A Helpful Guide to Reviewing Vendor Contracts
What are vendor contracts?
Vendor contracts govern relationships between a business and its vendors. They are an important contract to any business and is best practices to have a process in place on how to effectively onboard new vendors, which should involve proper contracting. While young businesses may not use many vendors, they may be very reliant on a small set which makes these contracts important. More mature businesses may use hundreds or even thousands of vendors, so creating effective contracts to govern these relationships will lead to less problems and costs down the road.
Below are some key elements of a vendor contract broken down. Note, other elements may be important based on your industry or type of service you are purchasing. These are common elements that are important to understand.
Goods and Services: What are you buying?
This section outlines exactly what goods and services the vendor will provide under the contract. It is important to be specific in this section so there are no miscommunications that may lead to a dispute down the road.
Pricing and Payment Terms: How much and how do I pay?
This section outlines the pricing for the outlined goods and services being provided, as well as obligations around payment. These are often seen as ‘business’ decisions, but make sure the pricing is in line with what was negotiated and that the payment terms will work with your accounting process. Things to look out for include how payments are to be made, when they are due, and what penalties exist for late payments.
Term and Termination: How long and how do I get out?
This section outlines how long the contract will be effective and how the parties will get out of the contract. It is important to understand both of these items specifically, as there may be penalties in place for ending contracts early. This should be negotiated to protect the interest of the business.
Confidentiality and Proprietary Information: What happens to my confidential information?
Often an NDA has been put in place for negotiation prior to reviewing a vendor contract. However, a vendor agreement should have a section that protects your sensitive and confidential information that may be shared with the vendor. In most circumstances, it should forbid sharing this information with third parties or using it for other purposes.
Limitation of Liability: What is a vendor on the hook for if something goes wrong?
This section essentially outlines the ‘limitation’ of recovering damages from the vendor, should there be a breach of contract or dispute in the future. It is in the vendors best interest to limit this as much as possible, so they will typically want to limit this to the cost of the products or services they provide. Businesses should analyze should review the risk level and impact of the good or service on their business, and negotiate a reasonable limitation of liability in case something goes severely wrong, which could include things such as fraud or gross negligence. Note, vendors will typically not accept an unlimited amount of liability.
Indemnification: Will the parties be covered if something goes wrong?
This clause outlines the obligations for the party or parties to cover losses if one of the parties does something that causes harm or causes a third party to sue you. In other words, it will specify under what conditions one party must compensate the other party for unintentional harms, claims, or other liability. These are common clauses in vendor agreements. These clauses should be reasonable, clear, and balanced on both sides.
Breaches and Dispute Resolution: What happens if someone breaches the contract?
This element outlines what happens if either party decides to break the terms of the contract and how the dispute will be resolved. For instance, a contract may outline the dispute resolution will be through Arbitration or handled in a particular jurisdiction. It is important to review this clause and plan for the worst case scenario.
As mentioned earlier, there are other elements to vendor contracts that may be considered which are often dependent on industry and service. As always, if you have any questions or need advice on vendor contracts, please speak to a lawyer!