(a) International supply of services

Main idea: The ITC Model Contract for the International Supply of Services is a framework for the provision of services, in other words an agreement under the terms of which a client requests that a service provider (the “supplier”) furnish certain services.

The type of service may vary widely, for example:

  • advice (professional consultancy);
  • storage (in a warehouse);
  • transportation (although this is heavily regulated by law);
  • construction work;
  • processing (manufacturing) work;
  • treatment;
  • design;
  • research or development services;
  • headhunting (acquisition and selection of personnel);
  • ‘hands’ (making personnel available, e.g. by way of secondment);
  • brokering and commissioning services;
  • mediation services.

Each type of service has its own particularities and requires its own specificities in a supply of services contract. It is important to consider what can go wrong in the case at hand and provide for specifically relevant obligations, incentives or remedies to prevent that it actually goes wrong.

Framework with options. This ITC Model Contract is a general framework only and must be tailored to the circumstances of the particular collaboration. Like most of the ITC Model Contracts discussed in this handbook, this model provides a series or ‘menu’ of possibilities depending on the background and the nature of the agreement. Many provisions may not be relevant to any one particular contract and should, if not relevant, be deleted.

Change of specifications vs. extra work. In Article 1.7, this Model Contract envisages that the client may give instructions, with details or specifications as to how the services must be implemented. The provision is fairly simple and limited in scope. However, it is a contractual mechanism that distinguishes between instructions and amendments to specifications, which permits each party to propose and draft amendments that can be controlled by the customer.

In fixed-price projects and in projects where timely delivery is of the essence, this can create a grey area: are the instructions given by the customer a change of the agreed specifications, or merely a specification within the agreed scope? In the former interpretation, the service provider is likely to charge the difference as ‘extra work’, but the latter interpretation would have no effect on the agreed service fees. To avoid uncertainty and prevent disputes, in complex fixed-price projects it is recommended that such instructions be given in writing and that the service provider be required to announce any price effects in excess of ten percent before undertaking the related services.

A Statement of Work (SOW). In large or complex projects, the desired results will be outlined in a project plan (also called ‘statement of work’ or, abbreviated, an ‘SOW’). This is a somewhat technical document in which all aspects of the required services are spelled out in appropriate detail: for example, high-tech engineering work requires that product quality and any possible permitted purity or contamination are specified, that tolerances for fitting components are listed, and that any uncertainties are identified. Such uncertainties are often expressed as an ‘assumption’. For a customer, it is important that those uncertainties and assumptions are reduced as much as possible, as they are the step-up to price increases if the assumptions are incorrect or the uncertainties fall out negatively.

Steering committee and project management. In most projects, the supply of services is monitored by a project manager. Large and complex projects will normally be managed by a project team (also called “steering committee” or “project board”) that includes each party’s project manager. If this is the case, consider including a provision addressing the power and authority of the steering committee: are its members formally entitled to decide on behalf of the party they represent? Which modifications are they entitled to make on behalf of the parties? An example of a contract clause that could be inserted as Article 2 (with Article 2 (Payment of fees) and the following Articles then being renumbered accordingly):

Acceptance testing. A considerable source of disputes is the delivery and acceptance testing of the (milestones and) results of the services. As of the delivery and acceptance, the supplier will likely be entitled to payment of the services fee (or any success fee or completion bonus). While the supplier would like to ascertain that it is paid in full, the client will make sure that the deliverables are all in accordance with the agreement (e.g. as specified in the statement of work). For this purpose, the parties may provide for an acceptance testing procedure: within a certain period of time after (timely) delivery by the supplier, the client must test the deliverables and notify any deficiencies.

If the supplier takes responsibility for the deficiencies, it must repair them in due course, otherwise either party should be entitled to invoke expert consultation: to engage an independent third person who will establish whether the supplier has indeed delivered according to the specifications or whether the notified deficiencies and other defects have to be repaired.

Compensation. Compensation for services is commonly referred to as a ‘services fee’. Many services are agreed on a fixed-price basis, but most contracts establish a ‘time and materials basis’: the customer pays on an hourly, daily, weekly or monthly basis and will be compensated for any materials used in relation to the services. (And compensation for such materials can be subject to prior written approval or might be allowed if ‘reasonable’.) The parties are free to agree that the services fees be paid in instalments, for example ten percent before commencement of the services, sixty percent upon delivery of the contracted results, and the remaining thirty percent after acceptance of the results.

Projects and milestones. Many projects are divided into milestones. This kind of subdivision enables the parties to:

  • tackle uncertainties and allow for go/no-go decision points;
  • monitor progress and evaluate the service provider’s performance levels;
  • involve or dismiss subcontractors of different disciplines (for parts of the entire project);
  • establish payment moments (i.e. upon completion and acceptance of a milestone);
  • facilitate the planning of the entire project.

If the parties wish to provide for milestones, the contract should be rephrased: everywhere a reference is made to “the services”, consider changing this to “the services or any milestone”.

Professional (consultancy) services. Many small services agreements are agreed on a personal basis, with an independent professional or freelancer. The ITC Model Contract is well suited for such purposes. In these cases, consider adding a provision that “the contract is ‘personal’ and the services shall be performed by Mr or Mrs XYZ”. Many tax authorities monitor these types of arrangements, as they are sometimes used by a client to avoid taxation or by a supplier who ‘forgets’ to pay its wage taxes. In many countries, the tax legislation entitles the tax authorities to claim such wage taxes from the contractor, i.e. the client. In those cases, the following statement (to be inserted as Article 1.8) and indemnity (as Article 4.4) would be helpful:

1.8     Independent. The Supplier is a self-employed person and shall be responsible for all tax, national or health insurance and similar contributions in respect of the service fees payable under this contract to the appropriate tax authorities.

4.4     Tax-indemnity. The Client shall not be liable in respect of any duty to pay wage or income tax, or employee insurance contributions (including any interest, penalties and costs) pursuant to the Services or the payment of any service fees. The Supplier shall on first demand, unconditionally indemnify the Client in respect of any claim made or any alleged tax evasion in connection with the foregoing, as well as in respect of any additional tax assessments or tax or employee insurance claims for Supplier’s other services.

Materials belonging to the customer. If performance of the services is dependent on the prior delivery of any materials, components, or equipment from the customer, then the service provider cannot be expected to perform (in a timely manner), unless such materials, components and equipment are delivered at the relevant time. It is recommended to include an obligation to this effect:

Supplier shall not be required to commence performance of the Services before receipt from the Client of the agreed (number of) materials, data and other information. In case of a delay in delivery, Supplier shall be entitled to postpone the delivery date according to the duration of such delay or to such later date as necessitated by its planning capabilities.

In the absence of such a clause, the contract (and the context in which the parties have been performing or failing to perform) must be interpreted by taking into account all the circumstances. This may protect the service provider, but it might also be required that the service provider give timely notice to the customer, if required, that it is awaiting a timely performance by the customer and that it is therefore postponing the performance of its own obligations.

Intellectual property rights. If the contract triggers or involves the creation or divulgence of any intellectual property rights or know-how, it is strongly recommended that this be addressed in the contract. By default, intellectual property rights are owned by the creating party, which is likely to be the supplier. If the creation was partly or entirely paid for by the other party (the client), a reallocation of ownership or the grant of a licence may be necessary.

Duration. As concerns the duration of performance, the ITC Model Contract provides for two main schemes (in Article 1.4): In the principal option, the services have to be provided on a specific date. In the alternatives, it is envisaged that the services will be provided on different dates and/or during a certain period of time.

Article 5 deals with the duration of the contract and has to be aligned consistently on the scheme provided for in Article 1.4. An additional option (not addressed in the ITC Model) could be to give the contract a specific term with subsequent renewal requiring mutual agreement.

Damages and limitation of liability. As concerns damages (Article 4 in the ITC Model), the parties may wish to include the liability of the supplier for lost profit suffered by the client as a consequence of any breach by the supplier of his obligations under the contract. Article 4.3 should be amended accordingly.