Exploring the Standard of Care in Services Agreements

Regular readers will know that I’m an advisor to LegalSifter, the artificial-intelligence-plus-expertise company that helps with review of the other side’s draft. In that capacity, I help decide what issues to look for, and I figure out how those issues are expressed in contracts. In doing that work, I get to explore systematically all sorts of topics. Recently, one such topic was how to express the standard of care in services agreements.

I suggest that services agreements address the standard of care in one or more of four ways. Let’s consider them in turn.

Individual Assessment

One way that contracts express the standard of care is to state a vague standard for directly assessing performance. Here’s a simple example (I haven’t vetted any of the examples for quality):

The Consultant undertakes to perform the Services diligently and conscientiously.

One feature of such provisions is that they express the standard many different ways. Here’s part of a list I compiled for LegalSifter:

• competent/competently/competence
• professional/professionally
• workmanlike
• ethical/ethically
• diligent/diligently/diligence
• expert/expertly/expertise
• prudent/prudently/prudence
• skillful/skillfully/skill
• conscientious/conscientiously
• careful/carefully/care
• honest/honestly/honesty
• efficient/efficiently/efficiency
• proper/properly
• faithful/faithfully
• loyal/loyally
• commercially reasonable efforts

That variety isn’t helpful. For one thing, many of those words express the same general meaning, and it’s hopeless to attribute significance to using, for example, professionally instead of expertly. As I say in the comments to this 2016 post on workmanlike, I like competently, and I don’t bother with any variants.

And I wouldn’t use honest, faithful, loyal, and their variants. If any of those words is intended to express a good-faith standard, I wouldn’t bother. If they’re meant to say, “Don’t cheat me,” I wouldn’t bother. If they’re meant to express “Work only for me,” you’d better say that way more clearly. (See this 2014 post on faithfully.)

Expect to see a post soon on using an efforts standard in this context. (Spoiler alert: it’s a bad idea.)

Another feature of this way of expressing the standard of care is that drafters are prone to expressing the standard multiple ways in a given provision:

The Consultant shall perform the Services honestly and in good faith, and in an efficient, prompt, professional, skillful and careful manner … .

That’s a standard response to vagueness, but you can’t escape vagueness by piling on words.

Comparative Assessment

A second way to express the standard of care is to say that the provider is required to meet the same vague standard (using one or more of the standards described above) as that established in comparable circumstances by the provider or other providers.

One can do this by invoking how the provider has performed previously:

In providing the Services hereunder, each Party will exercise the same degree of care as it has historically exercised in providing such Services to the other Party and its affiliates prior to the date hereof, including at least the same level of quality, responsiveness and timeliness as has been exercised by KURA and KSU with respect to such Services.

Of course, this works only if the provider has previously performed services for the customer in question.

Alternatively, one can invoke standards of a broader community:

Consultant shall perform its services in a manner consistent with the level of care and skill ordinarily exercised by members of Consultant’s profession currently practicing in the same locality under similar conditions and with reasonable diligence and expediency consistent with sound professional practices.

This seems unobjectionable, but depending on what aspect of the services is being assessed, it might be unrealistic to expect that it would be feasible to compare the services at issue with services performed by others.

Satisfaction of the Other Party

A third way to express the standard of care is to say that the customer has to be satisfied:

Contractor will perform the Services in a thorough and workmanlike manner and to the satisfaction of Company.

But note what MSCD ¶¶ 13.722–.723 has to say:

If you say that something has to be satisfactory to Acme, the standard might be an objective one, in that it would be met if a reasonable person in Acme’s position would be satisfied. Alternatively, it could mean that Acme actually has to be satisfied, subject only to the implied duty of good faith—the standard is a subjective one. The result is ambiguity. Courts prefer the former meaning; see 2-5 Corbin on Contracts § 5.33; 13 Williston on Contracts § 38:22.

Saying instead reasonably satisfactory to Acme is a succinct way of making it clear to the parties, and to any court, that the objective meaning is intended. To make it clear that the subjective meaning is intended, drafters customarily say satisfactory to Acme at its discretion (or a variant; see 3.228–.232). But strictly speaking, that doesn’t go to the meaning of satisfactory. The following formula is wordier but explicit: satisfactory to Acme, with Acme’s satisfaction in this instance being a function of whether Acme is actually satisfied (subject to any implied duty of good faith), rather than whether a reasonable person in Acme’s position would be satisfied. It’s hard to imagine any counterparty accepting such a standard.

Industry Standards

A fourth way to express the standard of care is to say that the provider is required to comply with industry standards:

To the extent applicable, both Sponsor and INC Research shall comply with any applicable validated methodology, generally accepted professional standards of care, and all Applicable Laws and Regulations of each country where the Services will be conducted, including without limitation ICH Guidelines for GCP.

Such provisions are most effective when you’re dealing with an industry that promulgates written standards. If that’s the case, refer to the standards explicitly. If no such standards exist, such a provision would essentially function as a comparative-assessment provision of the sort described above.

Combining Standards

It’s commonplace for drafters to combine one or more standards of care. The sample provision in “Satisfaction of the Other Party,” above, is of that sort. Here’s another example:

The Management Team hereby covenants with the Corporation to:

• perform or take (or cause to be performed or taken) its functions, responsibilities and duties hereunder in a professional, competent and efficient manner;
• carry out its duties as Management Team fairly, honestly, in good faith and in the best interests of the Corporation ;
• exercise the degree of care, diligence and skill that a reasonably prudent Management Team would exercise in comparable circumstances; and
• perform the Management Services to the satisfaction of the Corporation and give the Corporation full and prompt cooperation in the performance of all aspects of the Management Services.

The four enumerated clauses express, in turn, individual assessment, individual assessment, comparative assessment, and satisfaction of the other party.

Is that approach worthwhile? I suspect that usually it’s a function of drafters thinking they can escape the risk inherent in vagueness by throwing words at it. I recommend you start with just competently, and supplement that only if you have good, specific reasons for doing so.

(By the way, you want a demo of LegalSifter? Contact me.)