Whenever a company goes into business with a third party, it's extremely important to screen the contract to prevent unnecessary risks and exposure that may be hidden in the fine print.
Ultimately, almost every contract negotiation (especially in the software industry) will come down to a handful of things, including price, data protection, limits on liability, scope, and indemnity. When you have the tools to monitor and identify these points early in the process, you can not only decrease negotiation time, but also protect yourself from unfair contracts.
We’re here to make the process easier by equipping you with best practices so you can identify an unfavorable contract right off the bat. Keep reading to learn about the various elements of third-party contracts and how to spot an unfavorable contract.
Key Frequently Negotiated Terms to Identify in Third-Party Contracts
Unfair third-party contracts will result in friction and disputes between all the parties involved. In an ideal world, all contracts would be balanced and acceptable by both parties with no negotiation.
However, the reality is that some standard software contracts offer starting positions so egregiously unreasonable and out-of-market that they will likely be negotiated out of the final contract. This back-and-forth erodes trust in the commercial relationship, and delays revenue and the service unnecessarily.
To learn more, let’s break down some of the commonly negotiated terms listed above.
Before signing a contract, you need to negotiate the right prices with suppliers of the products or services. Negotiating prices doesn't mean that you get what you want or at the cheapest prices — negotiating means the prices match the market price.
When you notice a price above market value based on the services and/or product provided, it’s a clear sign of a vendor-favorable contract.
Data protection is a growing concern among businesses and consumers alike. You need to know how a partner will collect your personal data, who has access to the information, how long they can hold it, and what they can do with it. Entering into a third-party contract without clearly defined data protection stipulations could be detrimental to your business.
For instance, you could be content with a provider using your data for purposes beyond the rendering of the service, such as marketing to you. However, broad usage rights to your data (i.e. allowing the vendor to make it available to third parties) could be a deal-breaker.
According to the Word Commerce & Contracting report, limitation of liability is the single most negotiated contract term. As you look to limit the amount of liability for potential damages incurred over the lifespan of a contract, these clauses are crucial to align on.
A vendor disclaiming all liability should be a non-starter for any customer. This makes it nearly impossible for a customer to recover from a vendor, no matter what goes wrong — even if the vendor violates other provisions of the contract. 14% of standard vendor terms try to push this position and will likely be negotiated out.
Not surprisingly, indemnification ranked third in WCC’s report for most negotiated contract terms, only behind limits on liability and price. In addition to limiting your liability if something goes wrong within a contract, it’s also prudent to determine which party will bear the cost of defending legal claims through an indemnity clause.
For example, it’s only fair and expected that a vendor should indemnify a customer of software they bought from them if the use of such software infringes on third-party intellectual property. However, nearly 6% of standard software agreements do not have this indemnity.
The scope of a contract refers to all the expected services or products agreed upon through a contract that match your needs. A clearly defined scope will help you understand what you are paying for. If all the parties share all the details openly, there will be confidence among each one of you.
Determine Your Best Option When Reviewing Third-Party Contracts
Proper contract screening demands extensive human hours and, frankly, a better approach. While your legal team can handle this, they may be overwhelmed with the extra work.
You can safeguard your reputation and minimize risks through:
Outsourcing the whole third-party review process to another consultant
Hire a local firm on a retainer basis to assess the third-party contract
Adopting a contract management platform that uses artificial intelligence to analyze contracts
While the first two options are viable, they aren’t the best solution in 2022. Contract review software can handle all of the manual tasks that consultants and in-house teams would otherwise spend hours on end completing.
Improve Your Third-Party Contract Review
PwC reports that third-party contracts can lead to substantial financial losses, reputational damage, and unexpected liability if not reviewed correctly.