Legal Tips

Vendor Agreements: The Must-Knows For Your Business

When it comes to vendor agreements, there’s no shortage of what could go wrong. These documents can include language on things as varied as intellectual property rights, payment structure, what happens if one party gets sued by a third party, and how logos are used.

Resources exist to help you trudge through all this on your own. But it’s probably best to recruit an expert. We talked to one – trademark and contracts attorney Elizabeth Breakstone at Fortem IP – about some of the pitfalls to avoid and how to get the most out of your business’s vendor agreements.

Watch the full webinar with Elizabeth here. But until then, we’ve boiled it down to a few must-know points:

Pay attention

Before we get into the nitty-gritty, an important principle to remember is a simple one: read. It’s crucial you read through your vendor agreement and understand its contents. A vendor agreement will usually originate from one of three sources: the vendor has a standard agreement it uses, you have a standard agreement you use, or one of the parties finds a sample agreement online or somewhere else. No matter where it comes from, your focus should be on on reading through any standardized vendor agreement and making sure it includes contents you need.

Elizabeth recommends starting by brainstorming issues that are important to you in a particular deal. Your list will depend on what the vendor is providing – software, event space, equipment rental, etc. For example, if you’re working with a software company that’s generating and storing data for you, you might want to think about how you can access that data if the agreement terminates. You can also look at agreements with other vendors that you’ve signed in the past to see what those agreements include. Depending on the size of the vendor, the number of customers it has, and how much you’re paying for the product or service, you might not be able to negotiate a deal. But even if that’s the case, it’s important to read the agreement so you understand what you’re signing up for.

But whether you’re signing a non-negotiable agreement or hiring a lawyer to negotiate a complex engagement, it’s important to have a basic understanding of your vendor agreements so you can get the most out of the products or services they’re providing.

Content in vendor agreements can be divided into two categories

The first (and simpler) category of content in vendor agreements is operational details. This includes practical things like what services are being provided, who is the main contact person, how does your business access the necessary software, when do you have to pay fees, etc.

The other piece to vendor agreements is risk allocation. Information on indemnification (more on that later), warranties, limitation of liability, and more is included in this section. Basically, it’s “all the things that determine, if something goes sideways, who is on the hook for it,” according to Elizabeth.

Things to be on the watch for

All vendor agreements are different. But there are a few general things you should always be on the lookout for. Payment terms – like if your business is paying for the product or service before or after you receive it – are crucial to understand. You should also be aware of how to terminate the agreement. Some vendor agreements can only be terminated after a certain amount of time (like at the end of the term) and others renew automatically unless you terminate within a specific window of time.

If you’re working with a creative (think: graphic designer, copywriter, etc), vendor agreements also should address intellectual property ownership and who owns what the vendor creates. (We laid out some basics about trademark law here).

Ambiguity is your enemy

If your business’s vendor agreements come with any level of ambiguity, you could pay for overlooking the details later. Everything should be 100 percent crystal clear, no matter how you look at the wording. If you don’t understand something, don’t be afraid to ask.

Elizabeth once saw a vendor agreement that didn’t clearly define what “customer” meant. This was important because the company that engaged the vendor had to make payments based on the number of customers it had. The company thought a parent company and its subsidiaries counted as a single “customer”; the vendor thought each subsidiary counted as its own “customer.” This confusion became a million-dollar dispute – which could have been avoided with a clearer vendor agreement. (Elizabeth was not involved in drafting this agreement. She only saw it a few years after it had been signed).

Some basic legal terms you should be aware of

Although hiring a lawyer will help you get the most out of a vendor agreement, it’s important to understand some common phrases and provisions.

“Representations” are statements that the vendor and customer are making about things that are already true (e.g. the vendor is allowed to enter into the contract). “Warranties” are statements about how the vendor and customer will perform (e.g. the vendor’s software won’t contain viruses). These establish legal expectations, Elizabeth says.

Indemnification involves who is on the hook for mistakes made. For example, if your business has a vendor agreement with someone creating an advertisement for you, but that person copied content from someone else, you would not want to be financially responsible for something like trademark infringement. If the contract has good indemnification language in it, and if someone sues your business for that contractor’s IP infringement, that contractor would have to cover the expenses of the lawsuit.

Limitation of liability can limit how much you can recover from a vendor if you sue. For example, companies will often use vendor agreements to cap their liability at, say, whatever the customer paid the previous year.

Weigh the cost versus benefit of hiring a lawyer

At the end of the day, engaging an attorney for an expensive or complicated vendor agreement, or one in which you’re giving a vendor access to sensitive information, is a good idea and can be worth every penny. But sometimes, legal costs can outweigh the benefit you would receive from that relationship. An example of this might be an agreement that you can’t negotiate – for example, a vendor with hundreds of thousands of customers may not be willing to consider negotiations if you’re only going to spend a few hundred or a few thousand dollars. Whether you’re talking to your lawyer about the issues that are important to you and to her, or if you’re making sure you understand what you’re signing up for with a vendor, the provisions discussed above are some of the important pieces of an agreement to keep in mind.

For more information on Elizabeth, visit her WMN / WRK profile here!