Contract Negotiations: Breaches & Termination
One frequent problem we encounter is airtight vendor contracts that cannot be terminated, even when there is a substantial pattern of breaches. Breaches in this context is referring to failure to perform (not security). Let’s review a few examples of what to watch out for.
When evaluating a vendor contract, it is important to look at the conditions around service delivery, service legal agreements (SLAs), and how a failure (i.e. breach) is handled. When it comes to a breach of the contract, there are two common options, a financial credit, or the ability to terminate the contract early. Both options will typically have restrictions and hoops to jump through. While a financial credit can be nice to have, you should always require the ability to terminate early for both repeatedly poor performance, and in the case of gross negligence/lack of capability.
Termination for recurring poor performance
Say you hire an IT company on a three year contract. Their contract has a provision that if they are unable to meet their SLAs by fixing issues fast enough, you can give them a notice of breach, and they have 30 days to cure (i.e. step up their performance). Sounds great right? Well now they can fall into a cycle of 30 days of bad performance, followed by 30 days of good performance…and repeat this up to 18 times with zero consequences. An example of a change to that type of contract we’d ask for is if there are 2 breach notices in a 12 month period, the contract can be terminated immediately.
Gross negligence / lack of capability
Have you ever signed a vendor contract, only to realize that some of their people were unqualified to be working on your IT? A good contract should specify that only qualified staff will be used, to keep you from overpaying for underqualified people who may take longer to complete a task, and to make sure things are done right. Speaking of…
Every contract should have language around outages/downtime. And not just IT contracts. Movers break your conference room table? Now that conference room is out of commission for a few days while you buy a new one. Copier is down for a week while you wait on parts? There should be a built in service credit for downtime. In an IT contract, the most important part in this regard is data loss. There should be robust language around what happens in the event that data is lost or inaccessible for a long period of time - failed migrations, backup failures, etc.
Looking for a partner who has negotiated hundreds of vendor contracts? CGP is your easy button, vendor management & negotiation is handled by both our IT and Legal Operations practice groups!