Purchasing Services: Things to Look for In Your Contract

I was reviewing a contract for a client recently that reminded me of several items I have addressed in these columns – when to call your lawyer, what to look for in a contract, the importance of not blindly signing form contracts, and how to choose the right team to address your insurance needs. It is a good opportunity to pull those topics together in a particular context – purchasing services for your business.

Bill Nolan

This contract involved a relatively small nonprofit business purchasing certain management services from another entity. Businesses often purchase services and, as was the case there, often the sellers of those services will approach you with a form contract they have written. The purchase may often be relatively modest, and understandably you want the process of entering into the agreement to be fairly straightforward. In what will often be the order of importance (from most to least critical), below are the issues I commented on in this agreement. This framework will apply to many businesses’ contracts to purchase services.

1. If somebody can be harmed by the services performed on your behalf, is your business adequately protected from any liability? This is certainly, in part, a legal question based on a review of the language of the contract, but as a practical matter more than anything, it may be an insurance issue. If you are paying somebody else to conduct some small part of your business, and a customer or potential customer or other third party is harmed in the course of that, are you covered? Start with your insurance agent, ask if your current coverage is adequate to cover the situation, and get the answer in writing. I would normally strongly suggest that you consult with your lawyer to assess whether the written answer from the agent is sufficient, but often the inquiry starts with the representative of your insurer, and his/her response will, in part, guide the legal response.

2. If you are not happy with the services, can you get out of it? Of course both parties to an agreement usually want some degree of assurance that the rug will not be pulled out from under them without fair notice. Often if the vendor is providing the agreement, it may be somewhat one-sided on this point – the vendor has the protection of being able to terminate, but you do not. Make sure you are comfortable with how this reads, and remember that not all relationships go as well as it feels like they will when you are entering into the contract. That’s why there are disputes over them!

Is there a notice period for you to terminate and can you live with it? If there is particularly egregious lack of performance or even misconduct, does the contract allow the notice period to be shortened? And are there costs to termination, such as a termination fee? Most often it will be prudent to let your lawyer help you with these questions, but if you are “self lawyering” at least be on the lookout for these red flags.

3. Is the service provider’s discretion reasonably limited? The contract will provide for things the service provider will do on your behalf. It may state that certain things are done at the service provider’s discretion, perhaps even stronger terms like “sole absolute discretion.” Rarely does it seem to me in a business contract that a service provider should have more than “reasonable” discretion – can’t a service provider meet that standard? Usually it is not controversial to offer modest revisions that make clear that the service provider’s discretion is not more than what reasonable discretion would allow.

You probably need your lawyer to help you identify the handful of places in the contract where such adjustments are called for. When I do this, often it amounts just to inserting “reasonable” or variations of it, but knowing where to do so likely requires the assistance of a professional.

4. Are your obligations limited to what is reasonable? On the flip side, as the consumer under a services contract, your business probably has obligations as well. For example, you may be required to provide certain information to allow the service provider to fulfill its obligations. This is reasonable, of course. But just as you want to make sure the vendor’s obligations are not less than reasonable, you want to make sure that your business’s obligations are not more than reasonable. Here again, you probably need your lawyer’s help to spot the places where you might inadvertently be taking on obligations in a manner that does not account for things outside your control.

5. Is it clear? My last set of comments to the contract I was looking at I referred to as cleaning up “general clunkiness” to the client. Sometimes it takes the eye of somebody who has spent time litigating over contracts that went wrong to spot things that seem clear now but may not be later – at least to one of the sides – in the event of a dispute.

When somebody is going to provide services to your company and hands you a form contract, do not sign it blindly. At a minimum, look through the document with these questions in mind, and run the document by your insurance team. Then consider whether it is one of those situations where you will save money in the long run by asking your lawyer to have a quick look.