Introduction
I know how you feel. You’ve been reading a long Service Agreement and you are exhausted. And bored. Your brain is fried and you’ve had it up to here with legalese. You’ve hit the boilerplate section, often a series of sections under the heading Miscellaneous, and you start to skim…quickly. “Can’t be anything bad in here, can there…”
Well just slow down a minute. While most of the heavy lifting is done, there are a few traps lurking. Not every contract will have every one of these clauses and that is OK. But keep these sections in mind as you finish your review.
Exclusivity
From time to time you’ll see a Service Agreement with an exclusivity provision. Some people call these non-compete provisions. A simple form of exclusivity provision might provide something like the following:
While this seems straightforward and maybe even reasonable, there are several things an Agency should keep an eye out for.
- Just Delete It. If proposed by a Client, a good first response to a clause like this is to delete it. For the reasons discussed below, it is a big ask so don’t assume you must accept it. It may be dusty boilerplate that the Client doesn’t really care about for your project.
- Understand the Business Case. If striking the clause doesn’t work, ask the Client to identify the specific business concerns as applied to your relationship and work. That will help identify the real issue and come up with an appropriately drafted restriction. Is the concern sharing of information (more a confidentiality issue)? Or is the Client worried that the design your Agency develops will show up on a competitor’s website (more of a copyright than exclusivity provision). These are different concerns and there may be ways other than exclusivity to address them.
- One at a Time. The typical concern is that Client doesn’t want you working for a competitor at the same time you are working for Client. That is a much different (and more easily solved) problem than what is presented in the sample clause above. So, when looking for ways to tailor a clause like this, a first step is to have it apply only while Agency is providing services to Client. In other words, after your engagement is complete, you are free to work for anyone.
- Exclusivity Isn’t Free. If your Agency is forced to accept an exclusivity clause remember that exclusivity isn’t free. A clause like this essentially takes an Agency out of certain aspects of the market. This is a big ask! For an Agency to consider agreeing to a provision like this, make sure the Agency prices itself accordingly. If your Agency has a narrow industry focus an exclusivity provision could be devastating and should only come at a high price. If you are a general service Agency without industry specialization, you won’t be able to command as high a price for exclusivity (and it is probably less of a concern).
- Be Specific. Keep an eye out for broad and vague provisions like “businesses that compete with Client.” This language can be read very broadly. Better approach is to specifically list the companies, or even the business units within companies, that are considered competitive and off-limits.
- Use a Separate Team. Large agencies can often respond to a clause like this by with a carve out that allows work for a competitor with a separate client team. This addresses a client concern about sharing of Client information and creative ideas with competitors. This has logistical and technical challenges and is understandably difficult for smaller agencies.
Independent Contractor
Most Service Agreements contain a clause describing the independent contractor nature of the relationship between Client and Agency. A typical clause might read like this:
While there isn’t a lot to negotiate in a short clause like this, there are a couple things to keep an eye out for:
- Beware Indemnity. Sometimes buried in these clauses is an indemnity from the Agency in favor of the Client for any extra costs that Client may suffer if Agency is reclassified by the state as an employee instead of a contractor (e.g., unemployment withholdings, workers’ compensation, etc.). This isn’t much of a risk for an Agency of any size, but it can be a risk for a freelancer (even one with an LLC). An indemnity is inappropriate because the reasons a freelancer might be reclassified as an employee are generally under the Client’s control, not the Agency’s. An Agency shouldn’t have to indemnify for risks outside of its control.
- Contract May Not Control Contractor Status. Again, an issue for freelancers: in some states, the wording of the contract is not the final determinant in whether a person is classified as a contractor (vs. an employee). Rather, the determination in those states is based on the nature of the actual relationship between the parties.
- Long Form Clauses. Sometimes an independent contractor clause is a lengthy repetition of all the tests under state and federal law as to what creates contractor status (vs. employee). As applied to the freelance Agency, some of these statements may not be true. Your focus in this case should be simply to avoid the indemnity clause discussed above. Otherwise, your negotiating energy is better spent elsewhere.
Confidentiality
A full discussion of confidentiality agreements is beyond the scope of this book, but there are a couple things an Agency can keep an eye out for:
- Coordinate with Portfolio. Make sure any confidentiality clause works with your Portfolio provision. A simple caveat to the confidentiality clause that says, “Except as provided in Section [X – portfolio clause] ….”
- No IP in Confidentiality. Beware of intellectual property representations, indemnities, and ownership transfer clauses buried in confidentiality provisions. There are entire other sections of the Service Agreement dedicated to these issues. No need to do double duty here.
Attorney Fees
A typical attorney fee clause looks like this:
The meaning is clear – the loser in a dispute pays the winner’s attorney fees. If this clause is missing, then each party pays their own attorneys’ fees (at least in the US). The purpose of the provision is to discourage frivolous lawsuits since the loser risks paying the winner’s fees.
As far as negotiation, this one is simple:
- Add the Clause. You need an attorneys’ fee clause. If your Client doesn’t pay, it will be an important tool that Agency can use to collect.
- Avoid One Sided. You’ll sometimes see a one-sided attorneys’ fee clause – one that only protects your Client. This is onerous and overreaching. If you see a clause like this, be sure to edit to make it benefit both parties. If the other side won’t edit the provision, enter the relationship with caution. (Note: some states automatically treat any attorneys’ fee clause as mutual, but not every state!)
Assignment
An assignment clause speaks to whether the rights and obligations under the contract can be transferred to someone else. A typical assignment clause looks something like this:
The general rule here is that neither party can transfer the contract without permission from the other party. Keep a few things in mind when reviewing assignment clauses:
- Default = No Assignment. In the absence of other facts, the default rule should be that the Service Agreement isn’t assignable without the consent of the other party. This makes sense since the parties made a deal to work with each other, not some unknown future transferee of the contract.
- Assignment on Sale of Business. It isn’t uncommon for a clause like this to include an exception allowing either party to transfer the contract to a buyer. An Agency concerned about a Client selling would look to strike this clause. But more importantly, an Agency considering selling its business wants a clause like this that also favors Agency. An edit to the sale exception clause to make it mutual would read:
- No Clause = Free Assignment. If a contract does not contain an assignment clause, that means the contract is freely assignable and no consent is required.
- Make Mutual. If you are presented with a one-sided version of this clause that only requires Agency to get Client’s consent to assignment, it is reasonable for the Agency to ask that the clause be made mutual.
Governing Law
A typical governing law clause reads like this:
Short Version: Don’t sweat it.
Long Version: A paragraph about governing law is pretty common in most Service Agreements. It does what you expect: controls what state’s law governs in the event of a dispute. Don’t confuse this with venue, a subject discussed next. Venue addresses where a dispute is resolved. Governing law just talks about what law the court will apply when you get to that venue.
Keep these tips in mind when reviewing governing law clauses.
- Most Laws are Similar. For most issues in a creative Service Agreement, the state law that governs is not going to make a big difference in the outcome. Most fights over creative Service Agreements are breach of contract claims. And while state laws vary, the general principles of contract law and remedies from state to state are comparable. In any case, to select the law that would be better for you, you’d need to know in advance what your dispute was about, which side you were on, the evidence, and more.
- Impact is Rare. Governing law is only going to matter if
- you’ve gotten into a dispute with your client;
- you can’t resolve the dispute by negotiation;
- you hire lawyers to file a lawsuit; and, only then,
- the choice of law may make a difference.
Most contracts never hit point 1. Of those that do, most never get past stage 2. For the few that do, only a tiny percentage of those are cases where the law is going to make a difference. For all these reasons, I say don’t sweat it.
- Trade It. When you edit the contract, set the governing law to your state. If the client leaves it, great. If the client changes it, see if you can “trade” that edit for something you really want. Like venue in your home state as we’ll discuss in the next section. It may not work often, but when it does, you’ll have almost certainly made the better deal.
- Delete It. Whatever you do, very rarely is it valuable to get stuck trading drafts that go back and forth on governing law. To take the hostage out of the equation, simply delete the clause from the contract. You’ll simplify the agreement and reduce the areas for negotiation. The agreement will still work normally. In the highly unlikely event of a dispute, the litigation lawyers will have tools to sort out what the governing law is.
Venue / Jurisdiction
Venue and jurisdiction can be a sticky and powerful piece of boilerplate. This clause dictates where the parties can litigate a dispute and what courts have power over them. Let’s look at an example.
The above example says that (i) if someone wants to sue, they can only sue in the named county (where the suit must be litigated) and (ii) that both parties consent to jurisdiction in that location (what courts have power over the parties). You’ll sometimes see this clause mashed together with the Governing Law clause. That’s OK. A few things to keep in mind:
- Venue as a Deterrent: Ideally, you’d like the county and state where your Agency is located to be named in this clause. Your Client is thinking the same thing. It’s a zero-sum game. Rather than each party fighting for its local courts, one alternative is state that the party filing suit must go to the other party’s state to file, and vice versa. The purpose of this clause is to encourage the parties to resolve disputes (because filing is inconvenient) rather than resorting to litigation. It also discourages what might be frivolous suits levied just because one party has access to a convenient forum.
- Delete It. Another alternative all together is to simply delete the clause. Don’t worry, the contract won’t fall apart. In the unlikely event of a dispute that goes to court, the litigators will sort out the answer. So, if you think the likelihood of a dispute is low (or even normal), then you likely aren’t taking much risk by deleting this clause. And you’ve simplified your contract in the meantime.
- Use Your Leverage. If you are much larger than your Client, this is sometimes something you can insist on just as a matter of leverage. By the same token, a more powerful Client is often inflexible in negotiating this provision. If you are facing an inflexible client offering an unfavorable venue and jurisdiction provision, remember that this clause is only relevant in the event of full-blown litigation. The clear majority of disputes are resolved short of litigation. So, an unfavorable venue or jurisdiction clause may not present you much risk.
Arbitration
Entire books could be written about arbitration clauses. But we’ll just focus on a few key issues. You’ll sometimes see this under the heading Dispute Resolution. First, a typical arbitration clause.
Just a bit of terminology: arbitration is like a court proceeding in that you get a final, binding ruling. One oft-cited benefit of arbitration is that it is cheaper and faster than going to court, though some dispute that. One nice benefit of arbitration is that it is private whereas court records and proceedings are public. Contrast that with mediation which is a consensual process where a third party (the mediator) helps parties try and resolve disputes. A mediator doesn’t have the power to issue a binding decision. Arbitrators do.
Some lawyers strongly favor arbitration and others do not. And the decision can have a lot to do with the state of local courts. Talk to your lawyer to understand her preferences and attempt to negotiate accordingly.
Let’s break down what this clause means and what can be negotiated:
- What Disputes are Arbitrated. Typically, all disputes related to the agreement will be subject to arbitration. It is customary that your Client will want an exception for things like infringement or breach of confidentiality so it can go to court and get an injunction. If there is an exception, then be sure to consider all the rules we discussed about Venue / Jurisdiction since that provision will dictate where lawsuits regarding the exceptions will be fought.
- Location of Arbitration. Where the arbitration will occur is an important issue just like Venue / Jurisdiction. Consult that section for tips on how to negotiate this type of clause. One alternative available with arbitration that doesn’t work with venue is to specify a location of mutual inconvenience. For example, if Client is in Seattle and Agency is in San Francisco, you might specify Portland, Oregon as the location for arbitrations. Again, the idea here is to encourage the parties to resolve disputes on their own without resort to litigation.
- Rules. One uniqueness about arbitration is that the parties can specify what rules they want to apply. The American Arbitration Association is a large, national organization with a well-developed set of rules. It is commonly listed. JAMS (formerly Judicial Arbitration and Mediation Services) is another typical alternative. There are also local and regional alternatives. All have pros and cons in terms of rules and expenses. All are likely fine choices, though your lawyer may have a preference.
- Entry of Judgment. One final point. The final sentence in the example above stating that the arbitrator’s decision can be entered as a judgment is a common and acceptable provision. If you have an arbitration clause, you should have a clause like this as well.
Notices
A notices clause makes clear where notices are to be sent in the event of a dispute.
Not every Service Agreement has a notices clause and that is OK. It can be important if you are working for a Client with lots of subsidiaries and affiliates or if your Agency has lots of offices. This clause does not apply to the day-in and day-out communication around a creative project. This clause is for notices in the event of a dispute or other major event involving the contract. If that distinction is unclear, be sure to explain that project communications are not notices for purposes of this clause.
A few small but important details in a clause like this.
- How to Give Notice. Make sure the notice methods make sense. I’ve seen modern contracts state that telex is an appropriate form of notice. Who still uses telex? Fax machines are also nearly gone so may not be appropriate in many organizations to allow notice by fax. First class mail or overnight mail are probably the best methods to use for these types of notices. I wouldn’t rely on e-mail as the sole form of notice but it can be used in connection with one of another hard copy notice method (the hard copy being the official notice).
- Who to Notify. Have the notice go to a senior business-person or to a senior title level position at your Agency, not the project manager. Project managers have turnover though a notice “Attention: President” should get to a person even if the person in that position changes.
- Notify the Lawyer. Lastly, you may also wish to state that any notice given to Agency must also be sent to Agency’s lawyer. Given that notices under this provision are for major contract issues, this ensures that your lawyer is notified early.
Severability
A typical short severability clause will look something like this:
The meaning is straightforward: the failure of one clause will not cause the entire agreement to fail.
Not much to haggle here. No worries if you see this clause included. And wouldn't even worry much if your contract is missing a clause like this. The issues included in most Service Agreements don’t raise the types of enforceability issues these clauses are designed to address. And in any case, many courts apply this rule when interpreting contracts even if the contract doesn’t have such a clause.
No Waiver
If Party A is supposed to do something for Party B, Party B can excuse (or waive) Party A’s performance obligation.
Contracts often have a provision making express how waivers must be given to avoid disputes about whether ambiguous acts constitute a waiver. A typical provision might look something like this:
In plain English, this says:
- Not insisting on performance (e.g., not demanding that a contract deadline be met) is not a waiver;
- Not enforcing a remedy (e.g., not declaring a breach or filing a lawsuit if a deadline is not met) is not a waiver;
- Waivers must be in writing and signed by the person granting the waiver.
Not much to negotiate here. This is a standard clause and appropriate to include in most Service Agreements.
If your contract is missing a waiver clause, consider asking for one in your negotiations. While there may be some slight advantage to an Agency by omitting the clause (leaving open the argument that Client waived details of Agency’s performance obligations by its inaction), I think such an approach is shortsighted. Instead, opt for the approach that helps avoid disputes. In this case, the clause prevents ambiguity by making the rules for waivers very clear.
Cumulative Rights
A typical cumulative rights clause looks something like this:
This just says that choosing a remedy in a dispute doesn’t eliminate other remedies that may be appropriate. Put another way, if both an injunction to stop certain behavior AND damages for breach of contract are appropriate, both remedies are available to someone filing suit.
This clause is only activated when things have totally broken down and lawsuits are filed. Recognizing that that only a tiny percentage of Service Agreement disputes result in lawsuits, this clause simply isn’t activated much.
If your contract is missing a clause like this, I wouldn’t worry. This is just a belts-and-suspenders expression of what the law provides anyway.
Survival
You’ll sometimes see a provision in the miscellaneous section of an agreement labeled “Survival” or as part of the termination section labeled “Effect of Termination”:
This clause makes express that termination of the agreement does not terminate those provisions that are reasonably understood to have effect after termination. This includes things such as the obligation to pay for work provided, ownership of intellectual property, indemnification, confidentiality provisions, limitations of liability, etc.
If your contract is missing one of these, don’t fret. Courts are generally able to determine which provisions are intended to operate past termination and give them appropriate effect.
If your contract does have a clause like this, make sure you do a sweep at the end of your negotiation to make sure all the cross references are correct and any new provisions are added where appropriate.
Injunctive Relief
This provision typically reads something like this:
This clause says that if the Agency breaks certain promises, that Client ask a court to order Agency to stop breaking those promises. A clause like this typically refers to confidentiality, intellectual property, and exclusivity/noncompetition clause.
Not every contract will have a provision like this. If a contract presented to you is missing one, that is OK. And even though this clause seems to favor the Client, I wouldn’t waste your negotiating efforts here for a couple reasons.
- Unlikely to Occur. A clause like this only applies in the very unlikely event of a lawsuit to prevent a very specific type of behavior. Your negotiating efforts are better spent elsewhere.
- Court May Ignore. This clause attempts to mandate an injunction in certain circumstances. Because an injunction is a special type of remedy, a court isn’t obligated to follow this short-cut and may still insist that Client prove that damages aren’t appropriate.
Integration / Entire Agreement / Amendments
This is one of the more important pieces of boilerplate. The long but typical version of this boilerplate often reads something like this:
The clause says say that the agreement is only what is in the four corners of the document and excludes any side agreement, earlier deal, prior discussion, or other understanding relating to the work.
This clause is typical and your agreement should contain something like this. If it doesn’t, you generally want to see that one is added. A few drafting tips:
- Make Sure All Agreements Addressed. The flip side of that coin is to be sure the integration clause contains all of your understandings. Don’t expect to be able to answer a dispute by saying “oh we had a side deal about that.” For example, if you have a separate NDA, just mention it as part of this clause. For example:
- Consider Project Management. Given that an SOW will often change over the course of the project, you might want to describe a separate process for how the SOW can be changed based on your project management systems. An edit may be as simple as something like this:
Counterparts
You’ve probably seen a counterparts clause that looks like this:
This just says that a contract is still formed even if Client and Agency sign separate signature pages.
Not much to negotiate here. This clause is mutually beneficial. And, you need not worry if your contract is missing this clause as the intent of the parties will work to create the effect this clause makes express.