By Alexandra Ross (Senior Counsel, Paragon Legal)
An understanding of key contractual business terms will enable you to conduct more productive negotiations and maintain lasting relationships with your clients and vendors.
As a business lead, you should be prepared with a basic knowledge of the commercial terms that are meaningful to your company and relevant to the deal at hand.
The practical benefits of this are threefold: 1) you set appropriate expectations and a foundation for the contractual relationship; 2) you enhance the efficiency of the collaboration with your legal and/or purchasing department; and 3) as you assume responsibility for your role, you are more engaged and can provide significant and substantial business input.
#1 – Business Model
Spend the time to research and understand the business model related to the products and services to be purchased or offered. The key business terms may vary according to the context of the deal – whether it’s a traditional software license, software as a service (“SaaS), social media platform, or consulting services, for example. Review and compare the ways that competitors structure a similar business offering.
#2 – Enterprise Terms
Determine if your company, a parent or affiliated company already has contracts in place with this vendor or client. You may be able to reap the benefits of existing contractual terms and perhaps avoid a contract altogether (you may need an amendment or statement of work for your particular situation).
If you are negotiating from scratch with a new vendor or client, and you anticipate that related entities may wish to use these products or services, ask for enterprise terms, meaning that the terms you negotiate today will apply going forward to these corporate affiliates.
#3 – Term
One year contract terms are fairly standard and provide flexibility in the case of changes in your business. Vendors obviously prefer longer terms to lock in future revenue. As a purchaser, be wary of agreeing to terms longer than one year, unless there is a clear benefit (such as more favorable pricing terms).
Automatic renewal or an evergreen contract (like the tree, the contract term is ongoing until a party terminates) may be preferable if you do not want to spend resources tracking and potentially renegotiating contracts at the end of each contract term.
#4 – Termination
A contract should include provisions for termination for breach (failure to meet a contractual obligation) and ideally some type of refund (either full or pro rata) if the vendor terminates and cannot cure (fix or resolve the breach). The key business issue here is termination for convenience, meaning a party’s right to terminate in their discretion (i.e. for no stated reason, outside of the context of a breach). As with shorter contract terms, termination for convenience provides flexibility for future, perhaps unanticipated events where the contemplated contractual relationship is no longer desirable. Vendors typically push back on termination for convenience provisions and may demand payment of a termination penalty for early contract termination.
#5 – Deliverables
A deliverable is any tangible or intangible product to be delivered to the purchaser. Deliverables, such as custom development of software or consulting services related to your project should be specified in an order form or statement of work and attached to the main agreement negotiated for the situation.
The more detailed the description of the deliverables the better, in order to avoid misunderstandings of what is to be provided for the amount paid. A purchaser should ask for formal acceptance of the deliverables, meaning a process by which you review the work and against acceptance criteria – which could be the specifications provided by the vendor or set forth in the statement of work.
Make sure to specify sufficient time for the acceptance process and, as a purchaser, push back on any language that states that after a period of time deliverables are “deemed” accepted. From the purchaser’s perspective, it’s best to withhold some or all payment until after acceptance.
#6 – Ownership
Typically, in a software licensing context, the vendor “owns” the software and the licensee has usage rights set forth in the license grant. If you are paying for custom development or you would like the right to make modifications to the software, you may want ownership in addition to usage rights so as to prevent the vendor and/or competitors from using the custom or modified code.
For consulting services, typically the purchaser owns the deliverables created by the consultant – this is a work for hire arrangement. Often the consultant will wish to retain to ownership to their pre-existing work and the purchaser would only what is created specifically for them. Related to the concept of ownership is that of exclusivity – meaning agreed upon rights (often limited to a certain time period) to prevent others from using the product or service.
#7 – Pricing
Price is usually heavily negotiated and may be dependent on certain other contractual provisions such as term and termination rights. Make sure you fully understand how the pricing model works and what drivers or situations affect the price. For example, will you be accorded or offer Most Favored Customer status, meaning that the price (and often other terms) stated in the contract will be comparable to or better than terms offered to others?
Will the price increase over time or can you negotiate price protection, meaning that when you renew the contract or purchase additional products or services the price will remain the same or only increase a set amount – a certain percentage or an amount tied to the Consumer Price Index (CPI).
#8 – Payment Terms
Depending on the context of the contractual relationship, it may be appropriate to agree to upfront payment of fees. Many software licenses for example, require payment in advance of the license term (you may be able to negotiate monthly as opposed to yearly payments). In the case of deliverables or consulting services, it may be more prudent to withhold payment (or at least full payment) until after acceptance of such deliverables or services.
If you are paying for products or services, ask for Net 45 terms (payment due 45 days after invoice), a discount for early or cash payment and push back on interest fees for late payment. If you are receiving payment, ask for Net 30 terms.
#9 – Service Levels
A service level agreement sets the standard for performance for any vendor (i) hosting an application, a website or content and/or (ii) providing maintenance and support services. Examples of service levels include:
- Availability/Uptime: This means the percentage of time the hosted systems are available (typically 99-99.9%) during a certain period, excluding scheduled maintenance and downtime.
- Support and Maintenance: These can include express support service requirements such as error correction, e-mail support, telephone support, hours of availability, etc.
- Performance Standards and Maintenance: These can include commitments to hosting performance standards, (load and interaction times) as well as management processes to handle monitoring, maintenance, outages and “mean time to recover.”
- Resolution and Notification: This means accountability to certain error resolution and notification standards. There should be some commitment to (i) resolve critical hosting issues within a limited period of time and (ii) notification of the issues and potential solutions/work-arounds.
- Redundancy, Scalability and Stress Testing: These can include certain minimum standards in order to handle peak traffic capacities and design systems for fail-safe/redundancy and stress testing.
- Remedies: The service levels for both support and performance should contain remedies (refund of fees, termination of agreement) for the failure to meet performance, uptime and support standards.
#10 – Non-Solicitation
Non-solicitation provisions restrict individuals and organizations from soliciting (a) employees, (b) customers or (c) business opportunities from another company or organization for a period of time. This issue often arises in consulting or professional services agreements where a party wishes to avoid losing employees to the service provider (or vice versa).
These provisions can be limited in scope to the term of the contract or a period of time following the contract term. A typical middle ground contractual position is prohibiting intentional “stealing” or solicitation of employees, but allowing for hiring of employees subject to general job postings or advertisements.
Editor’s note: Got a question for our guest blogger? Leave a message in the comments below.
About the guest blogger: Alexandra Ross is Senior Counsel at Paragon Legal, working onsite on a project basis with clients such as Avon. Previously, as Associate General Counsel for Wal-Mart Stores, she managed privacy law and compliance for domestic and international ecommerce, marketing, social media and mobile initiatives. She is a certified information privacy professional and practices ecommerce and privacy law.