disclosed and that your Agreement contains the disclosure clauses as required, such as disclosure of the product provider, the agency name, the fine print, the schedule of services payment, and vendor platforms .
Some of the common mistakes we have seen in service agreements include:
- Failure to list the full and proper name of the insurer
- Not listing both the agency and producer names
- Not including a clear definition of "client"
- Putting your company name in the venue clause. Make sure it is in the dispute resolution clause.
- The indemnification section may be overbroad, but the limits of the indemnification section should be clear and appropriately define the extent of the duties owed to the other party
- Use of disclaimers or limitation of liability which militates against the clear duties owed by the agent to the client.