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Vendor management: How to negotiate contracts

Vendor management: How to negotiate contracts

Never accept contracts without changes and expect them to be one-sided in favor of vendors. Once you understand that, it’s time to negotiate. And negotiate hard, argues Mark Grossman.

Businesses buy computer-related goods and services all the time. Just to name a few examples, they buy consultants and technicians' time, custom programming, software and hardware. The way the parties usually handle the paperwork is that the vendor gives the customer their form and the customer signs it. After all, the form is printed so it can't be changed. Wrong!

I have two comments about those forms. One, I represent vendors. Trust me when I tell you that if you're the customer, you never want to accept those form contracts without changes. They're designed to be one-sided in favor of the vendor. I write them. I know.

Secondly, they are almost always negotiable. The basic premise is that most customers won't read them carefully and even fewer will take the time to really negotiate them. A smart customer sees the form as nothing more than a one-sided first offer and goes from there.

Involve a Lawyer?

Clearly, you cannot involve a tech lawyer every time you buy something computer-related. So, how do you know when you need legal assistance?

I think that you make that judgment based on what's at stake. You have to look at the size of the contract and the importance of whatever it is that you're buying. Essentially, I'm suggesting a quick, down and dirty cost-benefit analysis.

I recommend that you start by assuming that the form contract you are seeing was written by a skilled lawyer whose marching orders were to write a contract that gives you as little protection as possible. Then, imagine that the deal goes badly. Finally, assume that if you are forced to sue under the contract that you will lose because the other side was well represented and you were not. How much would you lose? How bad would this scenario damage you? If the damage is more than what is an acceptable loss to you, then you need a lawyer on your side too.

A problem in doing this cost-benefit analysis is that you may not know everything that you need to know to make these judgments. In that case, I suggest consulting with a lawyer to help you with your cost-benefit analysis.

Some Red Flags-Damage Limitations

One of the things you should always focus on is damage limitations. Be leery of clauses like, "Vendor's liability for any loss, damage or expense of any kind, resulting from the products or services, negligence, or any other cause whatsoever, regardless of the form of action, whether in tort or in contract, shall be limited to the selling price of the products or services." Variations on this type of clause may limit you to six months of service charges or some predetermined, and usually low, dollar figure.

Reduced to its essence, this clause says that no matter what they do to you, the most you get is a refund. So, you pay them lots of money to redo your office network, the system functions poorly, you lose lots of money and you get-a refund. It is not fair, but if you sign a contract with a damage limitation, you may have to live with it.

I say "may" because some courts, in some contexts, will not enforce contracts that are too onerous. Still, in negotiating a contract, you certainly daunt want to agree to a damage limitation in the hopes that if it ever mattered, a court will not enforce it.

Some states prohibit disclaimers of responsibility for negligence in some types of contracts. The more general rule is that a party can limit its liability for ordinary negligence, but not gross negligence.

Gross negligence is a difficult concept to define since it lacks a bright-line test. Generally, the concept is that gross "negligence" entails conduct that is almost willful and something worse than just ordinary negligence.

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