contracts

Preventive Law Step #1: Proactive Contract Development

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“Step one! We can have lots of fun.”
- Danny Wood, NKOTB

Okay, so negotiating and developing contracts may seem tedious for business owners. However, being proactive about your contracting process—the first pillar of Preventive Law—can ensure that you are not assuming unnecessary liabilities in the business relationship, and that prospective business partners are in fact qualified to do business with you.

A Cautionary Tale

We were engaged by a national product manufacturer with numerous vendors and materials suppliers. Over the course of many years, contracting had been delegated to the point where at least twenty managers across several departments were responsible for reviewing and signing contracts. There was no centralized process for vetting potential business partners to make sure there were no red flags. There were also no standard “pro-company” form contracts in place, outside of basic Non-Disclosure Agreements. This meant the company had been simply reacting to one-sided contracts provided by business partners, many of which were in complex transactional settings.

Long story short, these managers were signing contracts with multiple business partners, across multiple business functions, without fully understanding who they were contracting with or the liabilities and obligations being undertaken. They did not understand, and therefore could not negotiate, many of the legalese pitfalls contained in the one-sided agreements. And they definitely did not like being pulled away from production schedules to tend to eye-glazing tasks like this.

Ultimately, this led to the following problems for the company:

  • Assuming onerous obligations such as implementing impossible or impractical compliance programs, aggressive payment and credit-worthiness requirements, unreasonable inspection and acceptance periods, and overbroad and one-sided indemnification language;

  • Vague and one-sided contract termination provisions, giving business partners broad rights to terminate contracts for any reason and at any time without consequence;

  • Overbroad and ambiguous service provisions, resulting in projects continuing for much longer than what was initially anticipated (or desired);

  • Limited recoveries in the event of a breach of contract, including the inability to recover attorney’s fees when litigation became necessary as well as being forced to litigate in unfavorable venues; and

  • Business partners with significant safety histories and lack of appropriate insurance being given access to company premises to perform maintenance and repairs on heavy industrial equipment.

On more than one occasion, key suppliers had availed themselves of their one-sided contract provisions, resulting in substantial business interruption to the company. It was clear the company’s executive management did not understand the benefits of being proactive with its contract negotiation and development practices, and continued to find themselves having to react to problems that could have been avoided up front.

The Fix

We worked with the company to become proactive in their contracting processes, rather than reactive, by applying Preventive Law methodologies. We started by dramatically minimizing the number of managers and departments involved. The procurement department was a natural fit to centralize this function, and its new director was more than happy to have more control over the contracting process.

We then worked with the director to develop proposed pre-qualification standards given different business settings, including vendor and supplier relationships. For example, in a vendor/supplier setting, the prospective business partner would have to provide the following documentation before being considered:

  • Compliance with appropriate safety incident standards, including Experience Modification Rates and OSHA incidence rates;

  • References from previous customers regarding performance and safety;

  • Copies of drug/alcohol, jobsite safety and accountability, accident reporting, emergency response, and project inspection policies in place governing vendor/supplier projects and employees while on-site; and

  • Copies of certificates of insurance on multiple lines of coverage, with appropriate additional insured endorsements in place that adequately protected the company.

We also developed a set of “pro-company” contracts which could be tailored across multiple business functions and deployed proactively, instead of the old practice of simply responding to the one-sided vendor/supplier forms received. Needless to say, our forms were also one-sided . . . but this time in the company’s favor! Of course, the process we developed was flexible enough to accommodate having to react to the other side’s forms when necessary.

We accepted the reality that some business partners would demand their forms be used. That was okay, and we did not want to immediately blow up relationships over initial stubbornness. Instead, if this occurred, the director would simply request a copy of the contract in Word or other editable format. Reasonable business partners should expect that you will want a copy to redline if they demand use of their one-sided form. And if they refuse to do so, this should be seen as a red flag warranting consideration of other business partners (hint, if they are going to be this difficult in these initial negotiation stages, just imagine how problematic they’ll become if there are any issues with regard to contract performance!).

Game Time

After developing the standard process and forms, we worked with the director to obtain buy-in from executive management. Given the contracting problems the company had faced over a number of years, it was an easy sell. As such, we began implementing the process to ensure an enterprise-wide understanding and appreciation of what we were doing, as well as why we were doing it (all part of the Preventive Law protocol!).

Our Preventive Law team continues to be involved, particularly when:

  • The director or other side has questions about whether certain pre-qualification requirements can be limited or waived under a given set of circumstances;

  • We have deployed our own form contract, but the other side responds with its own redlines requiring review and evaluation;

  • The other side demands its own one-sided form be utilized, requiring redlines on our side to balance things out; and

  • Assistance is needed to develop negotiation strategies in order to arrive at acceptable contract language after the parties have dug in their respective feet after several rounds of back-and-forth redlining.

Following implementation, the company noticed immediate results:

  • Managers are not burdened with contract review tasks and are able to focus energy on managing their teams and making good products.

  • There is an enterprise-wide consistency around the contracting process.

  • Contracts with business partners are more balanced between the parties, and often even skewed in favor of the company when the other side signs the pro-company form without negotiating it (hint, our client is not the only one in need of Preventive Law assistance!).

  • Since the contract language has been discussed and negotiated in advance, issues with vague, ambiguous and overbroad provisions are minimized.

  • The company is able to perform effective gate-keeping early on to determine which business partners should be considered long-term fits for sustainable success, and which ones should not.

  • The contracting process finally supports the making and selling of product, instead of hindering it.

Contract negotiation and development may not be the sexiest part of running a business, but it is a critical component. As one of the nation’s only practices focused exclusively on Preventive Law, KEEFER is skilled at deploying appropriate strategies that can help you anticipate and respond to risks with prospective business partners, leveling the playing field in the process.

KEEFER is your ounce of prevention. Contact us to learn more.



Your Contracts, Your Cyber Insurance and You

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 “Don’t talk to me about contracts, Wonka, I use them myself.”
- “Square Deal” Sam Beauregarde

If you are a product brand, you’ve probably been required to enter into many agreements with everyone from manufacturers to distributors, payment processors to financial institutions and vendors of all shapes and sizes. Hopefully you’ve had the opportunity to review and understand these contracts, as landmines may exist within that labyrinth of legalese mumbo-jumbo which can affect the insurance you have purchased for your business. In this article, we’ll look at a few of these, particularly in the context of your cyber insurance policy.

BLT, Hold the Mayo

First, these contracts may require that you add another business to your insurance policy, otherwise known as an “additional insured.” This means that your new partner is able to enjoy coverage under your insurance policy, and at your cost (hint, insurers typically require additional premium for adding insureds to a policy).

Second, these contracts may also require that you hold certain minimum levels, or limits, of coverage. Beware these contracts may have varying minimum limits, which could affect the levels of insurance you purchase in order to stay compliant across all contracts.

Third, your contracts may also require different types of coverage. For example, one vendor may require that you carry commercial general liability and worker’s compensation insurance. Another may require you to carry cyber insurance. Yet another may require commercial auto liability coverage. Make sure you have all appropriate lines of coverage in place in order to stay compliant with your business partners.

Something About Making an Ass of U and Me . . .

In addition to adding businesses to your policy, as well as keeping minimum levels and types of coverage, these agreements may also require you to assume certain liabilities of your new business partners. This is especially true if you sell products online and will be taking confidential customer data and payment card information which could be stolen by bad guys.

To the extent your business partners could be blamed for such an event by their customers, clients or investigators, they may incorporate “tender of defense and indemnification” provisions into the contracts, effectively passing this responsibility to you. More specifically, if they are sued by their customers or clients or are investigated as a result of a cyberattack or data breach involving your system, they may be able to contractually force you to pay their costs of defense such as lawyer fees, settlements and judgments.

But what does this mean, and how does it affect you? Hopefully you have a cyber insurance program in place with first- and third-party coverage for cyberattacks or data breaches. As we discussed back in December, first-party cyber insurance can help with costs for recovering lost or damaged data, notifying customers, credit monitoring services and public relations, as well as lost business income from network interruption. Third-party cyber insurance covers legal defense costs in the event of lawsuits against your company for data breach, settlements and judgments, and regulatory fines and penalties. Things can change, however, if those legal defense costs come from your business partner tendering defense or requesting indemnification under the contract.

Cyber insurance policies generally exclude from coverage (i.e., insurers will not pay) liabilities assumed by contract, including those contracts you enter into with vendors and other business partners. Let’s say your company is the victim of cyberattack or data breach occurs and numerous records are compromised. A series of claims, lawsuits and investigations ensues. Several of your vendors wind up being sued and subsequently tender their defense and investigation costs to you under the respective contracts.

Under this scenario, you should be covered to the extent you undertake crisis response measures to minimize reputational harm to you and your vendors as a result of the cyber event. You should also be covered for lawsuits and investigations aimed directly at you. However, you may not be covered to the extent of your vendors’ tender of defense and indemnification costs, since those are assumed liabilities which are excluded under your cyber policy.

Make sure you review your contracts to determine what cyber-related liabilities you are assuming. To the extent possible, negotiate those contract provisions in advance with your business partners. Of course, success on this front may be dependent on bargaining leverage given the relative size of your company compared to your partner. In the alternative, consider having your insurance carrier create carve-outs for these contracts. There may be some additional premium paid, as the insurer will not want to undertake those risks without some cost for doing so. Then take a look at the adequacy of your limits and sub-limits of your full cyber coverage program, given the potentially catastrophic consequences of a cyber event.

Long story short, read and understand the agreements with your business partners, understand the liabilities you are assuming in those contracts, and then assess and react to the effects of those liabilities on your insurance program. As always, we're here to help