Part III what small business owners should anticipate when they land a major deal
“The bottom line is that, with care, it may be possible for even a small supplier to push back on the one-sidedness of a standard form contract advanced by its much larger customer.”
In part I we covered the strategies in negotiations Four Strategies for Breaking the Impasse in Negotiations In Part II, Negotiating and Surviving the Business Deal of a Lifetime: Part II we discussed how a small supplier entering into a business relationship with a much larger customer may be able to find leverage in the relationship to mitigate onerous terms of contract management and better safeguard the supplier’s intellectual property.
In this Part III, we will be looking at Indemnification, Non-solicitation, and Termination provisions and briefly discuss the ways in which the parties may resolve disputes short of having to sever their business relations.
Indemnification is an area where the imbalance in the bargaining power of the parties will produce a standard form agreement containing a unilateral provision in favor of the customer.
And yet the possibilities for a supplier to be sued by a third party due to a customer’s own actions or omissions abound.
For instance, the supplier may be asked by the customer to use materials or software that are later discovered to be in violation of a third party’s intellectual property rights.
The deliverables provided by the supplier could also be used by the customer in violation of the supplier’s instructions, resulting in an injury to a third party, or be used in violation of some regulation or criminal statute.
Thus, it is important that the final agreement contain a fully reciprocal indemnification provision.
In all likelihood, the supplier has invested significant resources in selecting, training, and retaining the best people in its employ.
Therefore, the supplier does not want to see its most qualified employees, collaborators, contractors, and suppliers being recruited by the customer, which could result in a loss of investment and, perhaps, in a loss of business opportunities as the large customer may be tempted to cut out the supplier now that it has captured the supplier’s source of skills and knowledge.
Thus, the agreement should include an express provision prohibiting the customer from soliciting the supplier’s employees, contractors, and subcontractors, and forbidding it from interfering with those relationships for the duration of the agreement and for a period, generally, of two years, thereafter.
A multi-year contract may become untenable for a supplier due, for example, to a lack of cooperation on the part of the customer or the customer’s unreasonable demands.
Such a situation can prompt a supplier to want to breach its agreement with the larger customer even at the risk of being sued or otherwise confronting serious financial consequences. This problem can better be addressed by a reciprocal termination provision that spells out circumstances under which each party can terminate the agreement and how a termination can be implemented to minimize the harm that may be caused to the other party.
Oftentimes, a supply agreement allows the customer to terminate the agreement without cause by paying for products and services already delivered and for work in progress, but many contracts only allow the supplier to terminate “for cause” so the definition of this term can be critical and should be specified in the agreement, or the no-cause termination could be made reciprocal.
A supplier’s general frustration with a business relationship and impression that it is a waste of time and resources or has resulted in the loss of more favorable business opportunities, is not a “good cause” justification for terminating an agreement.
The way in which the parties choose to resolve their disputes may reinforce one party’s dominance over the other in a business relationship.
In the complex and costly world of court proceedings, the better financed party may well have significant advantages in being able to make creative use of the discovery and motion process without concern about associated costs.
Such a situation can prove dangerous to smaller gage suppliers without a legal staff and a small, or even non-existent, legal budget. In fact, the disadvantages to small parties in a litigation can end up discouraging them from bringing even well-founded claims for fear that the costs of prosecuting them may not be worth the effort.
The Take Away:
The bottom line is that, with care, it may be possible for even a small supplier to push back on the one-sidedness of a standard form contract advanced by its much larger customer.
The key is for the supplier to understand its potential leverage in the relationship and to be able to anticipate worst case scenarios and try to address them as part of the contract drafting process.
In sum, while a supplier should rejoice in landing the customer of a life time, it should not ignore its own legal interests and should take stock not only of the relationship’s potential advantages, but also its attendant risks.