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Director's Service Contracts- why have a written service contract?

This post raises some of the issues to be considered when deciding whether to prepare Service Contracts for members of your Board of Directors and, if the decision is yes, what might be included in such a document.

Why have a written service contract?

There are numerous rights and obligations that will arise out of the appointment of a director. Having a document that sets out in writing such rights and obligations provides an element of certainty for both the individual and the company. It could also protect both parties by providing a reference document if there are any disputes, disagreements etc.

There might be different responsibilities between directors. For example, there are two broad types of company director:

  1. Executive director (“ED”); and

  2. Non-executive director (“NED”).

EDs will be responsible for the day to day management and operation of the company whereas a NED’s role tends to be less ‘hands-on’. Certain responsibilities under the law or a company’s Articles of Association will apply to both EDs and NEDs but other responsibilities will be usefully documented in a Service Contract.

The Contract

It is important that contracts are written in simple language, without jargon and that the provisions are easy to understand. Care should be taken to ensure that the text reflects what has been agreed during negotiations. No two Directors’ Service Contracts are likely to be the same but below is a non-exhaustive list of points that may be covered in the contract.

  1. appointment commencement date;

  2. duties required of the director including the amount of time to be spent on those duties;

  3. any limitations on the director engaging in business or professional activities outside of the relationship with the company;

  4. remuneration details – salary, bonuses, company car, pension etc;

  5. allowable expenses and method of authorisation;

  6. holiday entitlement/pay;

  7. protection of confidential information and intellectual property (“IP”) – this may include a provision dealing with IP created by the director in the course of his contract;

  8. details of the notice period to be given by the company to the director and vice versa or the date of expiry of any fixed term;

  9. other provisions relating to the termination of contract including the right for the company to pay the director in lieu of notice etc;

  10. any constraints on a director on leaving the company e.g. working for a competing organisation, poaching staff, soliciting or dealing with clients. (However, such provisions need to be carefully drafted to ensure they would be considered by the court to be no wider than is reasonably necessary to protect the company’s legitimate business interests.).

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.

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