Basics of Reviewing Service Agreements: Definitions, Checklist and Risks by Position

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

One of the contracts most frequently handled in day-to-day corporate legal work is the service agreement. It is used across a wide range of fields, from marketing support to system development, design production and consulting. However, even when contracts bear the same title of "service agreement," their content and legal nature differ greatly from transaction to transaction. The points to check change fundamentally depending on whether the contract promises the completion of a deliverable or the performance of certain administrative work or advice, and whether it contemplates subcontracting or the handling of personal information. If you simply reuse a template as is, unexpected conflicts may arise later over the scope of liability and payment of fees.

Confirming the Contract Type and the Actual Work

Under the Civil Code, there is no independent nominate contract called a "service agreement." Depending on the substance of the contract, it combines elements of a contract for work, a quasi-mandate, a mandate, a sale and so on. Its nature is not determined formally by the existence of a deliverable or by the names of phases such as "requirements definition" or "development"; it must be identified from the reality of what the parties have promised.

In the contract-for-work type, under which the contractor completes a certain piece of work, the central issues are finalizing the deliverable's specifications, the acceptance procedure and the allocation of contractual non-conformity liability. In the quasi-mandate type, under which the contractor performs the work with the due care of a prudent manager, the main points to check are the scope of performance, working hours, the method of work reporting and settlement of fees upon early termination. In practice, contract-for-work tasks and quasi-mandate tasks may be mixed in a single contract. Even where participation in monthly consultation meetings and the preparation of a final report are requested together, submission of the report alone does not mean that completion was promised. Where requirements definition, development and maintenance of a system are all requested, confirm the obligations undertaken for each phase. Also note that even if the contract is called a service agreement, where specific direction and supervision is exercised in day-to-day work or working time is constrained, worker status may be recognized in substance, which can create labor risks.

Scope of Work and Deliverable Specifications

Many disputes arise from differing understandings of the scope of work. These are cases where the client assumed a task would "naturally be handled," while the contractor regarded it as "subject to a separate fee quote." Rather than stopping at an abstract description such as "marketing support, complete set," clarify the content of the work and the exclusions, and decide the format of deliverables, the delivery method and the delivery date. If there is an element of a contract for work, also confirm the allocation of risk, for example where a deliverable is lost before delivery. Where a specification or quote in an appendix is incorporated as part of the contract, also set out the order of precedence relative to the provisions of the main contract.

The subcontracting clause, which governs entrusting work to outside partners, is also important. Decide whether subcontracting requires the client's prior consent or whether after-the-fact reporting suffices, and whether confidentiality and personal information protection obligations are also imposed on subcontractors on a back-to-back basis. Also state to what extent the contractor is responsible for the acts of subcontractors. The client needs to prevent quality deterioration and information leaks through subcontracting, while the contractor should check that it is not entirely prohibited from using outside resources it relies on routinely. It is also a practical measure to set out the client's duty to cooperate and a clause for revising the schedule, so that the contractor is not held responsible for delays in delivery when the client's provision of materials or decision-making is delayed.

Fee Terms and Compliance with Related Laws

The fee clause sets out the calculation method, such as fixed fees, hourly rates or success fees, together with the treatment of consumption tax, the bearing of actual expenses, the payment date and late payment damages. Deciding in advance whether costs are incurred upon an oral request when additional work arises, or whether prior approval in writing or by email is required, makes it easier to prevent disagreements at the time of invoicing.

Confirm the application of laws on the proper conduct of transactions, including for engagements of corporations. In transactions entrusting work to sole proprietors or freelancers, consideration of the Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators (Freelance Act) and the Act on Ensuring Proper Transactions with Small and Medium-sized Entrustees (the successor to the Subcontract Act) is essential. These are separate laws, and their application and the scope of obligations imposed differ depending on the parties' stated capital, whether and how many employees they have, the type of transaction and the period of the engagement. Payment cannot be postponed indefinitely beyond the statutory payment deadline on the ground of internal "acceptance approval." Design the clause after confirming the relationship among the actual date of receipt, the acceptance procedure and the statutory payment deadline. On the client's side, confirm whether inspection in line with the specifications can be carried out within the acceptance period. With a clause deeming acceptance to be approved unless a notice of rejection is given within a short period, it is important to set out the number of days actually available for inspection and the criteria for judgment.

Designing Intellectual Property Rights and Information Management

Ownership of intellectual property rights in deliverables is also a major item to consider. Consider whether the copyright is assigned to the client, or whether the contractor retains the rights and grants the client a sufficient license. If the client has secured a license scope allowing it to use and modify the deliverable freely in its own business, it may not necessarily need a full assignment of rights. On the contractor's side, make clear the reservation of rights in pre-existing assets, so that the general-purpose tools, existing libraries and know-how it has long held are not included in the assignment.

Clauses on confidentiality, personal information protection and information security are also essential. Where the contractor will handle the client's important data or personal information, set out the prohibition on use for other purposes, the management system, the method of return or disposal at the end of the engagement, and an obligation to report promptly in the unlikely event of a leak. Also check the requirements for early cancellation and termination and the cap on damages liability, and negotiate whether intent or gross negligence, information leaks and infringement of intellectual property rights are excluded from the limitation of liability. Decide the renewal method, the notice period for voluntary termination and the termination conditions in the event of credit concerns, together with the treatment of data after termination. A contractor intending a quasi-mandate should check that the clauses do not go so far as to guarantee results such as increased sales or zero failures.

Even when using generative AI to check contracts, AI cannot necessarily determine correctly and automatically whether a contract is a contract for work or a quasi-mandate based solely on the contract's title. It is important to provide the work content, deliverables and fee structure as premises for the input, and, while referring to the issues and draft clauses output by the AI, to have the person in charge assess the content against the premises of the transaction and the actual flow of work. The fees and scope for ongoing review of service agreements are described on our Legal Outsourcing page.