Key Areas of Concern When Dealing with a New Vendor

September 30th, 2017

Whether you are a well-established company or just starting out, outsourcing certain services may be in your best interest; big box retailers, for example, need not concern themselves over the creation of a customer-facing app to sell their products and all of the intricacies that accompany the technological world.  In order to create said app, or do virtually any other service for that matter, businesses often hire other companies better suited to do so, whose job it is to specialize in such matters.  When engaging in these outside vendor hiring processes, it is important to take into consideration a multitude of different factors, such as reliability, insurance, assurances, and termination rights.

A vendor’s reliability is perhaps the most important factor to take into consideration when first addressing whether to do business with them.  Make sure you conduct due diligence on the company and assess their past record of entering into contracts such as yours.  Have former clients of customers favorably or unfavorably reviewed them?  Are they rated by the Better Business Bureau?  Take a look at such testimonials and ratings in order to gauge the company’s reputation and overall reliability going forward.

Another way to protect your business from the potential harm of outside vendors is to require them to obtain multiple kinds of insurance coverage.  In particular, cyber insurance can be especially helpful if the vendor in question is to have access to private electronic data, such as the personal information of customers or employees.  Cyber insurance typically covers such things as computer and data loss recovery, credit monitoring, notification expense, and other related forms of liability.  Additionally, businesses oftentimes require certain amounts and other types of insurance coverage, even conditioning their vendor contracts on being named as an additional insured party in those policies.  Paying attention to how such requirements are drafted within the contract are just as important as requiring them in the first place.

Third party service providers, perhaps now more than ever, are being required to provide a multitude of assurances to their clients, promising such things as confidentiality, risk management, compliance with expectations, and integrity.  Companies are more frequently appointing people within their organization to attend to the management of the quality of service rendered.  It is important to lay out your expectations and required assurances at the outset of any vendor-vendee relationship, as it provides a permissible roadmap of situations to come, specifying what is and is not acceptable practice.  Contractual requirements and carefully laid out details help manage expectations. Details are always helpful because the parties can help ensure that everyone understands the “rules” and alleviate concern with new relationships on how the other party may act.

Likewise, and relatedly, the termination rights of parties are also important to consider.  As a business, it is important that you have the legal right to move on from a contract that is, for a valid reason, unfavorable to you or later on becomes unfavorable to you.  Try to anticipate potential issues that may arise, such as a material breach by either party, and provide for that in contract form.  Businesses may even wish to discuss the termination of a contract based purely on inconvenience, with a potential expense being incurred on the terminating party.  In essence, you want to make sure that you are not stuck in a bad situation by predicting future problems, and figuring out a way to settle them in a way both parties can agree to, in contract form, before they ever arise.  Likewise the vendor may require fallbacks to protect their interests. Such provisions can be negotiated by both parties to achieve an agreement which works for everyone involved.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.