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Sealing a Healthy Service Contract

The various clauses upon which a healthy Service Agreement would rest are as follows:

1. Definitions

  • All technical terms used in the Agreement must be clearly defined.
  • Ensure that the wording is wide enough to encompass the intention of the Parties yet be careful not to allow a free hand when interpreting the same.
  • When defining a vital term such as “Services” it is best to dedicate a separate clause or schedule for the same.

2. Duration and Termination

  • Date of commencement and the duration of existence must be stated in the Agreement along with an option of extension, if agreed upon.
  • Provide for a year-on-year percentage increase in the management fees payable to the Service Provider by the Client.
  • Provide Service Provider the right to terminate the Agreement without assigning any reason, by providing the Client a reasonable notice of its intention to terminate, as would be agreed upon.

3. Scope of Services

  • Very important to clearly stating the scope of services to be rendered by the Service Provider.
  • Each process making up the numerous services along with work to be done in each process must also be elaborated, such as housekeeping, waste management, pest control, overall management etc.
  • The manpower to be provided must be specified along with the appointment of supervisory staff.

4. Liability and Insurance

  • All liabilities under the Service Agreement arising out of any damage theft etc. ought to be borne by the Client.
  • Client must have insurance coverage which may be purchased on the advice and guidance of the Service Provider; however, the same shall finally be the responsibility of the Client.

5. Subcontracting

  • Service Provider must retain the right to subcontract with third parties in respect of services mentioned in the  Agreement.
  • Applicable to Service Providers who only provide a certain variety of services and thus require to subcontract the other necessary services.
  • Most applicable to Service Providers who specialise and provide expertise in Facility Management Services over and above the other services provided by them.

6. Budget Proposal

  • Service Provider to furnish budget proposal to the Client for approval.
  • Necessary to ascertain and finalise the projected costs and expenses to be incurred in the coming financial year.
  • Comprises of estimated expenses including estimates for repairs, maintenance, insurance and capital expenditure.

7. Advertising

  • Beneficial clause often overlooked by the Parties; the right of the Service Provider to advertise and inform potential clients and the public regarding their management of the premises in which they have been engaged.
  • Publicity and marketing provides substantial market value addition to the Service Provider.
  • Service Provider may be permitted to display their signage at the Client’s premises as per specifications and at a location as may be mutually agreed upon.

8. Non Exclusivity

  • In order to ensure clarity, the Service Provider should clearly specify in the Agreement that the Service Provider shall be entitled to provide similar services to any one or more third parties.
  • Stating that the Agreement entered into between the Service Provider and the Client is non exclusive qua the Service Provider.

9. Obligations of the Client

  • Other than timely payment on the part of the Client; in order to facilitate the Service Provider to fulfil their duties, the Clients shall provide the Service Provider various facilities.
  • Access to and use of the premises on a continuous 24 hour basis (if around the clock service is agreed upon or if the engagement is time sensitive).
  • Office space, as agreed upon, which shall not be deemed to assigned or in any manner transferred by the Clients to the Service Provider and shall be used by the Service Provider for the purposes of providing the Services agreed upon.
  • Amenities including electricity, computer, telephone, fax, photocopiers, air conditioners etc. as required.
  • Change room and rest room for the Manpower and storage space for the equipment and consumables at the premises.
  • Manuals, floor plans of the office layout; copy of instructions from time to time; copy of all statutory documents/ permissions required to be maintained at the premises.
  • Ensure that the Service Provider has access to the Project 365 days of the year.

10. Management Fee

  • May be an annual/monthly fixed lump sum amount or may be calculated on a percentage basis over the amounts spent by the Service Provider for services rendered.
  • The Management Fee should generally be increased after an agreed period, regularly, by a specified percentage.

11. Terms of Payment

  • Essential that all payments which the Client is obligated to pay, should be paid within the specified time period.
  • Common problem faced by many Service Providers.
  • Rectified by ensuring that the terms of payment and termination clause as specified in the Agreement are well drafted.
  • In case of failure to pay within the stipulated period, the Client shall be liable to pay interest at a specified rate on the amount of the invoice due to the Service Provider computed from the date of expiry of payment period till payment of the amount with interest to the Service Provider.
  • Client shall not be entitled to withhold payment on account of any dispute.

12. Termination

  • Clearly state what would constitute grounds for termination of the Agreement and the time interval after which the termination would be effective.
  • Tends to motivate the Service Provider to meet the Client’s requirements and at the same time helps to ensure that the Service Provider is not unreasonably pressured by the Client.
  • Either Party may terminate the whole or any part of the Agreement, with immediate if the other party commits any act of insolvency.
  • Commits any material breach of the Agreement and fails to cure the same within a specified time.
  • Failure by the Client to pay the Management Fee within the time period stipulated shall constitute material breach of the Agreement vis-à-vis the Service Provider.

13. Assignment

  • Beneficial to the Service Provider, wherein the Service Provider shall be entitled to assign any right or interest or benefit conferred by the Agreement.
  • Subject to such assignee assuming all the rights and obligations under the Agreement provided however that the Contractor shall stand behind the same.

14. Arbitration

  • Always advisable to attempt arbitration to resolve disputes that may arise.
  • Settle matters without the ills of lengthy litigation and the substantial costs associated with the same.
  • Initially attempt resolution by amicable negotiations within a specified period of the commencement of discussions, failing which the dispute shall be submitted for exclusive resolution by sole/joint arbitrators under the Conciliation Act, 1996.
  • Choosing the venue for the arbitration proceedings is very important with regard to the parties availing of Arbitration.

15. Various Protocols and Amenities

  • Depending upon the nature of the Agreement entered into and the scope of services to be provided, Client may furnish the Service Provider with certain amenities such as office space and infrastructure.
  • Spell out the protocols to be followed regarding the use of building facilities by the staff of the Service Provider; such as specified areas for security and controlled access areas; use of restrooms, kitchens, cafeterias and employee lounges; staging areas for installation work and storage areas for related equipment etc.

The points as discussed above sum up the bases of forming a Service Agreement between negotiating parties. Upon entering into the desired Service Agreement, with regard to both Parties in general and specifically with regard to the Service Provider, it is always advisable to periodically review the Agreement document. Over time, there is a tendency to forget some of the requirements contained in the Agreement and this may lead to service deficiencies or disputes in the future.

Ameet Hariani, Managing Partner &
Dheeraj Bhatia, Hariani & Co-Advocates & Solicitors

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