Legal Watch: Optimize Your Service Contracts

April 10, 2014
5 essential elements that each one should contain

Providing security as a service — not just selling equipment and providing remote alarm monitoring — is essential to building your business. Many security integrators focus on getting work through competitive bidding, or the “bid-and-chase” approach. Submit the lowest bid, get the installation contract, and (hopefully) grow the relationship. Bid-and-chase has a limited future, because getting clients is premised on price. Focus instead on service and expertise, not price, to get more — and better — subscribers.

It is a tough lesson to learn for any service provider, but if you want to succeed, make the transition from being just another security contractor to a first-class security service provider and subscribers will seek out for first-class security services. That leads me to service contracts. Any form of service you provide to a subscriber should be covered by a written contract. Any good service agreement should follow these five basic principles:

1. Get the service agreement signed up-front. When I say written contract, I mean one that is signed by the subscriber before you provide the services, not a service ticket signed after the fact. There are numerous defenses to the enforcement of service tickets, which is just one of the reasons why you should get your contract signed up front.

2. Form is less important than substance. You can include on-premises services (i.e., repair, maintenance, test and inspect, etc.) as part of your standard-form monitoring agreement or use a standalone form of service agreement. If you plan to exit from your business someday, some account aggregators only pay (or pay more) for subscriber accounts or agreements that include monitoring, often because the aggregator’s lender requires the high margin afforded monitoring services as a condition of borrowing against the purchased account.

3. Define your undertaking. Tell your subscriber exactly what you are going to do for them and make it clear that you are not undertaking any other obligations. For example, if your service agreement obligates you to inspect a fire alarm system, define what it is you are going to do (i.e. inspect the visible portions of the systems only), how often you are going to do it (annually) and when (only after the subscriber contacts you to schedule the appointment). Delineate what a repair contract is, a service contract and a maintenance agreement — they differ and have different fundamental pricing and services offerings. Chances are, your security monitoring agreement drones on and on about your obligations in the event central station receives a signal and what to do when you dispatch. Why not define your obligations under your service agreement?

4. Tell them what you can do (even if you aren’t doing it for them). List all of the types of services you offer subscribers to rebut potential claims that you failed to offer additional protection. Contracts should also include written acknowledgment that additional protection is available at additional cost and that the subscriber has selected its services and equipment based on the subscriber’s budget and appetite for risk. This proved quite helpful in defending an alarm company in a million-dollar jewelry heist where the jeweler alleged the company failed to inform him about cellular back-up. Fortunately, the client’s contract included cellular back-up as a listed service, and the case settled for pennies on the dollar.

5. Include essential risk-allocation provisions. You can get into as much trouble for problems with services as you can for problems relating to alarm monitoring. Make sure your service agreement incorporates the same sorts of risk allocation clauses as are found in your monitoring agreement. That means an exculpatory clause (no liability); a limitation of liability (limiting liability to a dollar amount); an acknowledgement that the amount of recurring revenue is related to the price of the goods and services provided and doesn’t justify taking on any risk; an obligation that the subscriber maintain adequate insurance coverages (for losses that could be sustained by the subscriber and claims that may be asserted against the subscriber for third-parties); and an agreement to waive the right of the subscriber’s insurers to bring claims against your company in the event of a paid loss. There are numerous other clauses that are essential to protect the interests of any service provider. As always, make sure you consult a knowledgeable, industry-experienced attorney to prepare your service contract.

Eric Pritchard co-chairs the electronic security group of Kleinbard Bell & Brecker LLP. Mr. Pritchard focuses his practice on the electronic security industry with an emphasis on acquisitions. This column does not constitute legal advice; contact an attorney with specific questions.

About the Author

Eric J. Pritchard

Eric Pritchard is a partner in FisherBroyles, a law firm with offices throughout the United States and in London. He spends his days trying to make the world safer for the security industry. You can reach Eric at [email protected].