Three serious legal errors when concluding a service agreement
The provision of services is an area in which a huge number of companies are involved. Sales of professional services, according to most entrepreneurs, are much more complicated than sales of goods. At the same time, many companies that work in this area make serious mistakes when concluding service contracts, which leads to disastrous consequences. In this article I will talk about three errors in negotiating a service agreement that can lead to losses for the contractor.
1. The right to refuse is not limited in the contract
I started with this error is no coincidence. Article 782 of the Civil Code of the Russian Federation establishes that the customer has the right to refuse to execute the contract for the provision of services on a condition that the contractor pays the expenses actually incurred by him. This means that the customer can cancel the contract at any time.
The consequence of the refusal by the customer is the reimbursement of actually incurred expenses. Such expenses may include expenses on stationery, the purchase of other components. Agree, in the field of services, the contractor does not incur large expenses that can be documented (by check, payment order). In a b2b relationship, the right to withdraw from the contract at any time may be limited. In b2c, such a restriction is not allowed. Costs of consumer law!
Example clause for a contract:
“7.1. The Customer is not entitled to unilaterally withdraw from the Agreement. The Contractor has the right to unilaterally and extrajudicially withdraw from the Agreement, provided that the Customer is fully compensated for all losses incurred in connection with this refusal. ”
When applying this clause, the general rules of the Civil Code of the Russian Federation will apply, allowing you to terminate the contract only if it is materially violated.
2. Losses are not limited to parties
This problem is not unique to service contracts. The Civil Code of the Russian Federation establishes that the contractor has the right to refuse to fulfill obligations under the contract for the provision of services for a fee only if the customer is fully compensated for the losses. Losses consist of real damage (it may be the cost of the services themselves) and loss of profit.
There is nothing to worry about returning real damage. Lost profits, in turn, can consist of literally anything. It may include the costs of finding a new counterparty, disruption of delivery, spending on more expensive services from another contractor. It is difficult to argue that the presentation of such requirements can make the business owner nervous. For example, the Decree of the Supreme Court of the Russian Federation of December 7, 2015 in case No. 305-ES15-4533 confirmed the legality of recovering 408.4 million rubles of lost profit from the pharmaceutical company TEVA. Although it was not about services, the amount of lost profits is impressive.
You can overcome this problem by including the following clause in the contract:
“4.6. The Contractor is liable to the Customer only for real damage. The Contractor shall not be liable to the Customer for lost profits, production costs, suspension of business, expenses for replacement transactions or any other losses, regardless of who or what caused such losses. ”
This loss limitation is a common business practice.
3. The contractor does not have the right to attract other persons to perform work
Very often, when negotiating an agreement, the parties cannot “outline” the scope of work to be completed; there is no clear technical task.
A general trend is the development of a company providing professional services with a separate specialization, which allows us to declare the presence of in-depth expertise. If, as the contract is executed, a task arises that requires expertise in another area, then subcontractors may be required. According to the general rule established by the Civil Code in Art. 780 of the Civil Code, the contractor must provide the services in person.
The performance of the contract by another person may constitute a material violation of its terms. And such a violation may become the basis for termination of the contract. I recommend that the clause include the following:
“4.3. The Contractor provides the Services in person, but has the right to attract subcontractors. ”
If the customer does not agree to such a condition, it is possible to add a clause that the involvement of a subcontractor is possible only with the written consent of the customer.
Attentiveness to the clarity of the formulation of the terms of reference and clauses of the contract is the key to successful execution of contracts and the absence of disputes between contractors.
And what problems did you encounter when concluding and executing paid services contracts?