In many standard service agreements, providers will typically be required to deliver their services in accordance with generally accepted industry standards and practices and with professionalism and a level of skill appropriate to the agreement’s demands. While this standard often serves as a benchmark, it is rarely spelled out in detail. To reduce ambiguity, some agreements may go a step further, introducing a defined term to capture the expected service quality.
For instance, consider this definition of “Good Industry Practice”:
“[A] degree of skill, diligence, prudence, foresight and practice which would reasonably and ordinarily be expected from an industry leading, skilled and experienced operator or service provider seeking in good faith to comply with its contractual obligations, complying with all applicable laws and regulations and engaged in the same type of undertaking and under the same or similar circumstances and conditions.”
Service providers should carefully evaluate the implications of agreeing to language similar to the example above, keeping the following considerations in mind:
- Applicability of Industry Standards: Can the service in question be effectively measured against “generally accepted industry standards”? For industries experiencing rapid evolution, such as generative AI or autonomous vehicles, these standards may not yet be well-defined or supported by case law or established norms.
- Market Position: How do the standards align with the provider’s position in the market? For a startup breaking into a well-established industry, meeting “industry-leading” or even “generally accepted” standards might be unrealistic or counterproductive to its goals.
- Measurement of Standards: What benchmarks determine “generally accepted industry standards”? Should comparisons be drawn from a few leading providers, a broader group of competitors, or an undefined pool? This lack of clarity can lead to disputes.
- Ambiguity of Interpretation: Who defines what is “generally accepted”? Without specificity, this term can lead to misaligned expectations or conflicts.
- Evolving Standards: Industry norms are not static and may evolve significantly over the course of an agreement. Service providers should consider whether they are agreeing to a moving target.
- Compliance vs. Standards: Would adherence to all applicable laws provide a sufficient baseline for quality, especially where industry standards may not align with innovation?
- Encouraging Innovation: Providers aiming to innovate within an existing industry might be penalized if their services deviate from established norms, even when pushing the boundaries of the field.
To mitigate the above risks, service providers should consider drafting clear and customized standards that accurately reflect the nature of the services offered. Metrics, benchmarks, and measurable criteria can help define expectations and reduce ambiguity, ensuring both parties have a shared understanding of the agreed standard. This work might be paralleled with the negotiations on the service levels in relation to the services offered.
Conversely, customers (recipients of the service) often favor the application of broad service standards for several reasons:
- Uniformity Across Providers: A broad standard ensures consistency in the quality of services provided—regardless of the vendor—leading to uniform expectations and fewer surprises.
- Scalability Over Time: As the scope or complexity of services evolves, a flexible and expansive standard can accommodate these changes without requiring frequent renegotiations.
- Alignment with Evolving Standards: Over a long contract term, industry standards are likely to evolve. Broad standards help to ensure that the service providers keeps pace with advancements, maintaining relevance and value in their service offerings.
- Baseline Competence and Quality: Broad standards establish a clear minimum threshold for performance, protecting the customer from receiving subpar services or outdated practices.
- Simplified Negotiations: A universally understood standard streamlines the contract negotiation process, avoiding protracted discussions over granular details.
- Encouragement of Best Practices: By tying service expectations to then-existing industry norms, a broad standard incentivizes providers to innovate and upgrade their offerings. For instance, if a previously relied-upon technology becomes obsolete, the service provider would be required to adapt their services to align with newer, widely accepted practices, all without reopening the agreement.
Such standards, while beneficial to customers, can present challenges for service providers, emphasizing the importance of striking a balance that ensures clarity, fairness, and mutual benefit in the agreement.
The next time you come across similar language in an agreement, which may often be overlooked as boilerplate, it would be prudent to weigh the implications discussed above and adapt the terminology to best suit your needs on either side of the deal.