How carefully does a business owner, MD, CFO or HR Manager scrutinise the contracts that they sign with their cleaning services, caterers, recruitment agencies, IT administrators, security services and the like? It is about more than just reaching agreement on service specifications and payment arrangements – simply signing the ‘standard contract’ provided by a service provider could leave the client open to many risks.

Outsourcing of services or contracting with a service provider usually means that the client company relies on someone outside of the company to run certain functions / activities on its behalf. When a business outsources some of its functions/activities, the third party then runs with that portion of the outsourced function – however, the responsibility and accountability cannot be outsourced and the risk remains with the client. The client should therefore contractually provide for the necessary warranties and indemnities relating to the service provider’s functions.

It stands to reason that the author of the service agreement would tend to be somewhat one-sided in terms of protecting their own interests. Or, as we have seen many times, the contract is sub-standard / outdated and not in line with legal provisions and best practice. This would mean that the client (or the service provider) may not be sufficiently covered nor have legal recourse when things go wrong. Signing a legal contract without having it professionally vetted, is pure folly.

Consider the following potential risk areas:

• One of the outsourced IT specialists who has access to the client’s intellectual property or unique systems, misappropriates these. How is the client protected in terms of the financial- and other consequences of his actions to its business?
• An outsourced security officer arrives at work intoxicated and assaults a customer. There are hospital costs and potential lawsuits.
• One of the outsourced cleaners at a facility catering for school camps, molests one of the children. If the client had obtained a contractual warranty from the service provider that their employees all have clearance certificates in terms of the National Register for Sexual Offenders (a statutory requirement for all people who work in places where children or the mentally disabled have access), this would go a long way to limit its risk exposure and to hold the service provider accountable.
• The client’s recruitment agency makes an offer on its behalf to a potential applicant it has been considering to appoint. The applicant accepts, resigns and arrives at the company’s door a month later to start work - although the client had decided to appoint someone else. There is a dispute between the client and the recruitment agency around whether the client had given them the go-ahead to make the offer, since the service contract does not stipulate clearly what constitutes such authorisation. The client now also faces a claim of unfair dismissal by the applicant.

There are many more such scenarios where, in hindsight, various risks could have been limited or avoided by way of contractual stipulations. This goes both ways – a clear stipulation of obligations and responsibilities protects both parties.

Some general areas that bear consideration when entering into a service provider agreement, include:

• Protection of confidential information / trade secrets / intellectual property
• Non-employment of the service provider’s staff by the client
• Penalty clauses for failure to perform in terms of the contract
• Indemnities / warranties – tax, labour laws, conduct of employees
• Client oversight over outsourced functions
• Outlining duties, obligations and responsibilities of all parties
• Specifying services to be provided; agreement on quality control; whose equipment will be used; insurance, etc.
• Aligning service offerings with the client’s internal policies and procedures and code of conduct
• Whether the service provider is permitted to delegate / subcontract (and cost considersations)
• Access to client’s premises – arrangements around loss control; security; searches / breathalysers; safety; surveillance
• IT systems - equipment use; monitoring of communications
• What happens in case of delays; breach; non-performance
• Dispute resolution; termination of contract and notice; legal jurisdiction; responsibility for legal costs

Client companies and service providers alike should make an effort to have their service contracts reviewed regularly with the assistance of a legal professional. The proverbial stich in time may just save them a lot more than nine.

Written by Judith Griessel, Griessel Consulting