1. CONTRACT REVIEWS How To Protect Your Company From The Unexpected
Susan Kohlhausen
Director, Legal Affairs
Coastal Federal Credit Union

2. Vendor On-Boarding Process
RFP (Request for Proposal)
Due Diligence/Risk Assessment
Vendor Selection
Contract Review
Contract Negotiation
Contract Execution
Followed by:
Ongoing Vendor Administration/Oversight
Contract Review process is just a fraction of the entire vendor on-boarding process.

3. Vendor On-Boarding Process
RFP (Request for Proposal)
Due Diligence/Risk Assessment
Vendor Selection
Contract Review
Contract Negotiation
Contract Execution
Followed by:
Ongoing Vendor Administration/Oversight
The Due Diligence (make the vendor show all their cards)/Risk Assessment (cost/benefit analysis) is critical so that you identify the risks and benefits of each possible vendor to allow you to select the vendor that is best aligned with your company’s mission, goals and policies.
EXAMPLE: Coastal spent more than 6 months evaluating various vendor software to replace a major financial system. Unfortunately, Coastal was unable to contract with its first choice because the vendor’s financial health did not meet Coastal’s standards.

4. Vendor On-Boarding Process
Does your company have a Vendor Selection Policy?
Coastal requires (in part) :
Management will obtain at least two competitive bids for each Level 1-Critical and Level 2-Significant publicly held and privately held vendors at the time of initial review and selection to ensure that pricing is competitive and reasonable and commensurate with their demonstrated ability to meet Coastal's needs. While cost is one of many factors evaluated in vendor selection, it is expected that vendors selected offer fair financial value to Coastal.
The Due Diligence (make the vendor show all their cards)/Risk Assessment (cost/benefit analysis) is critical so that you identify the risks and benefits of each possible vendor to allow you to select the vendor that is best aligned with your company’s mission, goals and policies.
EXAMPLE: Coastal spent more than 6 months evaluating various vendor software to replace a major financial system. Unfortunately, Coastal was unable to contract with its first choice because the vendor’s financial health did not meet Coastal’s standards.

5. What Is A Contract?
“A promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” - Restatement (Second) of Contracts = LEGALLY ENFORCEABLE AGREEMENT

6. Purpose Of Written Contracts
Performance
Documents expectations and obligations of the parties and products/services to be provided
Protection
Provides remedies for the unexpected (i.e. breach)
Why are contracts necessary? (i.e. no more “handshake” deals)
A. Act as a formal “roadmap to the relationship”
B. Contract survives the individuals negotiating the deal

8. Performance Clauses Scope Performance/Service Levels Reports
Subcontracting/Third Parties
Duration
Fees

9. Protection Clauses Assignment Right to Audit Compliance
Intellectual Property Rights
Confidentiality and Security
Business Continuity/Contingency
Insurance

10. Protection Clauses (continued)
Warranties
Liability/Damages
Indemnification
Dispute Resolution
Modification
Termination

11. Performance: Scope
Detailed description of product/services to be provided.
Specific obligations of all parties (including any subcontractors/third parties)

12. Performance: Service Levels (SLAs)
Plain language documenting specific minimum service levels, standard maintenance periods, response times for product (usually software) or service issues or failures, additional support (help desk) needs and measurement periods.
Usually included as an addendum/attachment to contract

13. Performance: Service Levels (SLAs)
Examples include:
Product/service will be fully functional not less than 98% per day/month/quarter excluding standard maintenance periods
Vendor shall commence review/analysis of all Severity 1 (non-function) issues within 4 hours of company’s written/verbal notification.
Vendor will achieve and maintain a customer satisfaction rating of not less than 75% each calendar quarter

14. Performance: Service Levels (SLAs)
Recommend use of industry standards to develop service levels
Maintenance periods should be narrow and during customer’s off-peak hours
Include specific language addressing notification requirements (specific personnel/communication channel ( /telephone)
Often requires vendor to self report issues/failures (Audit may be beneficial)
Damages for failure to meet SLAs usually in form of a % credit of fees with right to terminate for repeated failures within a certain measurement period or extreme failure to perform.
SLA terms are usually an exception/ stand-alone from general breach/right to cure language

15. Performance: Reports Outline all reports needed from vendor.
Include type and frequency of reports needed (performance, security, business continuity, etc.) and specific information to be included.
Note any custom or external reports and related fees.
Watch for upcharges. Recommend including “pass through cost” language.

16. Performance: Subcontractors
Contract should specify whether parties are permitted to use subcontractors and the specific obligations they will perform.
Who has right to approve, remove or replace contractor?
Who is liable for subcontractor? Minimum qualification/background requirements?
Be sure that subcontractor use language does not conflict with the assignment clause.

17. Performance: Duration
Length of contract should be commiserate with the type of product/service being provided and within industry standards.
Be aware of auto-renewal (evergreen) clauses and termination notification requirements
Build in enough time between notice of termination and actual termination to find replacement vendor (if needed).
Include minimum notification period for any fee increases to allow time to find and contract with new (less costly) vendor prior to termination notification requirements.
EXAMPLE: Vendor should provide notice of fee increase not less than 6 months prior to end of term where company is required to give 90 days notice of termination.

18. Performance: Fees
How calculated? (base payments, recurring services, activity charges, etc.)
Cost for product maintenance/upgrades
Responsibility for state and federal taxes
Right to dispute fees without penalty
Late payment penalties should be reasonable

19. Performance: Fees Watch out for language:
permitting vendor or party the right to deduct from company accounts without adequate controls.
permitting vendor the right to deduct fees/penalties from any income it collects on behalf of company
requiring payment while in a force majeure (emergency) situation.

20. Protection: Assignment
Which parties (if any) have the right to delegate (in whole or part) its rights and obligations to a third party.
Prohibit assignment without consent.
Exception: May see language permitting assignment in case of purchase or merger or to an affiliate.
Watch: Without limiting language, possible to assign to a vendor that failed company due diligence!

21. Protection: Right to Audit
Allows party (or third party agents) to audit company information/records to test internal controls or prove compliance with contract terms.
Watch for:
Overly broad property/information access language. Recommend including language limiting number of audits in a specific period without cause (i.e. not more than once annually), audit schedule (i.e. during company’s normal business hours) and scope of audit.
Who pays for cost of audit? (Under-reporting penalties)

22. Protection: Compliance
All parties should agree to comply with applicable laws (federal, state and local) and related guidance.
Be sure to include language that vendor will provide assistance/access as needed to company’s government regulators.

23. Protection: Intellectual Property Rights
Ownership, rights to and permissible use of company data, equipment, software
Property rights should generally remain with the property owner or licensor except in cases where there is work product specifically developed for another party
Includes right to name, logos, trademarks, copyrights, domains, etc.
Ensure contract grants license to use, sublicense, etc. all products/services as needed
PATENT TROLLS!

24. Protection: Confidentiality & Security
Prohibit parties (and its subcontractors and agents) from disclosing or using certain company information except as necessary to perform pursuant to the contract.
Standard confidentiality exceptions:
Previously known/becomes publicly available without breach
Developed independently
Provided by a third party without restriction

25. Protection: Confidentiality & Security
WATCH!
Disclosure for court order or authorized government request should NOT be a confidentiality exception.
To remedy, include language where notification is required except where prohibited by law or court order

26. Protection: Confidentiality & Security
Return or destroy confidential information upon termination of contract or other designated time.
Adequate security within industry standards and not less than used to protect own confidential information
Require prompt notification and full disclosure of security breaches of confidential information or that will affect company or its customers
Specify necessary corrective action (Damages: credit monitoring?)

27. Protection: Business Continuity
Back-up and protection plan in case of disaster or other extraordinary event that prevents use of primary/standard systems.
Vendor should provide copy of plan. Updated and tested regularly. Provide results.
Include business recovery time frames and other metrics as needed
Consider interdependencies among all service providers
Watch! Overly broad “force majeure” clauses
Any actions “beyond reasonable control”

28. Protection: Insurance
Consider types and amounts (liability, E&O, crime/fidelity, worker’s compensation). Minimums?
Additional insured or other endorsement needed?
Include language requiring notification of cancellation or material changes in coverage

29. Protection: Warranties
May include legal status of parties, authority to enter into agreement
Seek warranty of non-infringement for all intellectual property used or subject to the contract
WATCH! Recommend striking any disclaimer of implied warranties (workmanlike quality, merchantability and fitness for a particular purpose, title)

30. Protection: Liability/Damages
Generally limited to fixed amount, a service credit or a multiple of total amount paid for services under agreement or other identified term (# of months, quarter, etc.)
Lost data: limited to correction/reconstruction
Exclusion of indirect/secondary damages (consequential, special, incidental)
Assess whether damage limitation is commiserate with amount of loss (current and future) as a result of breach of contract.
RECOMMEND: Make any limits reciprocal

31. Protection: Liability/Damages
Be ready to negotiate these common exceptions/carve-outs to liability protections:
Gross vs ordinary negligence
Breach of confidentiality/security
Breach of warranties/representations
Violation of law
Death, bodily injury or physical damage to tangible personal property

32. Protection: Indemnification
Be sure “hold harmless from liability” language is broad enough. Should include:
arising from breach of contract;
negligence of the other party or its agents; and
intellectual property infringement (if applicable).
Include “defend” language? If so, include language for right to hire own attorney. If not, include language that vendor will pay all (reasonable) attorney fees and associated costs.
Limit to third party claims

33. Protection: Dispute Resolution
Mediation/arbitration clauses
Be aware of who decision makers are and how selected
Jurisdiction and venue are important
Ensure continuation of products/services during any dispute period
Losing party responsible for costs/fees
Reserve right to seek injunctive relief

34. Protection: Modification
All contract modifications should be in writing and executed by all parties.
Be very cautious of carve-outs giving vendor the unilateral right to increase fees or change terms of services or even terminate agreement.

35. Protection: Termination
For convenience: Rare
Usually seen low dollar contracts where there is no minimum/base fees.
For cause.
Right to cure?
Time period and measurement?
Does it conflict with SLA measurements and response times?

36. Additional Considerations
AVOID or HANDLE WITH EXTREME CAUTION:
multi-party agreements;
“In it’s sole discretion” language
 CAPITALIZED TERMS should be defined!
Include a MERGER CLAUSE. Contract language that states it to be the complete and final agreement between the parties.
Be sure to include language “attaching and incorporating” attachments, exhibits, addendums and amendments (including RFP responses) into agreement
 MISSING TERMS: Be aware of what ISN’T in the contract.
Use a CHECKLIST
ATTORNEYS: Unless they specialize in contracts, be cautious.
 THROW AWAY TERMS: Be ready to give up some during negotiations

37. SAMPLE CHECKLIST  

38. Questions/Comments? Susan Kohlhausen (919) 420-8268
THANK YOU!
Questions/Comments?
Susan Kohlhausen
(919)