The Pitfalls of Vendor Contracts

vendor contract negotiation

When your company does business with vendors for goods or services, you need clear and well-drafted contracts to govern these relationships. Otherwise, you may be risking future headaches that could include supply disruptions and lawsuits. There are a number of situations and pitfalls arising out of poorly written vendor contracts you must act to prevent. Sloppy contract drafting or a lack of foresight could doom your company to legal troubles. The best way to avoid problems with vendor contracts is to have an experienced attorney draft and review your contracts. In the meantime, here are some common pitfalls businesses may face with a vendor contract negotiation.

Signing an Unclear Contract

Both you and the vendor may think you know exactly what you are contracting for, but what actually appears on paper will control the business relationship. The contract must clearly state the rights and obligations of each of the parties. When there are ambiguities or the contract is missing terms, you may end up in a business dispute.

Your contract must clearly state what each party will do or not do as part of the contract. Each party to a contract must be giving the other something of value for the contract to be valid.

If there is any disagreement among the parties over what the contract says, a court will first look to the clear language of the document. The problem occurs when there is missing language or the existing language is unclear. Then, there is a host of uncertainty that is introduced. A court may use one of a number of methods of contractual interpretation, and the end result may be something that you never intended in the first place. If you are the party that drafted the contract originally, the court may interpret any ambiguity in the other party’s favor. Make sure to have well-defined terms because every word in a contract matters. If the contract is vague, the situation could become entirely unpredictable. Just because you may have intended certain language to convey a certain meaning does not mean that it would be read that way by a judge.

Not Having a Clear Disputes or Termination Clause

You do not want to be indefinitely tied to a vendor that cannot get the job done. If the vendor is not performing the contract as agreed to by the parties, you need to have clear procedures that guide what happens next. Each contract should have a termination clause that allows your business to end the relationship if another party is not performing their obligations under the contract. In addition, the contract also needs a disputes clause that will govern what happens when the parties disagree. If you are dealing with a vendor, you may want to consider a clause that mandates arbitration in the event of a disagreement if it works to your advantage. Otherwise, you would want to make sure you have the right to sue and to do so in the forum of your choice.

Without a robust termination clause, you may end up stuck in a contract with a non-performing vendor. A termination clause lays out when a party may legally terminate the contractual relationship. At a given point, the vendor may be deemed to be in breach of contract, and the document may give you the right to end the relationship. Otherwise, any step you take to get out of the contract could be deemed your own breach.

Omitting Choice of Law or Jurisdiction Provisions

It is critical to spell out which state’s law governs your contract. If you are the one drafting the contract, you should choose your state’s law as the governing body. Otherwise, you may end up with an unintended outcome because another state’s law could apply to your contract and any resulting disputes.

In addition, you should specify where any court cases relating to the contract must be filed. Naturally, you will want the other party to agree to language that requires a lawsuit over the contract to be filed in a court with a location that is convenient for you, such as a court in the county where you operate your business. Without a choice of law and jurisdiction provision, you may end up being hauled into court in an inconvenient location far away from you.

Not Spelling Out Potential Damages

Your vendors’ nonperformance may cause significant disruptions for your business that go well beyond the money you are spending on their services. Although you may not be able to hold the vendor responsible for all of your consequential damages, you can use the terms of the contract to spell out the exact damages they must pay. You should consider using a liquidated damages provision to ensure your business is compensated appropriately for the vendor’s wrongdoing.

However, you need to be careful about which liquidated damages you specify in the contract. If the requirement is overly punitive, a court may not enforce it. There is a fine line you must tread when you put a liquidated damages provision in a contract. You should have it in there, but you cannot overreach.

Using Boilerplate Language

Some businesses may be tempted to use a standard contract for all of their vendors. While you do not need a customized contract for every single term, you do need to consider the unique and specific circumstances of your arrangement with each vendor. Trying to shove the proverbial square peg into the round hole could lead to a contractual dispute.

If there are specific and unique aspects of a particular relationship, they must be reflected in the language of your agreement. Too many businesses have made the mistake of overusing boilerplate documents and then paying the price for doing so down the road. Many managers are in a hurry to get a contract signed, so they will end up choosing the document they think looks best without much further review. It does not matter whether the boilerplate language seems completely applicable—this is the language the court will need to enforce or interpret if there is a dispute, so you should make sure it is appropriate for the relationship with the vendor it will control.

Forgetting About Regulations

Each business must consider the regulatory landscape in which it operates. No matter what your company does, it is always subject to both federal and state regulations. Further, you cannot have a contract for an illegal purpose, nor can you perform a contract when the purpose of it is impossible.

You need to have a general understanding of the regulations in effect at the time the contract is signed, but you should also be thinking about how those regulations may change in the future. Having an attorney review your contract before you sign it can give you an understanding of the regulatory landscape today—and how to avoid a problem if regulations change tomorrow. An attorney may flag an area where an applicable or future regulation could complicate or frustrate the purpose of your contract.

The Failure to Protect Your Intellectual Property

Your vendors may need access to some of your processes and trade secrets as part of their relationships with you and the work you hire them to do. Any vendor contract negotiation should have provisions that restrict how a vendor can use your business’ trade secrets and knowledge. You cannot just rely on patents and trademarks to protect you, because some intellectual property may not be patentable or trademarkable. Your business has worked hard to develop its knowledge, and you do not want someone to take it from you because you trusted them enough to form a business relationship with them.

The attorneys at Feldman & Feldman can help your business by drafting and reviewing vendor contracts. Investing in legal advice now can save you considerable expense and stress in the future. To learn more about our legal services, and how they can benefit your business, contact us today to speak to a Houston contract drafting lawyer.