Key Terms To Review in a Servicing Contract

If you run a service business, your service contracts must contain the necessary terms to protect your commercial interests. Business contracts often operate with one party providing goods or services to another in return for payment. This is known as a servicing agreement. These are very important documents that you must draft correctly to protect your business from legal action. Furthermore, they can help you recover payment from other parties to the contract. This article will discuss the main terms you must review when drafting a servicing agreement. 

Servicer and Servicing Agreement

Servicers are organisations that fulfil the needs of a business by providing a service in exchange for payment. A servicing agreement is an arrangement where a servicer gives another organisation business services. These contracts can help a servicer enforce their right to receive payment under the contract. Organisations that may be servicers include:

• cleaning companies; 
• building companies;
• maintenance contractors;
• catering companies; and 
• blogging agencies. 

Key Terms 

A comprehensive servicing agreement should include several key provisions which can help parties enforce their rights under the servicing contract. The more detail you have in each clause, the less likely disputes will arise on disagreements and uncertainties around a servicing agreement’s terms. 

Description of Parties to the Agreement

A backup servicer is a party that can cover the services of the primary servicer if that organisation fails to perform its functions under the written agreement. For example, a cleaning company may go bankrupt and require the backup servicer to take over their obligations under the servicing agreement. 

A Detailed Description of the Services To Be Provided

The scope of the servicer’s functions should be in the servicing contract. These functions should give a detailed description of the servicer’s work. The more clarity you provide on the services to be performed, the less likely disputes will arise in performing the servicer’s functions. 

Duration of the Contract

Your contract must also set out the length of time that agreement should last. It must include a commencement date for the works and the completion date. You may also want to state the working hours the servicer will be expected to be on-site performing their duties under the contract.

Payment Terms 

For a contract to become legally binding, you need to have consideration passing between two parties. Consideration is a legal term that describes the payment of money or anything of value between two parties. Payment must be passed between the recipient of the services and the party providing those services. The payment mechanics of the arrangement must be set out in the servicing agreement. Specifically, they must describe who is to pay who, how that payment will work, and how much to pay.

Depending on the payment terms that have been agreed upon, there are several types of servicing payment options you may want to consider implementing into your contract. These include:

• lump-sum payments; and
• subscription-based payments. 

Lump-sum payments provide greater certainty to both parties than other types of contracts. Under a lump sum contract, one party will pay the total contract sum after the services are complete.

On the other hand, subscription-based contracts are where a recipient of services might pay a servicer at regular intervals for the ongoing completion of work. For example, in the construction industry, contractors may receive payment for each unit of work they complete on a large development project. If you are dealing with subscription-based payments, you may also want to set out a clear payment schedule in terms of the contract to ensure there is no discrepancy between what you and your contracting parties are expecting. 

Dispute Resolution Terms and Liability Clauses

Any servicing agreement should also have a dispute resolution clause. This sets out how parties can resolve conflicts under the contract. For example, a disputes clause might state:

• when you can bring about an action in law against another party;
• the applicable law and jurisdiction you can do this in; and
• how you can make that action through legal arbitration. 

Liability clauses are also important to help you limit how much you will be accountable for if you fail to adequately perform your duties under an agreement. You may want to include liability terms to transfer any contractual risk away from you and onto another party. For example, a liability clause could state that the servicer will accept liability for any damage that occurs in the property due to their actions.

Termination Provisions

Termination provisions give contracting parties the ability to cancel or end their legal relationship early. These clauses often require parties wishing to end a contract early to pay a termination fine to the other parties to ensure they do not miss out on any earnings they expect from the written agreement. For example, when you end a mobile phone contract early, you may need to pay a fee to cancel that contract early. 

Your contract should also include provisions that allow you to terminate the contract if another party breaches the terms of the agreement. If you fail to pay a servicer or do not complete your duties under an agreement, the termination provisions should allow another party to end the agreement for a breach of contract. 

Key Takeaways

When reviewing a servicing agreement, you must be careful. Your business must ensure your contract contains sufficient detail to avoid liability for a breach of contract. When reviewing the terms of your servicing contract, you need to include the:

• payment terms;
• the contract’s duration; 
• detailed scope of works;
• termination provision;
• liability limitation;
• dispute resolution clause; and
• definitions of each party in the agreement. 

If you need help reviewing your servicing contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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