by Mark Grossman

Vendor Management: How to Negotiate Contracts

Dec 23, 20087 mins
BudgetingOutsourcingRisk Management

Don't accept "standard" vendor contracts until you weigh the risk and potential costs. These tips will help you negotiate contracts that offer protection to you—the purchaser—as well as the vendor.

Businesses buy computer-related goods and services all the time. Just to name a few examples, they buy consultants and technicians’ time, custom programming, software and hardware. The way the parties usually handle the paperwork is that the vendor gives the customer their form and the customer signs it. After all, the form is printed so it can’t be changed. Wrong!

I have two comments about those forms. One, I represent vendors. Trust me when I tell you that if you’re the customer, you never want to accept those form contracts without changes. They’re designed to be one-sided in favor of the vendor. I write them. I know.

Secondly, they are almost always negotiable. The basic premise is that most customers won’t read them carefully and even fewer will take the time to really negotiate them. A smart customer sees the form as nothing more than a one-sided first offer and goes from there.

Involve a Lawyer?

Clearly, you cannot involve a tech lawyer every time you buy something computer-related. So, how do you know when you need legal assistance?

I think that you make that judgment based on what’s at stake. You have to look at the size of the contract and the importance of whatever it is that you’re buying. Essentially, I’m suggesting a quick, down and dirty cost-benefit analysis.

I recommend that you start by assuming that the form contract you are seeing was written by a skilled lawyer whose marching orders were to write a contract that gives you as little protection as possible. Then, imagine that the deal goes badly. Finally, assume that if you are forced to sue under the contract that you will lose because the other side was well represented and you were not. How much would you lose? How bad would this scenario damage you? If the damage is more than what is an acceptable loss to you, then you need a lawyer on your side too.

A problem in doing this cost-benefit analysis is that you may not know everything that you need to know to make these judgments. In that case, I suggest consulting with a lawyer to help you with your cost-benefit analysis.

Some Red Flags—Damage Limitations

One of the things you should always focus on is damage limitations. Be leery of clauses like, “Vendor’s liability for any loss, damage or expense of any kind, resulting from the products or services, negligence, or any other cause whatsoever, regardless of the form of action, whether in tort or in contract, shall be limited to the selling price of the products or services.” Variations on this type of clause may limit you to six months of service charges or some predetermined, and usually low, dollar figure.

Reduced to its essence, this clause says that no matter what they do to you, the most you get is a refund. So, you pay them lots of money to redo your office network, the system functions poorly, you lose lots of money and you get—a refund. It is not fair, but if you sign a contract with a damage limitation, you may have to live with it.

I say “may” because some courts, in some contexts, will not enforce contracts that are too onerous. Still, in negotiating a contract, you certainly daunt want to agree to a damage limitation in the hopes that if it ever mattered, a court will not enforce it.

Some states prohibit disclaimers of responsibility for negligence in some types of contracts. The more general rule is that a party can limit its liability for ordinary negligence, but not gross negligence.

Gross negligence is a difficult concept to define since it lacks a bright-line test. Generally, the concept is that gross “negligence” entails conduct that is almost willful and something worse than just ordinary negligence.

Limitations of Time to Sue

Many agreements have provisions like “No action, regardless of form, arising out of or related to this agreement may be brought by the customer more than one year after a cause of action has arisen.” This clause and similar ones reduce the time that the law gives you to file a lawsuit. For example, most states will give you four or five years to file a breach of contract claim. This clause, which you should assume is enforceable, reduces it to one year.

In my experience, this is a perfect example of a clause that is always negotiable. It is as simple as taking the time to ask for something better. I would start by asking that the clause be deleted as unnecessary. The law provides for a statute of limitations and your lawyer should argue that it is not needed. Even if they say no to that, they always agree to something more than the printed language. Even if you agree to three years instead of one, you have come out better off.

Is this significant? I can’t know that without a crystal ball. I would have to know if a situation will ever arise where you would need or want extra time to file a lawsuit or make a claim.

The point is that you often don’t know whether what you do when you negotiate a contract will matter. When you are negotiating, you are often just dealing with possibilities. Sometimes you have to wait until the contract plays itself out to know whether it mattered.

I don’t think that the question, “is it significant” is the right question to ask. Yet, that is the one people ask. It is as if by some magic the form becomes the starting point of what is significant and fair. Don’t let the vendor’s form take on magical properties. Their form is nothing more than their idea of what a one-sided deal should look like. I can assure you that if I ignored the vendor’s form and created a pro-customer contract from scratch, it would be completely different from the vendors.

My pro-customer contract wouldn’t even mention statute of limitations and if it did, I would say five years instead of one. Usually, I would be happy to live with the law’s typical four—or five—year period. Look at how different the whole dynamic of the negotiation changes if it is my form and the vendor is now “asking” that we reduce it to one year.

It seems so unfair. Moreover, fairness not significance should be your primary focus in a negotiation.

In negotiating your agreements, you must avoid that very natural tendency to see the deals starting point as being the vendor’s form. You should first see the deal from your one-sided perspective. What do you want and need?

In a negotiation, you’re not likely to get everything you want, but you must work to pull contracts back to the middle, i.e., back to what is fair. You should not ask for changes in a vendor’s form except after asking yourself whether the change is significant. If it is significant and one sided in favor of the vendor, ask that the provision be made neutral.

Some one sided clauses should be moved towards benefiting both parties. For example, if the vendor asks that you indemnify them for your wrongdoing, you should ask that they indemnify you for their wrongdoing. If they get attorney’s fees if they’re the prevailing party, then you should if you’re the prevailing party. If they can terminate the agreement if you sell your company, the reverse should be true.

After you have put every unfair provision on the table, you can use the issue of significance to decide which points to give up. Certainly, not every point has equal importance to you.

Just remember, what is good for them is good for you. That’s fairness.

Don’t walk into a deal thinking about how big they are. They want your business or they wouldn’t be talking to you. Sure, the Microsofts of the world budge less than the vendor down the road, but they all bend. The only way to find out how far is to push back.

Mark Grossman is a tech lawyer, business advisor, and negotiator. He is the founder of the Grossman Law Group with offices in Manhattan and South Florida.