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.

Limitations of Time to Sue

Many agreements have provisions like "No action, regardless of form, arising out of or related to this agreement may be brought by the customer more than one year after a cause of action has arisen." This clause and similar ones reduce the time that the law gives you to file a lawsuit. For example, most states will give you four or five years to file a breach of contract claim. This clause, which you should assume is enforceable, reduces it to one year.

In my experience, this is a perfect example of a clause that is always negotiable. It is as simple as taking the time to ask for something better. I would start by asking that the clause be deleted as unnecessary. The law provides for a statute of limitations and your lawyer should argue that it is not needed. Even if they say no to that, they always agree to something more than the printed language. Even if you agree to three years instead of one, you have come out better off.

Is this significant? I can't know that without a crystal ball. I would have to know if a situation will ever arise where you would need or want extra time to file a lawsuit or make a claim.

The point is that you often don't know whether what you do when you negotiate a contract will matter. When you are negotiating, you are often just dealing with possibilities. Sometimes you have to wait until the contract plays itself out to know whether it mattered.

I don't think that the question, "is it significant" is the right question to ask. Yet, that is the one people ask. It is as if by some magic the form becomes the starting point of what is significant and fair. Don't let the vendor's form take on magical properties. Their form is nothing more than their idea of what a one-sided deal should look like. I can assure you that if I ignored the vendor's form and created a pro-customer contract from scratch, it would be completely different from the vendors.

My pro-customer contract wouldn't even mention statute of limitations and if it did, I would say five years instead of one. Usually, I would be happy to live with the law's typical four-or five-year period. Look at how different the whole dynamic of the negotiation changes if it is my form and the vendor is now "asking" that we reduce it to one year.

It seems so unfair. Moreover, fairness not significance should be your primary focus in a negotiation.

In negotiating your agreements, you must avoid that very natural tendency to see the deals starting point as being the vendor's form. You should first see the deal from your one-sided perspective. What do you want and need?

In a negotiation, you're not likely to get everything you want, but you must work to pull contracts back to the middle, i.e., back to what is fair. You should not ask for changes in a vendor's form except after asking yourself whether the change is significant. If it is significant and one sided in favor of the vendor, ask that the provision be made neutral.

Some one sided clauses should be moved towards benefiting both parties. For example, if the vendor asks that you indemnify them for your wrongdoing, you should ask that they indemnify you for their wrongdoing. If they get attorney's fees if they're the prevailing party, then you should if you're the prevailing party. If they can terminate the agreement if you sell your company, the reverse should be true.

After you have put every unfair provision on the table, you can use the issue of significance to decide which points to give up. Certainly, not every point has equal importance to you.

Just remember, what is good for them is good for you. That's fairness.

Don't walk into a deal thinking about how big they are. They want your business or they wouldn't be talking to you. Sure, the Microsofts of the world budge less than the vendor down the road, but they all bend. The only way to find out how far is to push back.

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