Six Common Contract Pitfalls

The situation is common. Your company is in the middle of a sales process with a potential client, and company executives have decided on the basic terms of the order form – price, duration, service specifics, and timing. Now is the time to involve the legal. If you’re like most of the emerging tech companies we work with on a daily basis, it’s at this point in the process that you might be hit with a 30-page Master Services Agreement, the “standard form” that your larger company counterpart insist.

Aside from the fact that there are things you could have done before this point to get your counterparty to start from your chord form (which is always better, and a subject for another day), let’s assume that you’re stuck working on this monster of a framework services agreement, under pressure to get the deal signed, and trying to focus your efforts on the places in the deal that matter most.

But these grand forms of enterprise, in all their voluminous glory, can hide pernicious pitfalls for the unwary (or the wary but limited in time), whether through clever drafting, outright omissions, or side effects. subtle interactions, all of which can leave your business suffering if left undiscovered.

Over the years of helping small businesses navigate sales processes in a wide variety of industries, I’ve seen a huge variety of these pitfalls. Here I present a basic field guide to help you spot and navigate six of the most common and impactful traps you might encounter in the wild, in no particular order.

unilateral renewal

This trap is a smart little device designed to make sure big business can still get your product or service, even when you no longer want to provide it. It’s most often found buried in a purchase order or statement of work, or it’s the product of an interaction effect between how termination terms are written and how renewal terms are written. . This is because where the agreement is due for renewal at the end of the then current agreement term, the customer is the only party that has the right to provide notice of non-renewal – the seller does not have this law. When this provision is coupled with the absence of the seller’s right to terminate for convenience, the result is that seller must continue to operate as long as the customer decides to continue to renew the contract.

In its cleverest form, the one-sided renewal trap also interacts with the pricing condition, where either (i) the provider’s first-day pricing is locked in and cannot be changed without mutual agreement (which is problematic both due to the vendor’s inability to reflect changes in COGS or inflation over time, and because startups often need to change prices as their offerings and their competitors’ offerings change), or (ii ) the supplier may increase prices, but increases are only permitted once a year and are capped at a small percentage of prior pricing.

In short, if you sign an agreement today that says you’re ready to provide the exact same product or service, at the same exact price, 10 years from now, you better be extracting equally robust purchase minimums, exclusive supply commitments, or both, of your customer. Don’t get stuck in a one-sided version of a long-term relationship by mistake.

The Buried Exclusivity Provision

This trap is a blatant land grab that is a rare find, but it can take huge chunks of a seller’s total addressable market if not caught. An exclusivity provision is a commitment by the seller not to supply its products or services to others in the customer’s industry during the term of its agreement with the customer (or during the term and for a certain time thereafter ). I have seen this clause slipped into the “Entire Agreement” section without being referred to in the section header, buried in the definition of “Services” (e.g., “Vendor shall provide the Services exclusively to Customer”), or appear behind a thicket of representations and warranties (“Supplier represents, warrants and covenants that… other than to Customer, Supplier will not provide its products or services to entities in the [XYZ] business.”).

This kind of clause is dangerous for various reasons. He can exclude you from an entire vertical without you realizing it. When combined with a one-sided renewal clause, this lockout may not be easily terminated, forcing you to negotiate with your counterparty to be released or simply remain stuck serving only one customer across the entire business. an industry that will soon have agreements with your competitors. You could also easily end up in breach of the obligation if you signed the agreement without finding out, resulting in a surprising cease-and-desist from your client, or an awkward and awkward conversation with an investor or acquirer when this provision is discovered. during the diligence.

The MFN under another name

Most-favoured-nation, or “MFN” clauses are usually brought to the reader’s attention by labeling them as such and giving them their own section of the agreement. But occasionally, a smart shopper will write a most-favoured-nation pricing commitment in representations and warranties, or as a comma-separated clause in the definition of “Price” or “Charge”, such as ” … that the supplier represents and the commitments are not higher than the prices charged by the seller to any other customer. MFN engagements can wreak havoc on your ability to scale your offerings over time, provide incentives or personalized offers to future customers, or scale your sales process without the risk of a breach. The particular danger presented by these abbreviated MFN clauses is their lack of specificity. A fully negotiated MFN clause, entered into by both parties with eyes wide open, should contain details, such as exactly what products and services are subject to the clause and what types of other customer and customer agreements will trigger (or not ) the application of the MFN clause. In the absence of such safeguards, a simplified MFN commitment is ripe for violation and dispute.

Everything is a deliverable

Often, the definition of “Work Product” or “Deliverables” is written so broadly that it captures improvements that the supplier can make to its own products and services, simply because those improvements occurred during execution. Vendor’s Services or due to Vendor’s exposure to Customer Information. Or, these or similar definitions will state that anything Seller creates or generates during the term of the Agreement will become the property of Customer. Almost no wording of these definitions is actually feasible for a supplier, because unless the supplier provides simple work-for-hire type services using materials that have been supplied entirely by the customer, the supplier must preserve its ability to continue to do business. using its own in-house tools, technologies, and methods across its entire customer base, without accidentally getting locked out of ceding enhancement rights to a customer.

The glaring omission

Some of the hardest traps to spot are those that aren’t there to be seen. For example, almost no company-side procurement form will contain a limitation of liability, warranty disclaimer, or customer-provided indemnity. Few will contain a provision on feedback ownership, and even fewer will include the ability to use aggregated and anonymized customer data to improve the provider’s underlying product (which is a key right for many SAAS companies and IA). For some of these concepts, the omission is obvious since the form will include the parallel concept in favor of the company (for example, compensation). But for others, the whole concept is simply left out, and you’ll be stuck living without the rights or protections you need if you don’t spot the gap.

Audit to infinity

One of my favorite finds in any of these forms is the series of overlapping verification provisions, none of which are meaningfully related. Literally, the customer may have the right to enter the premises of the seller and examine any documents of the seller that he may request, at any time, for such period of time as he deems reasonable, without having to provide notice, and as often as he chooses to do so. You might think that vendor audit provisions are harmless simply because of their commonplaceness, but I’ve seen some of our SAAS customers deal with six-monthly, three-week-long security audits from customers such as banks and insurance companies – which is a significant cost in terms of internal engineering and CTO time when a company is frantically trying to scale and meet its product and sales goals. I have seen situations where the audit clause is used as a club, with the client initiating open audits on multiple fronts during a contract dispute and using the audits to drain resources, seek information and generally frustrate and distract the seller.

Not all of these situations are avoidable. Banks, for example, will be upfront about their need for regular and intensive security audits, depending on the types of services provided by the provider. But unless you know enough to try to limit these audit provisions when you negotiate the agreement (for example, limiting them to once a year for all audit rights, with 30 days, only to the extent necessary to address a pre-identified issue, the extent of the issues where the client can demonstrate a reasonable need for the information they are requesting, etc.), or to incorporate the unavoidable costs of such audits into your pricing (or to transfer them to your client), you will never make the client’s true intentions appear, and you will give your client potential leverage in the event of a possible dispute.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.National Law Review, Volume XII, Number 84

About Charles D. Goolsby

Check Also

Hartford faces a high-stakes retrial over Dunkin’ Donuts Park; tab for attorney fees now well into millions – Hartford Courant

HARTFORD — Hartford has paid $4.5 million in fees since 2017 to hire outside attorneys …