What is a Contract for Service
When referring to contracts for service, we are discussing the business-to-business contract. This is a fundamental characteristic of a contract for service.
A contract for service is defined as ‘an agreement under which one party supplies goods and/or services to another in exchange for payment or other form of consideration’.
The two primary components within a contract for service are either a good or a service. As per our definition above, it has to involve a party supplying bare goods (without labour) or bare labour (without goods). The alternative would be goods that require work (labour) to supply or services that also provide the client with goods .
It is important to note that a contract for service is fundamentally different from a contract of service. The latter is a contract of employment between an employer and employee. Whether a contract is a contract for service or a contract of service has serious implications for parties to the contract, for example, taxation, insurance and liability.
Although contracts for goods are common, contracts for services span a number of industries. Some examples of where contracts for services are most commonly found include:
With the emergence and expansion of the gig economy, contracts for services have become more common and needed than ever.
Essential Components of a Contract for Service
The key elements of any valid contract for service include the following:
Offer. An offer is created when a party manifests an intent to enter into a bargain that may be accepted by the other party. Whether or not an offer has been made depends on whether a reasonable or objective person would believe that an offer has been made. The offer must be clear, definite and communicated to the other party.
Acceptance. An acceptance of an offer is a manifestation of assent by the offeree to the terms of the offer. Generally, in the absence of a contrary agreement, an acceptance must be communicated to the offeror by conduct or performance or by promise. A counteroffer generally operates as a rejection of the original offer and ends the original offer.
Consideration. Consideration requires that a party give something of value to the other party in exchange for the other’s performance. This is the price for which the promise of one is bought and the promise of the other is paid. Consideration may be "bilateral" (that is, mutual), or "unilateral."
Capacity. Parties entering into a contract for services must have the legal capacity to do so. An individual may be disqualified from entering a contract because of age or mental impairment. In some cases a corporation does not have the capacity to enter into contracts.
Lawful object. Any contract for services must be for a lawful object. If a contract is for an illegal object, it is void.
Contract for Service vs Contract of Service
Generally speaking, a contract for service is one between a client and an independent contractor. The contractor is not subject to the control of the client, although the client can set minimum standards of quality, timing and pricing. The contractor agrees to perform the services in accordance with the client’s specifications, but does not take direction from the client on how to perform the work. The client does not withhold taxes or make other deductions on behalf of the contractor. The most important characteristic of a contract for service is that the client deals with the contractor on a non-employee basis.
In contrast, a contract of service is an employment contract and it is also a broader term. A contract of service could, in theory, exist between an employee and employer or a master and mistress and servant. The contract of service is as big as the employment relationship itself. In a contract of service, the employer can control the employee’s conduct and performance. The employee may have a duty to follow his employer’s instructions in all substance and detail. The employer must also withhold taxes and pay required withholding contributions on behalf of the employee.
For legal purposes, the distinction is important for the following reasons:
For employment rights purposes, the distinction is also significant:
For tax purposes, the distinction is also significant in several ways:
Advantages and Disadvantages of a Contract for Service
Contracts for service have their advantages. The rates of pay for independent contractors usually do outweigh those of employees, although not in every industry or for every employee. It is also theoretically the case that you have more freedom as an independent contractor to set your own schedule and determine the manner in which you carry out your duties. Many companies also prefer to hire more flexible independent contractors than employees because they can bring them in for a short period of time when needed and easily dismiss them when they are no longer useful.
But of course there are disadvantages to entering into a contract for service as well . You will miss out on many of the valuable protections and benefits of being an employee, such as paid vacation and sick days, health insurance and the right to file for Employment Insurance when you are unemployed. You, and not the company, will have to pay for all of your own equipment and other business expenses. Your income will be at the mercy of the company who hires you. If they risk being subject to legal liability, there is nothing stopping them from simply ceasing to use your services and cutting you off from future income. And, of course, you will be exposed to many risks of the business, including potential losses.
Legality and Statutory Compliance
Contracts for service need to be carefully vetted to ensure compliance with applicable laws and regulations. If such contracts are merely drafted by one side or the other in the transaction, there can be a strong temptation to overreaching in the drafting or in the client’s expectations, which could lead to significant problems down the road, if not lawsuits.
In exploring the legal landscape, as mentioned above, care should be given to consumer protection laws, and other related statutes. Not all contracts for service are created equal. For example, certain contracts for service must be in writing or in signed writing to be enforceable. Contracts for service with minors have certain rules that must be followed to comply with the law. As in all legal areas, state and Federal laws and regulations need to be reviewed to ensure that all the provisions of the contracts for service comply with statutes.
Legal analysis also involves considering conditions precedent to a contract for service. For example, in a contract for service to perform plumbing work, or an oral verification of a nude photograph deal, in addition to considering the details surrounding the contract for service, one must also consider if there are any preconditions to performance of the service under consideration. For example, if the contract for service is to photograph a person clad only in their birthday suit, a condition precedent to contract performance is that they have turned 21.
Legal examination of a contract for service is essential to ensure clear terms, dispute resolution methods and compliance with the law.
Contract for Service Drafting Tips
In order to draft a contract for service that is able to fully protect the interests of both parties, it is important to be mindful of the following considerations when drafting a contract for service: The contract should not only take into account the specific requirements of the customer, but also the potential risks involved. Both parties stand to benefit from the clarity that an effective contract for service provides; whilst the customer will be afforded the security of knowing exactly what is required of the service provider, the service provider will also be protected from future liability. The contract should be clear and concise in order to eliminate future disputes or misunderstandings. The contract should outline the steps which will be taken should one party fail to meet their obligations, as well as how the contract will be terminated. It is important that both parties understand the legal implications of the contract, and as such it is highly recommended that consideration be given to whether or not the contract should be reviewed by an expert in contract law , such as a qualified solicitor. In addition to the terms of the agreement, a contract for service should also provide a detailed breakdown of the scope of the work that is being carried out in order to avoid the risk of either party agreeing to something outside of their usual scope of work, or underestimating the time it will take to complete the task at hand. There should be reference to all prices agreed upon in relation to the service and any other elements of the contract so that a contractual agreement can exist the entire duration of the agreement. There should also be mention of the timing of payments, as in many circumstances the client may be unwilling to agree to a detailed payment plan due to a lack of time or understanding of the service being offered. This will prevent confusion at a later date and ensure swift payment. The contract should contain a confidentiality clause clearly outlining each party’s obligations with respect to the treatment of confidential information so that they are able to appropriately protect against infringing upon each other’s confidential information.
