Basic Business Law. Lesson 5. Sales', lease-, and service agreements

Basic Business Law
Lesson 5: Sales-, lease-, and service agreements
In business, there are basically two ways to make money; either through the sale of goods or through the
sale of services. But even someone in the service industry will enter into sales agreements from time to time,
and a company specialising in the sale of goods might find it necessary to enter into a lease or service
agreement.
For example, the tourism industry is a service industry in its very nature, but someone in the industry will still
be a party to a sale agreement on a regular basis. For example the owner of a boat might make his money
by doing hippo tours on Lake St. Lucia, but he first have to buy the boat. The prospective entrepreneur might
however find that buying a boat is too expensive and so decide to lease a boat instead, so that he can start
using the boat to generate money without having to pay for it up front.
Similarly a furniture manufacturer will lose a competitive edge if he doesn’t offer a delivery service as well,
but the number of deliveries might not justify the buying, or even the leasing, of a delivery vehicle and so
they might enter into a service agreement with a delivery service provider.
1. The contract of sale
1.1. The nature of the sale agreement
A sale is a contract whereby one party (the seller) undertakes to transfer a thing or the possession thereof to
the other party (the purchaser or buyer) in return for payment of a price by the latter.
In principle, to sell something, a party only needs to undertake to transfer free and undisturbed possession of
that thing to the other party. So a person may validly sell something he does not own as long as he makes it
clear that he is not the owner of the thing. But if the seller is the owner of the thing (the res vendita), he must
also undertake to transfer ownership to the buyer. Only certain kinds of sale require formalities.
The res vendita may be a corporeal thing, an incorporeal thing, or a future thing.
Corporeal things
Cars, buildings, equipment, and food all have physical properties; it can be seen, heard, felt, smelt, or tasted.
Incorporeal things
A liquor licence or a plane ticket doesn’t have physical properties. Yes you get a piece of paper that serves
as a record of the thing you bought, but it’s not the thing itself. You are buying the right to sell alcohol or the
right to fly somewhere.
Future things
You can place an order for wooden statues or woven baskets from an informal manufacturer and pay for
them upfront or you can buy the harvest of a farmer while the vegetables are still in the ground.
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The price agreed upon must have a monetary component for the contract to qualify
as a sale, but need not be entirely in money. For example, the buyer of a motor car
may agree to trade in his present motor vehicle as part payment of the price.
The price must be a fixed amount, or the parties must have agreed upon some external method or standard
to make the price fixable. For example, you can agree to pay an informal manufacturer at cost plus 50%.
1.2. Types of Sale
Cost Insurance Freight (CIF) sales
A CIF sale is one in which the seller must ship and insure the goods. He must then invoice the purchaser for
a sum which includes the price of the goods, the cost of the insurance and the cost of shipping the goods to
their destination
On tender of the shipping documents to the buyer, the seller is entitled to payment, even if the goods are
damaged, lost or destroyed. The seller is not obliged to ensure that the goods arrive safely at their
destination as the buyer is covered against losses in transit by the contract of insurance.
Free on board (FOB) or free on rail (FOR) sales
Where goods are to be shipped FOB or FOR the seller is obliged to put the goods aboard a ship or into
railway trucks for transport to the purchaser at the purchaser’s expense.
It is the responsibility of the purchaser to enter into the contract of carriage and insure the goods. Once the
seller has placed the goods on board or in trucks, the seller becomes entitled to payment.
Sales on approval and sales or return
A sale on approval is a sale subject to a suspensive condition that the purchaser will be bound only if he
retains the thing for longer than a certain period, while a sale or return is a sale subject to a resolutive
condition that the sale will lapse and be of no force and effect if the purchaser returns the thing within a
certain period.
Example
A woman buys a safari outfit for her ranger husband and takes it home for him to fit. She agrees with the
salesperson that if it doesn’t meet her husband’s approval, she will bring it back within a week.
If the outfit fits, he will keep it and the week that she agreed on with the seller will pass and she will be liable
to pay. The suspensive condition of her husband’s approval has been met.
If however the outfit doesn’t fit she will have to return it within the week she agreed upon with the seller and
she will not be liable for payment. As she returned the outfit within the prescribed period, the resolutive
condition of her returning the outfit has been met and she will not be liable to pay the purchase price.
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Lay-by agreements
A Lay-by agreement is a sales agreement where delivery of the thing only takes
place after the last instalment was received and is subject to the following conditions:
• A lay-by agreement is limited to six months.
• The seller may only recover the purchase price from the buyer, and cannot demand
compensation for storage or interest on the purchase price.
• The buyer can terminate the agreement at any time prior to its expiry and is then entitled to 90%
of all monies already paid.
• The seller must deliver the goods within 14 days after receiving the final instalment. If he fails to
do so he must return all the moneys received to the buyer plus 10% interest.
In the event of the buyer failing to meet his obligations, the seller may, 30 days after he has notified the
buyer by certified post of his intention to do so, cancel the agreement. On cancellation, the seller may keep
10% of the monies paid as a penalty and refund the buyer.
Sales in execution
This is a sale, by public auction, of the property of a debtor with a court judgment against him. Sales in
execution are regulated by the rules of court and are conducted by the sheriff of the court.
This type of sale differs from other contracts of sale in that the aedilitian remedies will not be available to the
purchaser and the purchaser becomes the owner of the thing sold even if it did not belong to the judgment
debtor and the latter could not himself have transferred ownership. (The aedilitian remedies are discussed in
more detail in paragraph 5.2.4.4 below.)
In performing his statutory duties in a sale in execution, the sheriff does not act as anybody’s agent, but as
an executive of the law. When he commits himself to contractual terms, he does so in his own name by
virtue of his statutory powers.
Example
You get a tour guiding assignment to take adventurist on 5-day hikes in the Drakensberg Mountains. In
between hikes you stay with your cousin in Underberg. You buy a TV to watch during the long winter nights
and you keep it in the dining room as your cousin doesn’t have a TV of his own. Unbeknown to you, your
cousin has declared insolvency and the court make a judgment that all his furniture be sold to partly meet the
demands of his creditor. When you get back after a hike you discover that your TV has been taken by the
sheriff of the court as well.
Even though you have a real right of ownership of the TV, you will have no claim against the sheriff of the
court for selling your TV in a sale of execution. Even suing your cousin will not be fruitful as you will simply
be joining his long line of creditors.
1.3. The effect of the sales contract
The making of a contract of sale has no effect on the passing of ownership. Ownership only passes when;
• in the case of immovable property, the transfer of the deeds is registered by the Registrar of
Deeds,
• in the case of incorporeal property, when the right is ceded or
• in the case of movable property, when it is delivered.
The law presumes that if the sale of movables was for cash, the seller intended to pass ownership on
receiving payment, but if the sale was on credit, the seller intended to pass ownership on delivery.
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As a general rule, the owner of property has to bear the loss if the property is
damaged or destroyed through no fault of another, but where the property is sold, the
rule is that the risk in the property passes to the purchaser as soon as the agreement is concluded.
Therefore, if the res vendita is damaged or destroyed through no fault of the seller and even while it is still in
his possession, the purchaser is not relieved of his duty to pay the price and, if he has already paid it, cannot
recover it. The benefit or profit follows the risk and, from the date that the risk passes, the buyer is entitled to
any fruits or other advantages which would normally accrue to the owner.
Example
Taxi owner Richman Khumalu sells a taxi to fellow taxi owner Badluck Sibanda without the knowledge of taxi
driver Reckless Davis.
The moment they agree on the sale, Badluck Sibanda will be entitled to the amount that Reckless Davis
would normally pay over to Richman Khumalu at the end of the day. If however; the taxi is involved in an
accident it is Badluck Sibanda that will be responsible for the damages.
The rule that the risk in the res vendita becomes the purchaser's from the date of the sale is subject to the
following qualifications.
• If the seller delivers late he bears the risk for the period that he delays.
• The risk only passes once the sale is perfecta; which means that the price must be fixed, the
subject-matter must be ascertained and all suspensive conditions to which the sale is subject
must be fulfilled.
Remember that the effect of the contract as described above is a reflection of the common law position and
the passing of risk and ownership may be varied by agreement in which case the agreement will be binding
and not the common law.
1.4. The duties of the seller
The seller must take care of the res vendita until delivery.
If loss through damage or destruction is caused through the fault of the seller, he will be liable, unless the
agreement provides otherwise.
The seller must exercise the measure of care a reasonable person would exercise, but if the purchaser is
late in taking delivery the seller is liable only for grossly negligent or intentional conduct on his part.
The seller must deliver the res vendita.
The seller must give the purchaser, or allow the purchaser to take, free possession of the res vendita.
• If the goods was physically identified delivery takes place where the goods were situated when
the contract was concluded;
• If the goods was not physically identified delivery takes place at the seller's place of business or,
if he has none, at his residence;
• If the goods have to be manufactured delivery takes place at the place of manufacture.
If loading and transportation are necessary, they are the purchaser's responsibility although the form of
delivery can be varied by agreement.
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The seller must deliver, not only the thing specifically agreed upon, but also its
accessories, appurtenances (trimmings) and fruits. The seller is in breach of the duty
to deliver if he tenders a thing which is not the thing agreed upon, irrespective of whether it is equivalent in
value or quality.
In a sale of immovable property the seller must free the property from all encumbrances like mortgage
bonds, evict any third parties in unlawful possession of the property, and remove any movables not forming
part of the res vendita.
In a sale of unascertained goods, the goods delivered must conform to all specifications and be in the
condition agreed upon, or in a condition fit for sale in the absence of an agreement.
The seller must ensure that the purchaser has free and undisturbed possession of the res
vendita.
The seller undertakes that the purchaser will not be evicted from the res vendita and undertakes to indemnify
him if he is evicted.
Eviction can be described as dispossession, or an interference with possession, arising out of some defect in
the seller's title.
Where the purchaser receives a demand to relinquish possession of the res vendita to a third party, he can
simply comply with the demand and voluntarily hand over the res vendita. If however he wishes to claim
damages from the seller, he must be able to prove that the third party's title to the res vendita was valid both
against himself and the seller.
Alternatively, he can refuse to relinquish the res vendita until dispossessed of it by a process of law. If he
adopts this course he must give notice to the seller when legal proceedings are started to enable the seller to
intervene in the case or assist in defending it.
On eviction the purchaser can recover the following damages from the seller:
• The purchase price,
• any increase in the value of the res vendita provided it did not come about as a result of
unforeseen or fortuitous circumstances, like when gold is discovered on a farm,
• any costs incurred in defending an action by the true owner and
• any further loss occasioned by the eviction if the loss was reasonably foreseeable by the seller at
the time of contracting.
Where the purchaser has made improvements to the res vendita in the belief that he was, or would become,
owner of it he has a right to recover the value of the improvements from the true owner, but in the following
cases he might have a claim against the seller:
• If the seller has washed his hands of the matter or
• the action against the owner would be too expensive or
• if the action against the owner is uncertain of success.
The seller must assume responsibility for latent defects.
The seller is liable for latent defects in the res vendita which existed at the time of the sale.
A latent defect is an abnormal characteristic which materially impairs the usefulness or
effectiveness of something. A flaw in an article is not a latent defect if a reasonable person would
expect to find in other articles of the same type, age and price.
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To qualify as 'latent', a defect must be such that it would not have been apparent
upon inspection by an ordinary prudent person. Even if a particular defect qualifies as latent, the purchaser
cannot rely on it to claim relief if he was aware of it.
The remedies available to the purchaser for latent defects are known as the Aedilitian Remedies: The actio
redhibitoria and the actio quanti minoris.
Actio redhibitoria (redhibition)
If the defect was so serious that a reasonable purchaser would not have bought at all had he known of it, the
purchaser can claim the following:
• The return of the purchase price,
• payment of all foreseeable and necessary expenses incurred as a result of the sale, like the cost
of taking delivery,
• payment of expenses incurred in examining the res to discover the defect and
• the cost of returning the res to the seller (including storage charges if the seller refuses to take it
back).
For a claim of redhibition to succeed the purchaser must restore or tender to restore the res vendita to the
seller. If the buyer creates the impression that he intends to keep something notwithstanding the defect, he
waives his right to claim redhibition.
Actio quanti minoris (reduction in the purchase price)
If the defect is such that a reasonable purchaser, had he known of it, would have bought it, but for a lesser
price, the purchaser is entitled to have the price reduced to the market value of the thing in its defective
state.
Where the seller is a manufacturer or dealer, he must indemnify the purchaser against
consequential loss resulting from latent defects.
The purchaser could hold the seller liable for consequential loss if the seller manufactured the res himself or
if he is a dealer in the type of article and has publicly professed to have expert knowledge regarding that kind
of article.
The liability of the seller who is a manufacturer or dealer to pay for consequential loss is additional to the
liabilities. Liability for consequential loss may be excluded by agreement of the parties.
Example
You buy a 4x4 vehicle to take tourist up the Sani Pass. Shortly after taking delivery of vehicle you drive into
the back of a luxury vehicle causing considerable damage to both vehicles. Your claim that the accident
happened because the breaks of the 4x4 was defective is confirmed by an independent assessor.
If you bought the vehicle from a dealership, the dealer will be liable for the damage to both cars and they will
have to repair the defective breaks. If however you bought the vehicle from a private person you will have no
claims against this person for the damages to the two vehicles, but this person will be liable to repair the
defective breaks.
This is so because both sellers has the duty to take responsibility for latent defects, but only the dealer has
the duty to assume responsibility for the consequential damages caused by the latent defect.
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1.5. The duty of the buyer
The primary duty of the purchaser is to pay the purchase price. In the absence of
specific agreement as to how and when he must pay, the position will be regulated by the common law.
Example
A friend of yours wants to buy a five-year-old SUV from a work colleague and plans to use the vehicle to do
airport transports. She tells you that the colleague is selling the car at 10% below the market value and she
thinks it is a good deal.
Discuss the advice you will give your friend in this regard. Refer to the passing of risk and ownership, the
dangers of buying from a private person and some of the protective measures you can take to protect
yourself from the common law dangers associated with an agreement of this kind.
Consider that the common law position as set out in paragraph 5.2 might not be in her best interest.
2. Lease agreements
2.1. The nature of the lease agreement
A lease is a contract whereby one party (the lessor) agrees to give to the other (the lessee) the temporary
use and enjoyment of a thing, in return for remuneration (the rent). - The thing let may be immovable or
movable property and excludes consumables. The leases of dwellings for housing purposes are regulated by
the Rental Housing Act of 1999.
When a lessor promises undisturbed use and enjoyment of the thing, he does not promise that he owns the
thing or that he has the right to let it. So if a lessor claims to be the owner when he is not, he can be held
liable for breach of contract in the normal way or the lessee may rescind the contract on the ground of
misrepresentation. But if the lessee doesn’t rescind he will be bound by the terms of the lease and cannot
use the conduct of the lessor as a defence against eviction or non-payment.
The rent must consist of money, but in the case of agricultural land, the rent may be a part or quantity of the
fruits of the property. The amount of the rent must be fixed or the parties must have agreed upon a method
or standard whereby it can readily be fixed without reference to them.
In general, no formalities are required for a lease of immovable property although some long leases require
formalities and a lease of a dwelling must be reduced to writing by the landlord if so requested by the tenant.
A lease of movable property must only be in writing where it qualifies as a credit agreement.
2.2. The effect of a lease contract
Lease Duration
Leases may be for a definite period, or for an indefinite period, depending on the agreement by the parties. If
the parties fail to agree on a period, the lease is regarded as a 'periodic' one, according to the interval
between rental payments. Periodic agreements can be terminated when reasonable notice is given by either
of the parties.
Reasonable notices must correspond with the lease period; for example if the lease is a monthly lease then a
moth’s notice must be given, but if the lease is a yearly lease, then six months’ notice is required.
A lease can be renewed when the parties agree to continue letting and hiring the property on expiry of the
lease. The renewed lease is a new agreement and not simply an extension or continuation of the old one,
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ut if no new terms are expressly spelt out in the renewal agreement, there is a
presumption that the property is re-let at the same rent and with the same provisions.
The “Hire goes before Purchase” Principle. ('huur gaat voor koop')
If the lessor of immovable property disposes of it, the new owner steps into his shoes and the original lessor
is entirely detached of his rights and duties under the lease. The new owner acquires all the lessor's rights,
and is bound by all the lessor's duties in terms of the lease. - He must therefore permit the lessee to continue
to occupy the premises in terms of the lease, provided that the lessee continues to observe his obligations.
The lessee remains bound by the lease and cannot rescind from it.
The operation of the doctrine is subject to the following qualifications.
• It applies only to leases of land and buildings
• The successor is bound by a short lease (i.e., one for less than 10 years) only if he has
knowledge of the lease or if the lessee is in occupation of the property.
• The successor is bound by a long lease for its full term only if he has knowledge of the lease or if
the lease is registered against the title deeds of the property.
• If he has no knowledge of the long lease but the lessee is in occupation of the premises, he (the
successor) is bound for a period of 10 years.
• The successor is bound only by terms which relate to the lease itself. For example, he is bound
by an option to renew the lease, but not by a clause giving the lessee the option to purchase the
property.
Subletting
A sublease is a contract whereby the lessee lets the property to a third party and it creates no contractual
relationship between the sub lessee and the principal lessor. For example on termination of the original
lease, the principal lessor can eject the sub lessee, even though the period of the sublease has not expired.
In the absence of agreement to the contrary, the lessee of an urban tenement may sublet it, but the lessee of
a rural tenement (a property used mainly for agricultural or pastoral purposes) needs the lessor's written
consent before he can sublet.
Improvements made by the lessee during the lease to immovable property
If the lessee makes improvements to immovable property, he is entitled to the following compensation on
termination of the lease and vacation of the property.
• Necessary improvements (those required for the protection or preservation of the property.) - The
sum expended on the improvements, including the labour costs.
• 'Structures' effected with the lessor's consent. - The bare cost of the materials used.
• Ploughing, tilling, and sowing seed on agricultural land. - The cost thereof, including the cost of
the seed.
Improvements made by the lessee during the lease to movable property
The lessee is entitled to the following compensation for any necessary or useful improvements made to
movable property which he made during the lease even if he made them without the lessor's consent.
• For necessary improvements - the amount expended on the improvements;
• For useful improvements - the cost of the improvements or the amount by which the value of the
property has been enhanced by them, whichever is less
Unlike in the case of immovable property, the lessee has a right of retention over the property until
compensated. If the lessee is unable to recover compensation, he may remove any useful improvements as
long as it can be done without placing the property in a worse condition than it was in before the
improvements were made.
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2.3. The duties of the lessor
The lessor must deliver the property.
The lessor must place the property at the disposal of the lessee so that he can use and enjoy it and must
deliver everything which is necessary for the use and proper enjoyment of the property. In a case of a long
lease the lessor must co-operate in registering it.
The lessor must afford the lessee beneficial use and enjoyment
The lessor must give the lessee the beneficial use and enjoyment of the property for the purpose for which it
was let. He must not do anything which interferes with the lessee's use and enjoyment of the property, or
allow it to be done. The lessor may enter upon the property for the purpose of carrying out repairs, provided
they are necessary and not just useful.
The lessor must ensure that the lessee is not lawfully evicted from the property by someone with a superior
title to it. If the lessee is evicted by someone with a superior title to the property he is excused from further
rental payments and is entitled to claim damages from the lessor.
Example
Johnny Landlord leases a residential property to Susan Chancer. He decides not to renew the lease
agreement when it expires and leases it to Happy Tenant from the 1st of the month following the expiry of
the agreement with Susan. Unbeknown to Johnny, Susan had been subletting the property to Badluck
Sibanda, who has another two months left on his lease agreement with her.
In this case Happy Tenant has a superior title to that of Badluck Sibanda and can evict him. Badluck will stop
paying any rent and will have a claim for damages against Susan Chancer.
The lessor must put and keep the property in a condition reasonably fit for the purpose of the
lease
The lessor is under an initial duty, to place the property in a condition reasonably fit for the purpose for which
it is let and, thereafter, to maintain the property in that condition for the duration of the lease, unless there is
a contrary agreement.
This duty relates to all flaws and disrepairs in the thing which prevent or unreasonably interfere with the use
of the thing for the intended purpose. The lessor is not liable for damages caused by the negligence of the
lessee or persons for whom the lessee is responsible.
If the property is defective when delivered, or if the lessor subsequently fails to keep it in a proper condition,
the lessee may claim the cost of repairs from the lessor. If the lessee calls on the lessor to rectify a defect
and the lessor does not respond within a reasonable time, the lessee may do the necessary repairs at his
own expense and deduct the amount from the rent.
If the defect is such that the lessee cannot reasonably be expected to continue with the contract he may
cancel it.
The lessor must pay taxes
The lessor is liable for all taxes and charges imposed by public bodies in respect of the property, such as
rates and licence fees, but not for charges for particular services rendered by public bodies at the lessee's
request, such as the supply of water and electricity.
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2.4. The duties of the lessee
The lessee must pay the rent
The primary duty of the lessee is to pay the rent. Rent is normally regarded as payable in arrear – For
example at the end of the week or month, but the parties may agree that the rent will be paid in advance if
they wish to do so.
If the lessee fails to pay the rent, the lessor may sue for it and for any damages suffered by reason of the
lessee's default and/or he may cancel the contract. On cancellation, the lessor is entitled to return of the
property. As security for his claim for rental, a lessor of immovable property has a tacit hypothec over all
goods which have been brought on to the premises.
If the lessee is prevented from using the property as a result of an exceptional unforeseen and uncontrollable
event, such as a flood, fire, riot, war or act of state, he is relieved of his duty to pay the rent as from the date
on which the event took place.
The lessee must use the property in a proper manner and for the purpose for which it was let
In using the property the lessee must exercise the same care which a reasonable person would exercise in
using his own property. For example, the lessee of a portion of a building must show reasonable regard for
the other occupants.
The property must only be used for the purpose for which it was let. If no purpose is agreed upon, the lessee
may use the property for the purpose for which it was previously used or to which it naturally lends itself. For
example, a residential property cannot be used for business purposes without the consent of the lessor.
The lessee must restore the property to the lessor on termination of the lease
On termination of the lease, the lessee must return the property to the lessor in the same condition as he
received it, but he will not be liable for reasonable wear and tear or damage to the property which was not
caused by him or someone for whom he is responsible.
Where the property is redelivered in a damaged condition, the lessor may claim damages from the lessee
equal to the reasonable cost of repairs.
3. Service agreements
3.1. The nature of a service agreement
It is important to realise that service agreements have a contractual origin. This means that the contract
between the parties alone will be regarded as the record of the agreement between the parties and will be
referred to, should a dispute between the parties arise.
Services agreements, and agreements that set out the expected levels of service, can help to clarify each
party’s goals, limit the liability of the parties, and ensure that both parties get the services and payments they
expect.
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3.2. The essential elements of a service contract
The following 12 points can be regarded as the most important elements to include in
a service agreement.
Description of services
The services that are to be performed must be clearly defined and deadlines for the completion of the work
product or the delivery of performance must be certain. Without clarity, the parties may only discover that
they had different expectations once the work is completed and one party is not satisfied.
The relationship between the parties should be as detailed as possible in order to lower the risk of
misunderstandings or unfulfilled expectations later.
Service levels that are designated for technical or other performance should be set forth in an annexure to
the agreement and stated in detail and could include designs and other drawings. Financial penalties or
rewards can also be added in such an annexure.
Payment details
The agreement should include a provision that clearly states how much is to be paid, when it is to be paid,
what is included in the payment (expenses, taxes, travel, insurance etc.), procedures for invoicing, and
penalties for late payments.
The relationship between parties
The agreement should include a provision that clearly states that the relationship is one of services rendered
by one party in exchange for payment by the other. The provision must make it clear that the relationship is
not a partnership, a joint venture or an employer-employee relationship.
Dealing with confidential information
The agreement should include a provision that states that the parties will exchange confidential information.
The provision must make it clear how that information will be identified and handled and must set restrictions
on disclosure and misuse.
Exceptions regarding what are to be included in confidential information or not must be clear. These
exceptions will depend among other things on whether the agreement is for the provision of services or the
hiring of a service provider and who drafts the agreement.
Ownership of the work product
When it come to the ownership of the work product there is a natural tension that exist between the service
provider and the customer. The service provider will want to make sure the agreement does not include a
provision stating that the customer owns the work product, so that the provider may continue to perform
similar services for other customers without the risk of legal interference or restriction.
At the same time, the company that hires the service provider will want to ensure that they fully own the work
product and that the agreement contains the legal language as required by copyright law.
The owner of the work product may agree to give a license to the other party, regarding the use of the work
product.
Specification of warranties
The following typical warranties are often included in a service agreement:
• That the service provider will re-perform defective or non-conforming services for a specified
period of time.
• That the services will be performed at or above industry standards.
• That the service provider will not infringe third party rights in performing services.
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• That the service provider is not violating any other agreement by
performing services.
Details of indemnification
The agreement must contain a provision stating that the service provider will indemnify the company making
use of its services for any breaches of the warranties. Indemnification means that the provider will have to
pay the company for any third party litigation costs that result from its breach of the warranties.
Limitation of liability
The service provider should include a provision that limits its liability to the maximum amount it receives
under the agreement, and for both direct and indirect damages.
Outline of term and termination
The agreement should include a provision that outlines how long the agreement will be in effect, and the
options and results for termination.
Insurance details
The hiring company should require a minimum level of insurance coverage from the service provider so that
it can be sure that any negligence or liabilities are financially covered.
The ‘force majeure’ clause
The service provider should ensure inclusion of a force majeure clause. A force majeure clause means that
in the event of war, acts of God, strikes, weather and other uncontrollable forces, the parties are excused
from performing.
Rules for non-solicitation
To protect both parties, the agreement should include a mutual restriction on each party soliciting
employment from the employees of the other.
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