How to Read a Vendor Contract Before Signing
When you own a business such as an LLC, you will likely find yourself working with many other businesses to effectively run your own. You could be working with shipping companies, marketing agencies, photographers and technical specialists, among others. Each one of them may have their own vendor contract for you to sign before you officially start working together.
Often filled with a lot of legalese, it can be difficult to understand what’s actually in these contracts. Before you sign, learn how to analyze a vendor contract so that you can protect your business.
Here’s what you need to know.
What’s Included in a Vendor Contract?
A vendor contract can vary depending on the industry and the type of business your vendor runs. However, for the most part, they are all pretty standard in terms of what they are composed of. For instance, you will probably find the following sections on a vendor contract:
- Scope of services or product description
- Relationship of the parties
- Payment terms
- Term and termination
- Intellectual property
- Representation and warranties
- Limitation of liability
How to Analyze a Vendor Contract Agreement
There’s a lot of information on a vendor contract and all of it must be understood. While it’s generally not advised to sign anything without having your attorney look through it, if you choose to do it alone, you MUST understand what you’re reading.
Here are some things you should look for when negotiating contracts with vendors:
1. Get a Second Set of Eyes
When we say “second set of eyes” what we really mean is your attorney. If you have a business and don’t have an attorney, get one — FAST! Having an attorney look over the vendor contract can save you and your business a lot of money down the road.
Business can be ruthless and you want to make sure everything on the contract is laid out correctly and there aren’t any loose ends that can come back to hurt you. The expense invested in getting your attorney to look over everything is well worth it.
2. Get Everything in Writing
A vendor contract should lay out the obligations and responsibilities of all parties involved. Leave no rock unturned so that everything is in writing and binding from a legal standpoint.
The vendor contract should be a complete outline that covers all aspects of the relationship between parties. Most of this should be within the categories listed above but if you see something missing from the contract, negotiate it being added.
3. Review Dates and Terms of the Agreement
Consider this a “what if.” For instance, if deliverables aren’t shipped in a timely manner, then what? If you don’t pay on time, then what? Anything you can think of happening should be laid out in the terms of the vendor contract.
Also, check all the dates shown. Are they trying to lock you into a long-term contract and you simply want to work off of a month-to-month basis? If so, terms and dates need to be changed and agreed upon. And if you don’t agree with certain terms or have questions, ASK.
4. Understand Terms and Their Definitions
Speaking of terms, before signing you need to be certain you understand their terms and what the definitions are for those terms. What you call one thing may mean something different to them and vice versa. Uncertainty is never a good thing after you’ve signed on the dotted line. Never assume anything.
If you need clarification on something, don’t be afraid to ask for them to explain it. Misunderstandings can cause serious tension and could potentially cause issues (from a legality standpoint) that could have been avoided if you fully understood the terms and definitions of the vendor contract.
5. Use Your Business Name
To protect yourself, all vendor contracts should use your business name as the “Company” and not your actual name. The same goes for the company you are looking to enter the contract with.
If your name is used, you could be on the hook for anything that breaks the terms of the contract. The only place you should see your name is at the signature where you are signing the vendor contract on behalf of the company.
6. Protect Your Business
At the end of the day, you need to protect yourself, as well as your business. There is generally a section found on many contracts called the “hold harmless and indemnification provision.” Read this section very carefully.
This section lays out that if you agree, you do not hold the vendor responsible for any issues, problems or liabilities that may arise from doing business. This could put you in a bad spot if their product isn’t what they say it is and a customer files a lawsuit against you. You waived the right to hold them responsible for such liabilities and those costs and expenses to fight the lawsuit will be yours, along with the damages from the plaintiff.
If it makes sense to agree to the hold harmless and indemnification provisions, be sure that section you negotiate the same for your business.
Getting Help with Vendor Contracts
While you can agree to a vendor contract on your own, it isn’t advised. It is absolutely critical that you have an attorney who specializes in such areas view the vendor contract before you sign it. This is to ensure you are protected and fully understand everything outlined in the contract. Remember, after you sign the contract, you are bound to it.
For additional help, you can always contact us at Incfile. We’ve helped thousands of business owners just like you with their legal needs, and we are excited to talk with you! We want to assist you with any contracts that become necessary during the evolution of your company. As your business expands and grows, we are here for you every step of the way!