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If you want to provide services to another person or use someone else’s services, it is wise to agree on the exact rights and obligations of the service provider (the mandatary) and the recipient of the services (the mandator) in a contract. An authorisation agreement is particularly suitable where there is no employment relationship between the parties, whereby the employee would be subject to the direction and control of the employer, and where the contract is not a contract for services which, unlike an authorisation agreement, is intended for the services to achieve an agreed result. The specificity of an authorisation agreement lies in its contractual freedom, i.e., the extensive freedom of the independent and equal parties to agree on rights, obligations, and other terms of cooperation. With a well thought-out and comprehensive written authorisation agreement, the parties can protect their interests, mitigate risks, and prevent potential disputes. In this article, we explain in detail the nature of an authorisation agreement, its main elements, and the key considerations to take into account when drafting an authorisation agreement.
What is an authorisation agreement?
Under an authorisation agreement the mandatary provides services to the mandator. The client or mandator pays the service provider or mandatary a fee for the provision of the services, if agreed upon. An authorisation agreement is a contract of obligations between the mandatary and the mandator, i.e., its conclusion and the main rights and obligations of the parties are governed by the law of obligations.
An authorisation agreement is suitable for such services which are directed at the process of performing the work, rather than the achievement of a specific result, and where the service provider is autonomous in the performance of the service, carrying out the mandator’s instructions according to the mandatary’s own knowledge and abilities. In addition, a mandatary engaged in economic or professional activity must perform to a generally recognised level of professional competence.
For example, an authorisation agreement is suitable for the provision of accounting services and various consultancy services (e.g., legal services).
Distinguishing between an authorisation agreement, a contract for services and an employment contract
When to choose an authorisation agreement instead of a contract for services?
An authorisation agreement is suitable for work that is not intended to produce or modify a physical product, or to achieve some other agreed result, but is directed towards the process of doing the work. For example, a lawyer providing legal services cannot promise his client a win in the court but must do their best to protect the client’s interests, acting to a generally accepted standard of professional competence. However, if the work has a recognisable and quantifiable result (for example, repairing a shoe, laying a parquet floor, or drawing up a detailed spatial plan), it is usually a contract for services.
When to choose an authorisation agreement instead of an employment contract?
An authorisation agreement is appropriate when the mandatary, who can be either a natural or a legal person, is not subject to the direction and control of the mandator, but performs the service independently according to their own knowledge and abilities, and is free to choose the time, place and manner in which the work is performed, as well as uses their own tools to do the work. However, if the worker is a natural person who is subject to the direction and control of the employer, who is subject to fixed hours of work and who is required to work in a fixed place, following the employer’s instructions and using the tools provided by the employer, there is an employment relationship and an employment contract between the parties. The content of the work to be performed under an authorisation agreement and an employment contract may be similar, so it is important to consider the nature of the work when choosing the right contract. For example, depending on the circumstances, an accountant may be either an employee or a mandatary.
An authorisation agreement may be appropriate for the purchase of a service requiring very specific expertise, for which there is no permanent need (e.g., an expert opinion). An authorisation agreement may be concluded for an indefinite period or for a fixed term, and the parties are free to agree on the termination arrangements, including time limits for giving notice of termination. However, as a rule, an employment contract is concluded for an indefinite period. There must be a valid reason for concluding an employment contract for a fixed term (e.g., that it is concluded for seasonal work). The standards of due diligence of the mandatary in the performance of the service are higher than those of the employee, and the limitations on the liability of the mandatary in the event of damage are not imposed by law but must be agreed upon between the parties.
Unlike an employment contract, which requires the employee to be provided with an agreed volume of work and to be paid at least the minimum wage, the volume of services provided under an authorisation agreement may vary and the service may be provided for less than the minimum wage or even free of charge. The remuneration must be paid by the mandator to the mandatary if agreed so between the parties.
Who can you sign an authorisation agreement with?
While an employment contract can only be concluded by the employer with a natural person, an authorisation agreement can be concluded between two legal persons, two natural persons or between a legal person and a natural person. Due to the lower tax burden and lack of obligations of an employer in an employment relationship, it is often preferred to buy services from another legal person under an authorisation agreement.
It is important to bear in mind that, when concealing the existence of a genuine employment relationship with providing and buying services from a company (OÜ), the tax administration has the right to intervene and tax the transactions according to the real economic substance of the transactions. It is common that a “one-man” company which is normally considered to be a limited liability company, in order to avoid or reduce the tax burden on labour, provides a service (e.g., management services) mainly to a single mandator. In such a case, the tax authorities are entitled to recognize the concealed employment relationship and demand the payment of labour taxes.
Paid authorisation agreements with natural persons always entail the risk of an employment relationship to some degree. In the event of a dispute, the actual content of the agreement, not the title of the agreement or the terms used in the agreement, will determine the relationship between the parties.
Does the mandatary have to perform the mandate personally?
By default, the mandatary is a professional in their field who provides the service based on their own knowledge and abilities and in the best interests of the mandator. While an employee has to perform their job personally, the mandatary may also use the assistance of a third party to perform the service, unless this is excluded by agreement between the mandatary and the mandator. The mandatary may also, by an agreement with the mandator, delegate the performance of the service to a third party.
Format of the authorisation agreement
The law does not prescribe a compulsory format for the conclusion of an authorisation agreement. It is advisable to have a written or at least a sufficiently detailed authorisation agreement in a form that can be reproduced in writing, since in the event of a dispute it is the agreements between the parties that are verifiable. The freedom of format should be understood as a remedy in the event that a written contract is not concluded, but some form of protection is needed against a breaching party.
Essential terms and conditions of an authorisation agreement
Clearly describe the services
Specify in detail the services or work to be provided or performed under the authorisation agreement. The description could include the content of the services, the way in which the services are to be provided, the volume of the services, the time, and deadlines for the provision of the services, the quality (quality requirements for the services and the procedures for verifying that the services meet the quality requirements) and other essential aspects arising from the nature of the services. The clearer the description of the services, the lower the likelihood of subsequent disputes.
However, it should be borne in mind that, where the service provider is required to provide the service on the basis of their professional knowledge or abilities, the contracting mandator may not give detailed instructions as to the manner and conditions of performance of the agreement.
Agree on fees and payment terms
The parties are free to agree on the amount of the fee and the arrangements for payment, including payment deadlines. The fee may be fixed at a flat rate or depend on the volume of services provided (e.g., an hourly rate). Where the agreement is for a longer period or for an indefinite period, it is usual to agree that the fee is to be paid periodically, for example once a week or once a month on a fixed date. In the case of a short-term agreement, the payment of remuneration may be provided for after the completion of the mandate. The agreement may also provide for the provision of services and payment for services to be agreed in stages.
An authorisation agreement may also provide for a lower or higher rate of interest for late payment than the statutory rate.
For the sake of clarity, it should be specified in the authorisation agreement whether the fee includes taxes applicable to the fee and who is responsible for declaring and paying the taxes on the fee.
It is important to bear in mind that if a company concludes an authorisation agreement with a natural person, the mandator must withhold and pay the same taxes on the remuneration paid as in the case of an employment contract (income tax, social tax, unemployment insurance contributions and funded pension contributions (if the person has joined a second pension pillar)). The provision of a service by a natural person on the basis of an authorisation agreement must also be registered in the employment register.
Expiry and termination of the contract
An authorisation agreement is usually by default terminated by the performance of the mandate (e.g., an educator gives an agreed lecture). However, an authorisation agreement can also be concluded for a fixed term or for an indefinite period of time, whereby, unlike an employment contract, the conclusion of a fixed-term agreement does not need to be justified.
In the case of an indefinite-term contract, the mandatary will provide the agreed services until the agreement is terminated by the parties or by one party. By law, an indefinitely concluded authorisation agreement may be terminated at any time by either party without cause. If the mandator is unable to obtain the services covered by the contract by any other means, the mandatary may be liable for damages. Therefore, it is reasonable to agree on a notice period for the regular termination of an indefinite-term authorisation agreement, so that in case of termination, the other party has time to reorganise its activities and the parties can avoid a legal dispute.
In the case of a fixed-term authorisation agreement, the services must be provided in accordance with the agreement until the expiry of the term and cannot be terminated without the express agreement of the parties. A fixed term contract can be terminated early either by agreement between the parties or by extraordinary termination.
Either party may terminate a fixed-term or indefinite-term authorisation agreement for good cause, i.e., if it appears that, taking all the circumstances into account and weighing the interests of both parties, the party wishing to terminate the agreement cannot be expected to continue to perform the authorisation agreement until the expiry of the period of termination or the term of the contract or the performance of the mandate. It is advisable to include such valid reasons already in the agreement as an open-ended list (e.g., the mandator is seriously late in paying the remuneration or the mandatary has culpably caused material damage to the mandator) and to specify whether and in which cases the other party must be warned or informed in advance of termination.
Formulate additional obligations
Confidentiality obligation
Although the law of obligations already provides for an obligation on the part of the mandatary to keep the mandator’s manufacturing and trade secrets, it is worthwhile for the mandator to specify in the authorisation agreement the content of the manufacturing or trade secret and the period of the obligation after the termination of the agreement. It may also be in the interest of the parties to agree on a bilateral confidentiality agreement, i.e., each party must keep confidential information of the other party.
A contractual penalty for breach of confidentiality may be agreed upon in the authorisation agreement.
Non-compete and non-solicitation
If the mandator wishes to restrict the freedom of action of the mandatary by a non-competition and/or non-solicitation clause, the parties must agree on this in the authorisation agreement or in a separate agreement. The restriction of competition must be clearly and reasonably defined for the mandatary in terms of subject matter (the competing activity), space (the territory of the restriction) and time.
A natural person providing the service should also be reasonably compensated in case the non-compete agreement stays in force after the termination of the authorisation agreement, in order to avoid the non-compete becoming null and void.
A contractual penalty for breach of the non-competition and/or non-solicitation clause may be agreed in the authorisation agreement.
Intellectual property
If the mandatary creates important works protected by intellectual property rights in the course of or as a result of the provision of the services, it is reasonable to agree in the authorisation agreement whether and to what extent the mandatary transfers the economic rights to the mandator and whether and to what extent the mandatary grants the mandator a licence to exercise their moral intellectual property rights. Unlike in an employment relationship, with an authorisation agreement even the economic copyrights of the author are not transferred by law to the mandator.
Limitation of liability and dispute resolution
Limitation of liability
In an authorisation agreement, the parties can agree to exclude or limit liability for breach of duty. For example, the obligation to compensate for damage caused by a breach of an obligation because of carelessness may be excluded, or a financial limit may be imposed on the liability of the party in breach of the obligation. However, an agreement cannot exclude or limit liability for intentional breaches.
Applicable law and jurisdiction
In an authorisation agreement, the parties can, as a rule, choose the law of the country which they wish to apply to their relationship and in which court or arbitration tribunal to settle disputes arising out of the agreement.
Seek expert advice on drafting an authorisation agreement
As the specifics of the nature of the service, i.e., the nature of the mandate, can have a significant impact on the rights, obligations, and liabilities of the parties, it is advisable to seek the advice of a legal adviser when drafting an authorisation agreement. The legal adviser will approach the drafting of the contract on the basis of the specific needs of the client, helping to ensure that the agreement protects the client’s interests in the best possible way. The expert will help to clearly define the rights and obligations of both parties in the agreement, including a description of the services, the payment arrangements, confidentiality obligations and other important terms. A clear and precise agreement will help to prevent potential ambiguities in the future and reduce the risk of disputes.
Do you need help drafting an authorisation agreement?
Do not leave anything to chance. The experts at Hedman Law Firm can help you draft an agreement that protects your interests and is legally correct. Contact us to discuss how we can help you.
