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Negotiating vendor contracts


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Negotiating vendor contracts

  1. 1. Robert J. Weil Law Office of Robert J. Weil, PLLC 4031 University Drive, Suite 100 Fairfax, Virginia 22030 (703) 934 2036 O (703) 277 7730 F (703) 399 5671 C Negotiating Vendor Contracts and Consulting Agreements
  2. 2. NEGOTIATING VENDOR CONTRACTS AND CONSULTING AGREEMENTS – ESSENTIAL ELEMENTS With alarming frequency I have noticed that organizations, whether for-profit or non-profit, execute legally operative and binding agreements without giving careful thought to what they might be giving away or the potential hazards to which they are leaving themselves exposed. The focus of this article is to raise the reader’s awareness of some of the issues requiring more careful consideration and to position you to ask critical questions BEFORE you sign anything that you might later regret. It is imperative to remember that to at least some extent, every contract is negotiable. You may not get everything you want, but at the very least you should secure concessions that extend you the greatest amount of protection possible from monetary loss or liability exposure. Any company or individual that refuses to engage in good faith negotiations with respect to essential terms and conditions with the goal of rendering the contract equitable to both parties is a company or vendor you should be wary of. I will address briefly two types of contracts, either or both of which may be of relevance to each of you and your business or non-profit. VENDOR CONTRACTS Let’s take a look at the provisions in the typical vendor contract that I find to require additional thought, consideration and negotiation. 1. Identity of the Parties – Always ensure that the proper parties are correctly and completely identified, including addresses and types of business entity (Individual, corporation, LLC, etc.), and state of formation or registration. It sounds basic, but it facilitates pleadings and service of process in the event of litigation. It also facilitates early due diligence on the other party. 2. Scope of Services – This is an area requiring careful review and consideration by both sides. If you are contracting for services to be rendered on your behalf, specify them with as much detail as practical. Don’t use vague or overly broad terminology and don’t permit the other party to oversimplify or understate the services it will be performing. Don’t settle for language that leaves both sides with widely divergent interpretations and/or expectations as to what services are being performed or products delivered. If you want, attach a separate schedule identifying in detail the services to be performed or products to be delivered and any schedule for performance. This is also a logical place in the agreement to address specific time concerns with respect to performance. If the timing of performance is critical to you, don’t hesitate to insert “time is of the essence” language. 3. Standards of Performance – It is a not unreasonable to require vendors to acknowledge in writing that they will perform their duties and obligations under the contract to specified (read “high” or “professional”) standards of quality, professionalism, and in a manner consistent with their expertise. Why allow them to be held to a lesser standard of performance?
  3. 3. 4. Term of Agreement – Often times the parties fail to adequately define the term or duration of the agreement. Specify when the agreement is to start or become effective. This may prove critical if there is a subsequent issue over notice of termination or non- renewal. If you want it to renew, either automatically, or upon mutual consent, put that in the agreement. Be wary of contracts that extend beyond one or two years. In the absence of liberal and clearly worded escape language, be cautious about entering into long term or extended contracts. This is also the place to consider whether you are comfortable with automatic renewals. If the contract provides for automatic renewals unless written notice is provided, be absolutely sure to diary the notification date in the event you determine there is a chance you might want to avoid a contract extension. Also consider whether the automatic renewal will be at the same rate of compensation. If so, and you’re satisfied with the performance to date, you may want to take advantage of the automatic renewal. 5. Compensation or Fees- What are the terms and conditions of payment? Who is due what payment and when? Will invoices be used? Is there a deposit or percentage of money paid up front for services? If so, and you’re paying for the services, keep the figure as low as possible. How are payments to be made and in what form? You need to have enough money held back to ensure satisfactory contract completion. 6. Ownership of Intellectual Property – Who owns the right, title and interest to the product or intellectual property being developed or sold under the agreement? Is ownership passing to the purchasing party, or is one party merely granting the other a license to use it? Example: Copyright ownership of writing produced by non-employee - Is it a true “work for hire” owned by the purchasing party? It may not be. Has the non- employee/consultant author transferred in writing all right, title and interest to the party paying for the written work? These issues should be addressed and clarified at the earliest possible time. 7. Confidentiality – Is confidential and proprietary information, data or documentation of yours passing or being made available to the other party? If so, you need to take affirmative steps to protect it from unauthorized disclosure to third parties who might use it to your detriment and/or for their financial benefit. You should clearly identify your confidential and proprietary information, data or documents and require its return or destruction at the conclusion of the agreement. This duty of confidentiality needs to run not just to the vendor and its employees, but also to third parties the vendor may subcontract with. This duty should also survive the termination of the contract for any reason. 8. Insurance – This is a provision often overlooked or treated far too casually. Does the party you are contracting with have commercial general liability coverage that would protect against a third party claim for personal injury or property damages? Are the services being rendered of a professional nature wherein some form of professional liability or errors and omissions insurance is necessary to protect them and you from potential third party liability exposure? If you are requiring the other party to have liability and/or property/casualty insurance in place, be sure to request a certificate of insurance naming your company as an additional insured. You should give the same consideration to insurance when your company is the one rendering services. Do you
  4. 4. have the requisite commercial general liability and/or professional liability insurance in the event of a third party claim? Ask your insurance agent and be sure that when you seek insurance for your business that you fully disclose the precise activities you will be engaging in. Don’t risk a later denial of coverage for failure to disclose the activity on your application for insurance. 9. Indemnification - In any agreement for services, there should be language requiring the parties to provide mutual indemnification. That is, each party should be charged with indemnifying and holding the other party harmless from any third party claim(s) arising out of or resulting from the indemnifying party’s (or that of its officers, directors, employees, agents, etc.) alleged negligence or intentional or willful misconduct. I frequently come across form contracts from vendors or service providers wherein the vendor requires indemnification against third party claims, but is unwilling to reciprocate. The duty of indemnification should be mutual and survive the termination of the agreement for any reason. From a practical standpoint, mutual indemnification is fair and reasonable. The exception may be when you’re dealing with governmental entities or state universities that are prohibited or strictly limited by statute as to indemnification. In such event, consider inserting language to the effect that the entity will indemnify you to the fullest extent permitted by statute. I’ve tried this when negotiating with state universities for the performance of services under a research agreement. 10. Limitation of Liability – Is it in your best interests to limit the scope of your liability? More and more parties are seeking to insert language limiting their liability to the other party in the event of litigation to enforce the contract. A liability limitation frequently seen is the total value of the contract. I have also seen attempts to limit liability to payments made or received during a specified period (for example, 1, 3 or 6 months). You may want to seek such a limitation for your company or association, but you should resist whenever possible such a limitation from the party actually performing the services for which you are paying. 11. Dispute Resolution – In the event of a dispute over the terms and conditions of the contract, how do you want the dispute resolved? Do you want full blown civil litigation to enforce the contract or do you prefer binding arbitration? There are advantages and disadvantages to both. The preferred manner of dispute resolution should be spelled out clearly. Mediation is sometimes included in the mix as a first step before litigation or binding arbitration, though my personal experience with mediation is that it is often ineffective and ends up costing the client even more money. 12. Governing Law/Forum Selection - What state’s laws will govern the contract and in what state’s courts (Federal or State) will the parties be required to bring litigation in the event of a dispute? Be careful about agreeing to litigate only in the courts of another state. While you may not be able to negotiate this, it’s not a bad idea to try. If you’re a small business or a non-profit located in Virginia, you probably don’t want to be locked into bringing or defending contract litigation in California. 13. Legal Obligations - This short clause can include language providing that both parties agree to adhere to all applicable federal, state and local laws and regulations. It shouldn’t be an issue.
  5. 5. 14. No Conflicts – Each party should be willing to represent and/or warrant that it has no current and conflicting obligations that would interfere with its performance under this agreement. This helps avoid potential liability for interference with contractual relations if the other party has already contracted with a third party on the same or similar subject matter. 15. Termination or Default - How is the contract terminated by the parties? What constitutes a breach of the terms and conditions that would give rise to the right to terminate? Specify with clarity what constitutes a breach. Must the breach be “material” or can any violation of the terms and conditions give rise to the right to terminate? If late payment is grounds for termination, consider negotiating some grace period for notice and payment. Also consider inserting language that allows each party a period of time to cure a claimed material breach. 16. Notices - Make sure to identify the proper and authorized contact person for any notices to be delivered under the contract. If you have a preference, identify the manner of delivery or mailing of any required written notices. Don’t make it too onerous for yourself. 17. Legal Fees: Do you want to insert language providing that the prevailing party in any dispute recovers reasonable attorneys’ fees and court costs incurred? Consider this carefully as such language cuts both ways. 18. Non-waiver of rights - This is boilerplate language that should be inserted in any agreement. The non-waiver clause provides that if one party does not enforce its rights under the agreement for one reason or another, such current waiver does not give rise to a waiver of those or other rights in the future. 19. Assignment and Delegation- Unless you really don’t care, don’t allow for the assignment or transfer of the rights, duties and obligations under the contract without your prior written consent. This is particularly true where you’re hiring someone to perform particular services on your behalf and the reason you contracted with them in the first place was because their services came so highly recommended. 20. Successors and Permitted Assigns – Such language provides that if the other party merges or consolidates with another company, the contractual obligations will continue. 21. Merger – This clause provides that any prior agreements, negotiations or discussions between the parties are of no legal effect and are superseded by the terms and conditions of the signed agreement and any attachments to the contract. 22. Amendment – Don’t allow for any amendments, changes, additions or deletions to the contract without the prior written consent of both parties in writing. The signatories on any such amendments should be authorized representatives of both parties. 23. Authorized Signatories – Make sure to require language that each signatory is authorized to sign and bind the party and include his or her title. Consulting Agreements A few thoughts on consulting agreements. With more and more work being outsourced for performance, independent contractor status vs. that of employee requires more careful review and consideration. First, make sure the person actually qualifies for treatment as an
  6. 6. independent contractor. The key is to avoid exercising too much behavioral and financial control over the consultant and to maintain a true independent contractor relationship. 1. Define the Services - Again, as with any other contract for services, define the services to be rendered with sufficient specificity that you are comfortable that you can point to language that supports your position in the event of a dispute over what the other party or you are supposed to do. 2. Independent Contractor- Be sure to specify that the party is being retained as an independent contractor and not as an employee and that the document does NOT constitute a contract of employment. Specify that the consultant or contractor is responsible for withholding and payment of applicable taxes, etc .and is not entitled to any benefits of employment. The party being retained as a consultant or contract must be free to perform work for other parties, so long as it does not conflict with the duties and responsibilities to be performed under the consulting agreement. You should not appear to be in a position of exerting too much control over the location, timing and methods of performance. 3. Responsible for Tools of the Trade - The consultant or contractor should be responsible for its own expenses, i.e. phone, office, facsimile, equipment, insurance, utilities, etc. 4. Confidentiality and Non-Disclosure- A consultant or contractor must be willing to warrant that it will maintain the confidentiality of proprietary information or documentation it receives from the principal and not disclose the same to any third party, except as authorized and that it will return all such information, documents and records at the conclusion of the agreement. This duty should survive the termination of the consulting relationships for any reason. 5. Termination – The parties should be able to terminate for defined “cause” or, if more advantageous to you, without cause upon specified written notice. 6. Indemnification – As with any contract for services or the delivery of a product, mutual indemnification from third party claims is essential. 7. Insurance – Will you require the performing party to carry its own insurance? This is strongly recommended. Again, consider requiring that your company be named as an additional insured and be sure to ask for a certificate of insurance. Remember that in the event of litigation to enforce an agreement, the court will interpret ambiguous or confusing contract language in a light less favorable to the party that drafted the agreement. Also, many contracts are now drafted with language that requires the parties to acknowledge that they have been advised of the right to have counsel review the document and that they have done so. Contract review by your legal counsel in advance of document execution could save you considerable time and money later on down the road. Remember, in the words of Ben Franklin, an ounce of prevention is worth a pound of cure. If you have any questions, please contact Robert J. Weil, Esq. at (703) 399 5671 or you can e- mail me at Law Office of Robert J. Weil, PLLC
  7. 7. 4031 University Drive, Suite 100 Fairfax, Virginia 22030 (703) 934 2036 Office (703) 277 7730 Fax (703) 399 5671 Cell