Navigating Vendor Agreements
The pandemic left businesses in the precarious position of being committed to vendor agreements that they could no longer perform on. Businesses faced with supply chain issues, work stoppages, or decreases in revenue were left either paying for services they did not use or did not want, or even worse, incapable of meeting their contractual obligations. Though many businesses will concede their contract obligations as written, there are times where the plain language of the agreement, and some good old-fashioned negotiating, can lead to relief. This article is designed to highlight how Mayer LLP can assist businesses in negotiating, renegotiating, and terminating unfavorable vendor agreements in efficient and strategic ways.
Businesses seldom seek legal advice when entering into vendor agreements because, for the most part, they are routine and necessary. The pandemic, however, taught us that even the most routine vendor agreements could be upended by lack of customers, lack of products, or lack of employee-power. This is where certain contract provisions, if included, could save businesses thousands of dollars and much heartache. Below are a few examples of key contract provisions which should be in all vendor agreements:
Term and termination:
Though this seems like a rudimentary provision, it is arguably the most important section of a vendor agreement. Limiting term to one year, or at least automatically renewable one year terms, can significantly reduce payment obligations in the event the agreement is no longer viable. Alternatively, and more importantly, including a no-cause termination provision allowing either party to terminate the agreement with 30, 60, or 90 days’ notice, without penalty, drastically lowers financial liability.
Termination for cause:
It is shocking how many vendor agreements do not include termination for cause provisions. Termination for cause or breach allows the non-breaching party to terminate, or provide notice of intent to terminate the agreement, when the other party has failed to fulfil its contractual obligations. An agreement including such a provision allows a non-breaching party to seek termination for a myriad of reasons such as poor customer service, or inadequate products or services. Termination for cause customarily allows the breaching party a finite time to cure before the contract terminates.
This seldom used contract provision made headlines during the pandemic. A force majeure clause suspends party obligations if performance is hindered or prevented because of war, acts of God, pandemic, terrorism, fires, storms, governmental regulations or other causes reasonably beyond a party’s control, for as long as the circumstances prevail. For obvious reasons, force majeure has practical applications and can provide a business with immediate contract relief.
Prevailing party fees:
A prevailing party attorney’s fees clause entitles a prevailing party to a dispute under the agreement to receive its attorney’s fees and costs incurred in connection with a proceeding to enforce the agreement. Such a provision is extremely useful in the context of a breach insofar as it bears the additional weight of attorney’s fees if the breaching party fails to cure or when, as discussed below, a party seeks to terminate an agreement for cause.
Renegotiations and Termination
Having contractual provisions that anticipate rainy-day scenarios will make contract renegotiation and termination easier and less costly. A force majeure clause, by way of example, can bring parties to a mutual understanding that contract performance, as expected, may not occur during the terms of the agreement, thus necessitating termination or renegotiating of more favorable terms.
A less obvious example is when no-cause termination clauses operate as a mechanism to renegotiate a vendor agreement that, in practice, has not lived up to expectations. New vendor relationships for services or supplies to generally younger businesses may turn out less glamorous after months 2 or 3 than what was contemplated during contract negotiations. Utilizing a no-cause termination clause can signal to a vendor, who never wants to lose business, that a more favorable agreement is better than no agreement at all.
Having an attorney identify breaches as part of a for-cause termination also provides immense bargaining power to the non-breaching party. Vendor agreements routinely come with waste that is sometimes difficult to identify or quantify. At times, waste is only identified after several months or years have gone by. Even more alarming is how seldom businesses terminate vendor agreements for waste or breach. Businesses equipped with for-cause termination and prevailing party fees provisions have considerable power over vendors who rarely have an appetite to litigate against unhappy customers with a litany of complaints neatly set forth in a termination or attorney-demand letter.
Vendor agreements are seldom perfect and routinely come with some waste. Having an attorney review and negotiate even one vendor agreement can identify and limit contractual pitfalls and serve as a benchmark for entering into favorable, forward-thinking vendor agreements in the future. Moreover, consulting an attorney when faced with having to pay for unwanted or subpar services, or on a contract that is no longer tenable, can lead to creative and cost-effective solutions designed to avoid waste and litigation.