A formation and performance agreement is a legal contract between the organization which requires certain professional services for its benefit and an organization or entity or employee who agrees to provide those professional services for a fee. The terms and conditions that need to be fulfilled by the organization or entity providing the services in order to be rewarded, or receive certain benefits are clearly mentioned in the agreement. The events that cause non-performance are also mentioned which lead to termination of services or revocation of the contract. The background of the service provider is mentioned in detail in the contract which qualifies them to apply for the required service.
When Do You Need a Formation and Performance Agreement
A formation and performance agreement is required when a company or any other organization requires to engage a professional organization or entity for certain services. The purpose of a formation and performance agreement is to protect the interest of the company requiring the service and the service provider. The service provider may be an individual or an organization who agrees to provide those services in exchange for the reward or benefit offered by the company.
The agreement will contain the details of the services that the entity or individual promises to provide. The payment schedule, which could be a monthly sum or on a pro-rata basis depending on the stage of completion of the service, should be clearly stated. The agreement protects the interests of both the company as well as the organization or entity providing the required service.
[Also Read: Professional Services Agreement]
Inclusions in the Formation and Performance Agreement
A formation and performance agreement has two parties who need to be included in the agreement, namely the organization that requires the services and the entity or individual that is agreeable to provide those services. The agreement should include the effective date of the agreement, the disclaimers, the details of the services required by the company, the code of conduct of the entity or employee, the payment schedule and the facilities to be provided by the organization requiring the services.
The rights and liabilities of both parties are to be clearly mentioned in the agreement. There is also a provision for performance appraisal which decides the final payment to be made to the service provider. The damages, if any, caused by the entity or employee and the penalty thereof needs to be mentioned.
How to draft a Formation and Performance Agreement
While drafting a Formation and Performance Agreements, the following points should be kept in mind:
- The names of the parties to the agreement and the relationship between them should be clearly laid down in the agreement.
- The services required by the company and the services to be provided by the entity or employee need to be clearly stated.
- The conditions under which the contract is terminated needs to be mentioned.
- The total reward or benefit to be paid to the entity or employee and the payment schedule
- The facilities to be provided by the company that requires the services.
- The payment schedule and the method of payment need to be mentioned.
- Penalties with regard to cancellation of the event need to be incorporated.
Benefits of a Formation and Performance Agreement
The following are the benefits of having this agreement:
- Both the parties, the company requiring the services and the entity providing the services, know the deliverables and the performance parameters eligible for payment.
- The interests of both the company and the service provider are protected. When the services are provided according to the terms laid down in the contract, the company is bound to pay.
Drawbacks of a Formation and Performance Agreement
The following are the drawbacks of the agreement:
- It is the sole discretion of the company requiring the services to decide if the performance was according to expectations or not. They might cancel the contract on this basis.
Key clauses of a Formation and Performance Agreement
The key terms of the agreement are:
- The key services to be provided by the entity or employee.
- The services which the entity or employee agrees to provide.
- The services requested by the company.
- The payment schedule with complete details.
- The terms which lead to termination of services or revocation of the agreement.
- The facilities to be provided by the company.
- Indemnity for copyright infringement.
- Acknowledgment that the services shall be performed as an independent contractor.
- Exemption from obligations in the event of any sudden illness, accident, riot, strike, an act of God, etc.
Sample for Formation and Performance Agreement
If you require to avail the services of a professional entity, it is advisable to go for a formation and performance agreement to protect the interest of both parties.
You can download a sample Formation and Performance Agreement below
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