In this article, we have a look at some of the important aspects that must be kept in mind when drafting a Professional Services Agreement
The Professional Services Agreement usually relates to a single project with defined scopes or timelines and is usually not a continuous service.
Persons with certain expertise and ability usually provide services under a Professional Services Agreement.
The scope of the service is often disputed, and for this reason, providing a detailed scope is recommended. What are the deliverables? Within which timeframe must the Deliverables be provided? Must the Services be provided at a specific location?
The scope of the Agreement is often separated from all the legal terms—schedules to the Agreement, detail scope of work, timetables and payment tables.
What are the criteria for acceptance of the Deliverables? What if the Deliverable does not meet the acceptance criteria? These are all important aspects that must be detailed in the Agreement.
Are there different rates that apply to different people providing the Service? Will any expenses be reimbursed? Can the Provider add a markup on the expenses? Is prior written approval required for the expenses?
The people involved with providing Services under a Professional Services Agreement often have unique skills, expertise and knowledge. Therefore, if an entity is appointed under the Professional Services Agreement, it can risk losing its skilled professional to a Customer who wants to employ these individuals directly. For this reason, non-solicitation provisions are often added to a Professional Services Agreement.
Generally, Services provided under a Professional Services Agreement will constitute work for hire, and all intellectual property will belong to the Customer. However, some aspects that relate to intellectual property must still be dealt with in the Agreement. For example, how will the intellectual property that the Provider brings to the table be dealt with under the Agreement? Will a licence be provided in respect of this Intellectual Property? What are the terms of such a licence?
Read more on building intellectual property clauses.
The payment provisions will detail payment terms, overdue amounts, method of payment, setoff, taxes, payment disputes etc.
The Provider may be required to take insurance against, for example, cyber crimes. The insurance provisions should detail the type of cover to be taken out, the amount of cover required, what happens if there is a failure to maintain cover and obligations to produce certificates confirming cover.
For a Customer, it may be difficult to determine whether or not the Provider is executing their obligations under the Agreement. Audit rights allow the Customer, or their authorised representative, to conduct certain audits.
With the audit clause, aspects often addressed include notices of audits, the number of allowed audits, confidentiality and what happens if there is an adverse finding.
Both Parties would generally want to protect such sensitive information, which, if disclosed to certain third parties, will be detrimental to their business. The confidentiality provisions provide which information must be regarded as confidential, obligations relating to handling confidential information, and what happens if there are unauthorised disclosures.
Unrecoverable losses and maximum liability are generally dealt with under the limitation of liability provisions. Unrecoverable losses may include, for example, consequential losses, and claims relating to breach of data protection provisions may be limited under the maximum liability amount to a fixed amount.
The Customer and Provider will usually provide certain mutual warranties. These may include, for example, that they have the legal capacity to enter into the Agreement and that they have not offered unlawful or prohibited inducements to the other Party or any other person in connection with the Agreement.
Then there will also be warranties that relate to the Services that will be provided.
Typical warranties will include that the Services will be done efficiently and that people with certain skills and experience will be used to provide the Services.
Breach of the warranties will also need to be addressed, and the disclaimers which will apply will also need to be included.
An indemnity often found in a Professional Services Agreement is an indemnity relating to Intellectual Property infringement claims.
The indemnity provisions need to identify what will be regarded as indemnified losses (what will be covered), what will trigger the indemnity and the claims procedure.
How will the Parties deal with disputes? Through a Court process or alternative dispute resolution? Are there different processes for different disputes – For example, expert determination for disputes relating to the Software Deliverables?
The Parties may conclude the Professional Services Agreement for a fixed term. There may also be auto-renewal of the Term, which must also be detailed within this clause.
The termination provisions detail when a Party can terminate the Agreement before the Term ends and may also provide for termination assistance the Provider must provide if the Agreement is terminated.
The boilerplate clauses will include the provisions relating to public disclosure, third-party beneficiaries, how amendments will be dealt with, how notices under the Agreement must be provided, assignment etc.
Martin Kotze is a commercial lawyer with over 10 years of experience. He specialises in transactional work within the Tech, Financial Services and Property industries.
He is also one of the co-founders at DocNinja and regularly advises listed companies to small and medium enterprises on how to contract better with their customers.
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