BUSINESS ESSENTIALS: THE PROCUREMENT AGREEMENT

By James Forrest

From the time we launched our firm’s blog, we have remained consistent in advising each new client related to having a proper set of contract templates in place for every third party that their business may have a relationship with (customers, vendors, employees, etc.).  Having the right set of contract templates in place to govern different relationships is absolutely an essential component of basic risk management.  The cost of developing such templates can be fairly minimal and can mitigate against company ending type liabilities.

In this space, we’ve reviewed a number of agreements, including, master services agreements (MSAs), statements of work (SOWs), agent/re-seller agreements, non-disclosure agreements, and employment agreements.  Today, we’ll address another common contract, the procurement agreement.

Procurement agreements guide relationships with vendors that provide companies with critical products and services.  These products and services can be items as simple as bulk office supplies or as complex as enterprise-wide technology and manufacturing platforms.  As companies scale up their business and development and reach maturity and sustainability, procurement contracts become more and more critical.  Business attorneys can tailor procurement agreements to the simplicity or complexity of the relationship and/or business at hand.  In general, these agreements neatly divide into just a few summary sections:  product or service warranties, pricing, confidentiality, indemnity and term/termination.

Probably the most important section of a procurement agreement addresses product or service warranties and pricing.   Your company, as the consumer, should require robust warranties from the vendor, giving your company comfort that the product or service will meet the agreed upon specifications or expectations.  In addition, this section will address pricing (i.e., the amount, the timing of payments (i.e., 50% down and 50% at delivery), minimum requirements, volume discounts, etc.).

Since vendors often will become privy to private, sensitive information of the companies they serve, it’s necessary that proper procurement agreements have key provisions to define confidential information and protect the purchasing company from unauthorized use and disclosure of its information.  After careful outlining of the types of information to be deemed confidential within the relationship, agreements should limit the use of the information to purposes solely related to the delivery of products and services under the procurement agreement (and for no other purpose).  Lastly, the vendor should be prohibited from disclosing the confidential information to any third parties (except perhaps for its key advisors that are limited by their own confidentiality obligations that are as restrictive as those set forth in the procurement agreement).

With regard to indemnification, these provisions give proactive attention to potential liabilities.  Lawyers should clearly spell out the situations in which a vendor must hold the purchasing company harmless and without liability.  Examples of these types of situations include the delivery of products and services that fail to meet the standards expectations of the company, the negligence of the vendor, as well as liabilities arising from products that infringe upon the intellectual property of third parties.

In addition, a good vendor agreement will clearly define the term or length of the agreement, as well as the reasons that either party may be able to terminate early.  Termination options are generally divided into 2 categories:  “for convenience” (i.e., for any or no reason), and “for cause” termination.  The rights and responsibilities of the parties under these scenarios differ and should be clearly identified.