August 15, 2021 | 3 min read
When you’re in a hurry to obtain goods or services, the last thing you want to do is read the fine print of the contract presented by a supplier. However, it is vitally important to read and understand the terms of any such contract. A contract is more than just a description of what you are buying and the price, although precision on both of those points is important. It is ultimately about the allocation of risk presented by the transaction, and that risk allocation can affect the health of your business.
Many suppliers will pressure you to sign their terms by saying they are not negotiable. On the contrary, everything is negotiable. It’s just a matter of getting beyond the sales folks who are anxious to book revenue and asking to deal with the purchasing agents or contract administrators who routinely handle transactional terms.
Our purpose here is to describe some of the key contract terms you should look for. The list is not meant to be exhaustive as the relative importance of terms will vary with the type of services. It is complicated stuff, so always seek professional advice because some of these issues can present existential risk to your business.
Look for a description in the contract of how, when and where services are to be provided or goods delivered.
Look to see what warranties are provided, and, if the service is critical to your business, what specific service levels the supplier must meet. What remedies would you have if the supplier fails to live up to those warranties or fails to meet the required service levels? What rights would you have to terminate the contract if there is a failure of performance and what obligations you might have (beware of termination penalties) if you exercise such rights?
Explore how liability is assigned should legal claims arise during performance
Confirm whether the supplier has included a cap on its liability in the event of a dispute which could leave you holding the bag. Pay particular attention to hold harmless clauses and ensure that the supplier is only requiring you to be responsible for conduct which you have the ability to control. Check to see that the supplier provides appropriate types and levels of insurance coverage.
Understand which set of country or state laws will govern interpretation of the contract.
Are you being required to waive your rights to a trial by jury and pursue arbitration or some other form of alternative dispute resolution? Where must you appear should you need to pursue a claim or dispute?
Read the confidentiality provisions regarding how your private or competitive information will be protected.
In this digital age where information is in many ways the new currency, you need to know if and how the supplier may gather and use any information you provide. Beware of provisions allowing the supplier to use your information for commercial purposes or otherwise obtain ownership interests in your information.
Understand what rights you have to audit the supplier’s performance, including compliance with the financial terms.
Find out what internal controls the supplier uses to govern its own performance including the frequency of its own audits.
Contracts address, or should address, issues which are of critical importance to the continued success of your business. Read and understand your contracts and, because of the complexity of issues arising under contracts, seek appropriate professional advice. Being a lone ranger with contract terms is a risk in and of itself.
Special thanks to John Berry, Capital One Sr. Contracts Manager, for providing this article.
