Your business may depend on numerous vendors, suppliers, and distributors who have unique policies, procedures, and practices. Before signing agreements with them, you’ll need to review the contracts they provide and ensure that the terms suit the needs of your business. This task is one that’s best handled by an attorney. But in this article, we’ll help you understand what you should look for in a vendor contract; think of it as a handy go-to checklist.
Why do I need an attorney to review my vendor contracts?
Vendor, supplier, and distributor contracts are non-standard, so reviewing them isn’t always a simple task. Attorneys can help in a few ways. Because of their specialized training in contract terms and conditions, most can spot these features:
- Unusual terms, including those that aren’t common practice in your industry
- Terms that prevent you from seeking damages for defects or lags
- Other red flags that may not be apparent to people who don’t work with these contracts on a daily basis.
Further, an attorney can help you negotiate more favorable terms that might save you money, speed up your time to delivery, and help you ensure you have the products, inputs, or inventory you need at just the right time.
Would you like to connect with an attorney who can review your vendor contracts? Start here:
What role should I play in the review of vendor contracts?
With your attorney, you'll take these steps to ensure your contracts meet the needs of your business:
Step 1: Study the scope of services.
Three key points warrant your attention:
-
- The right to modify the deliverable.
- The rights to expand and retract the number of products or services offered.
- The right to subcontract parts of the work.
- The right to pass along one another’s terms and conditions to customers or other members of the supply chain.
- The responsibilities you both must uphold to comply with federal, state, and local laws and regulations.
- The responsibilities you both must uphold in training and meeting standards for proper use.
Step 2: Review the proposed performance standards in the service level agreement.
The service level agreement (SLA) will describe the services you can expect to receive while the contract is in place. You should expect to see the following six elements in an effective SLA:
Step 3: Confirm the duration of the contract.
Step 4: Review the price terms and fees.
Price is an important component of your contract. Be sure to study how much you will be charged, how incremental costs will be incurred, and the payment terms you must meet to attain discounts or avoid penalties. You may also find terms relating to rush order charges, late payments, and maintenance or servicing surcharges.
Step 5: Examine how subcontractors will be used.
If applicable, determine how and in which contexts the vendor, supplier, or distributor may introduce other parties to take on responsibilities they must fulfill. Make sure there are procedures in place to report the hiring of subcontractors and confirm their quality, performance, and adherence to the procedures you’ve put in place.
Step 6: Locate the default and termination clause.
Make sure clear terms are set around how contracts may be canceled because of non-performance or for any other cause, and review the fees you might pay for early termination (which should only be in place if you are terminating for convenience rather than vendor quality issues or their inability to fulfill contractual terms).
Some contracts include terms requesting the return of loaned products or the discontinuation of the use of software or service options, so be sure to determine your obligations upon cancellation.
Step 7: Look for security and confidentiality commitments.
Review the privacy practices, security protocols, and confidentiality provisions the other party promises to adhere to. These may include steps to guard access to shared systems, safeguard your account information, provide notification of unauthorized access, and destroy records upon the termination of the contract.
Step 8: Study contingency provisions.
Ensure that there is language that defines how operations will resume in the event of a defined disaster and any off-site practices they’ve implemented for fast restoration of normal business operations.
Step 9: Make sure intellectual property and allowable use are discussed.
Make sure the contract defines the ownership rights and allowable uses of both parties’ data, systems, and intellectual property. Your attorney can help you determine your legal responsibilities for data storage and use.
Step 10: Ensure the contract includes and indemnification clause.
Review terms that affirm that the other party will hold your organization harmless in the event of their negligence. If these terms are absent, be sure to work with your attorney to add an addendum to your contract before signing it.
Step 11: Ensure the vendor, supplier, or distributor will limit the liability you may experience.
Study contract terms that convey how much loss your organization may be responsible for if the other party fails to perform. The party may provide coverage for losses over an established dollar value or losses that occur over a set period of time. It’s your responsibility to ensure that these values or limits are suitable for your business.
Step 12: Review the proposed dispute resolution procedures.
Look into how and where disputes can be brought forth and the process for escalation. Many entities request mediation before arbitration and arbitration before litigation. However, if a dispute resorts to litigation, your contract may indicate a state or specific court in which the issue may be heard. Some entities choose courts or states that tend to favor big businesses or businesses in a specific industry, so it’s important to recognize that you may be at a disadvantage in bringing forth a suit.
Step 13: Study the general contract provisions.
Review the other elements of the contract, which may include terms regarding the governing law, survival, severability, failures to exercise rights, and options for waiving terms. Your attorney can help you recognize non-standard terms and red flags that warrant your attention.
These terms may be included in a single contract, or they may be offered to you through supplier agreements, quality agreements, purchasing agreements, rate contracts, non-disclosure agreements, subcontracting norms, or other contractual vehicles.
Which terms can I negotiate?
You can try to negotiate any terms you wish. You may also consider adding special requests to suit the unique needs of your business or to address the dynamics that must be in place for the relationship to succeed and endure.
Can I revisit the terms of a contract I already have in place?
Generally speaking, contract terms cannot be changed after the documents have been signed. However, you can prepare for future contract discussions by revisiting your contract and deciding which terms will need to be altered to suit your goals.
Contract reviews should be thorough, but often, proposed changes take place in one of the following five areas:
- Scope. Review whether your business continues to need the deliverables you’ve agreed to with similar timeframes and the same rights and responsibilities of your previous agreement.
- Performance. Evaluate how well the other party has lived up to the terms of the contract and met your standards of performance. If necessary, you may can negotiate tighter standards or alternate means to recover costs on quality concerns or delays the party could cause you to incur.
- Price. Consider negotiating for a good customer discount, especially if you’ve maintained a positive relationship and have become a high-value customer. You might also try to lower fees or make other adjustments to costs or the payment terms of your next contract.
- Credentials. If your standards have changed (or if your key customers are demanding more rigorous qualifications from their vendors), you might consider imposing demands for accreditations, certifications, or other qualifications from your vendors within a set period of time.
- Renewal. You may wish to remove language that enables your contracts to auto-renew without providing opportunities for review or renegotiation.
What’s next?
Be sure to connect with an attorney before negotiating or signing any contracts for deliverables. If you’d like to connect with an attorney who can help you review your vendor contracts, check out these options.
You may also want to take time to review your business's own terms and conditions. This article will help you get started:
Then, log into your owner’s portal for more articles and advice you can use to navigate risks, plan for growth, and take on the everyday challenges of running your business.
