The Service Agreement

When we think about the contracts a business commonly needs to enter into as part of its professional activities, we tend to think first of commercial lease agreements such as the 3/6/9 commercial lease, the professional lease, or the short-term or derogatory lease. However, in the course of its activities, a business will in many cases need to enter into service agreements with third-party companies.

A service agreement is a contract that commits a service provider to carry out a service on behalf of a client, in exchange for payment. While service agreements are widely used, a solid understanding of several key elements is needed to draft one professionally and securely. Various pieces of legislation govern service agreements and place obligations on both the provider and the client.

Service agreement: definition

A service agreement is in fact one of the most commonly used contracts in business. It covers transactions that do not involve the transport or transfer of ownership of tangible goods — including haulage, property rental, and the management of consultancy work. This trend has been reinforced in recent years as businesses increasingly choose to outsource all or part of their activities to external providers in order to boost their competitiveness.

This contract is agreed between two parties: the company commissioning the service, and a service provider. Putting a service agreement in place establishes a structured, remunerated relationship between the parties. It is therefore a commercial contract whose scope of application can be relatively broad.

It is important to note that a service agreement is not an employment contract — unlike fixed-term or open-ended employment contracts — nor is it a subcontracting agreement or a contract of sale. Its form is defined by Article 1710 of the French Civil Code under the name of "louage d'ouvrage" (contract for work).

The service provider must be able to carry out their activity independently, with no subordinate relationship to the client within the meaning of employment law.

Please note: a service agreement can only be entered into by a person subject to VAT — that is, a person carrying out an economic activity as referred to in Article 256 A of the French General Tax Code. This includes activities carried out by producers, traders, and service providers, including agricultural activities and liberal professions. In other words, the party in question must be a self-employed professional.

What is a service provision?

Service provision covers a broad range of offerings, and the scope of services available to businesses can be very wide. These may include tangible or intangible service provision (consulting, training, and so on).

This diversity makes it essential to pay close attention to how the contract is structured, in order to minimise the risk of undeclared work. The quality of service providers plays a key role. They may be individuals or legal entities, including public bodies.

The DGE (Directorate General for Enterprise) classifies business services under two distinct categories:

• Intangible economy services: digital services, engineering, accounting, architecture, research and opinion polling…
• Services for competitive performance: maintenance, cleaning, logistics, temporary staffing, professional conferences…

The French government's official website breaks these categories down further and specifies that service provision activities can be of 3 different types:

• Commercial services: estate agents, restaurateurs, entertainment organisers…
• Craft services: hairdressers and taxi drivers in particular
• Liberal profession services: doctors, trainers, consultants…

Where a business carries out a mixed activity, the project owner or business manager will need to determine which activity is primary and which is secondary, the latter being pursued in support of the former.

What does a service agreement contain and how should it be drafted?

A service agreement is first and foremost defined by a mutual commitment. The identified service provider undertakes to carry out a specific piece of work within an agreed timeframe, while the client undertakes to pay for it. Both parties are bound by this obligation.

Whenever a commercial relationship exists between two parties, their respective scopes and obligations must be set out in a service agreement. This contract secures and governs the relationship in the best possible way. One example would be the registered address service for your company.

It is worth noting that beyond its purely regulatory purpose, this contract also gives the service provider valuable long-term financial visibility, enabling better planning and organisation.

In addition to specifying the nature of the services and their price, the contract must include the following elements:

• The parties involved (company name, legal form, share capital, registered office address, companies register entry, etc.)
• The subject matter of the service agreement
• The price of the services, together with the payment terms and any provisions relating to late payment
• The duration of the contract
• The obligations of each party
• The termination terms of the service agreement and the applicable penalties
• Force majeure clauses and other provisions relating to disputes
• The cancellation terms and penalties
• The competent jurisdiction in the event of a dispute

Beyond these mandatory clauses, a number of additional elements may be annexed to the contract. Most commonly these include confidentiality clauses, non-competition clauses, ethical rules, and obligations of means and results.

Once the parties have reached an agreement, the contract must be initialled and signed in at least one copy per party. The signatory must have the authority to legally bind the company they represent.

Which laws should you know when drafting a service agreement?

Depending on the nature of the services involved, different laws will apply. Both parties should familiarise themselves with the legislation governing the outsourced activity in question.

That said, several "general" laws are worth knowing, whether you are becoming a service provider or engaging a service provider company:

• The Treaty on the Functioning of the European Union, which prohibits restrictions on the "free provision of services" within the European Union.
• The decree of 27 October 2005, which sets out the documents to be requested in order to prevent undeclared work in the context of a service agreement.
• The Hamon Act of 17 March 2014: which specifies the service provider's obligations towards the client.
• The Pinel Act of 18 June 2014: which reaffirms the obligation to issue an invoice in the context of a service contract.

Drafting a service agreement is therefore no simple matter, and it is advisable to seek the assistance of a qualified professional such as a solicitor or business lawyer. It is a genuine legal instrument that should help you guard against the risk of the contract being reclassified as undeclared employment, clearly define the scope and nature of the services to be provided, and ensure the financial soundness of the contracting parties.