More Than Just Terms and Conditions

I often encounter clients who discount the significance of standard contract terms as they pertain to their business decisions and negotiations.  Of course they understand that the legal terms are important to protect their company’s interests.  However, sometimes the business person wants to avoid a deep dive into the contract terms and leave it to lawyers to “do their thing” without getting too involved, hoping there is not too much delay or that the legal review process does not derail the deal.

I encourage my clients to at least understand the contents of their agreements, and ideally to consider the standard terms as part of the overall commercial “package”.  Even though terms are “standard”, the nature of certain key provisions could have an indirect impact on pricing and other deal terms.  A company that is taking on more potential risk exposure has a case for charging more and gaining concession on other points.  A company that aggressively shifts substantial risk of loss and exposure to the other party can find little sympathy for requesting other concessions and can foster distrust.  (However, such a company may be in a position to force their terms because they offer such a unique value or are the only feasible alternative for their customer.)

I recently had a client contracting with two separate vendors to provide similar services in different locations.  One of these vendors (Vendor A) had a very one-sided form of service agreement that was generally designed to protect the vendor to the detriment of the customer, and to eliminate any potential liability exposure, even for areas where one would expect the vendor to be responsible.  The other vendor (Vendor B) had a middle-of-the-road form of standard agreement.  The key terms started off where one would expect reasonable parties to end up after some negotiation.  Interestingly, Vendor A’s pricing structure was higher than Vendor B’s, but without a significant difference in quality or service levels.  Vendor B was able to get their deal closed and moving faster.  Vendor A had to endure a more painful negotiation process to bring their agreement in line with acceptable terms.  Their pricing suffered as well because the extra attention necessary to work with their agreement created more scrutiny for the underlying service offering.

I have been involved in a number of cases where we revised pricing and obtained other concessions by pointing out that my client is being pushed to absorb a higher level of risk exposure.  It’s not always easy, but knowing that seemingly “boilerplate” contract terms can be modified and manipulated to structure a desirable compromise can be useful.