The following article originally appeared in the October 2013 edition of The Myers Report newsletter published by the firm.

 

Size Matters When Negotiating Contracts

By Jane M. Myers, Esq.

 

Hallelujah!  You’ve landed a lucrative contract to provide your goods and services to a HUGE company.  This is exactly what you’ve needed to catapult your business from good . . . to really great!  Let the celebrations begin!!

Before you pop the champagne cork and plan your early retirement, be aware that when it comes to contracts, huge companies conduct business differently from smaller ones.

Very differently.

You’re probably used to years of doing business using your “standard contract.”  Your customers probably sign with little or no attention paid to negotiating any changes.

That will not happen when you deal with a huge company.

What can you expect???

#1. Say good-bye to your “Standard Contract” 

  • Huge companies often insist that their “standard contract” be used to document the deal.  Don’t be surprised when their contracts include terms you would never agree to if you weren’t dealing with a huge company.  Expect to see some terms you probably never even thought of.

 #2. Payment Terms           

  • Huge companies often insist that you perform very quickly . . . and then insist on an extended time period in which to pay you.  The payment cycle is usually anywhere from 45-60 days from receipt of your invoice.  Plan your internal budgeting accordingly.
  • Don’t lag behind in your billing. It’s common for huge companies to require that you submit your invoices promptly, usually no later than 90 days after you’ve provided goods or services. Their contracts will also typically state that if you’re late in submitting invoices, you won’t get paid for the work you did.

#3. Termination 

  • Although your contract with the huge company may state it’s for a term of 5 years, read it again, very carefully. Many contracts will include a clause allowing the company to terminate on 30 days’ notice, “for convenience”, that is to say, without any reason.  What this means is that you don’t really have a 5 year contract; what you have is only a 30 day contract.   In case you were planning to offer the company an “incentive” to do business with you by way of discounted pricing, consider the negative impact of that early termination clause.  One way for you to protect your company is to negotiate a provision that says if the huge company terminates the contract early, discounts will not apply, and they’ll be required to refund the difference in price to you. 
  • Some large companies recognize that a “termination for convenience” clause is a lot to ask and will accept limitations on their right to terminate by agreeing to a longer notice provision or by agreeing that they will not be entitled to a refund of any pre-paid fees. For that reason, it’s a good idea for the smaller company to agree to an early termination clause only if the huge company pays more of their fees upfront.

#4. Warranties 

  • If you are a re-seller of another company’s goods, you can expect that the huge company’s contract will contain very extensive warranty and indemnification provisions in case something should go wrong with the product. These clauses should be reviewed carefully and limited to the extent possible.  What the huge company will be looking for is for your company to be responsible should there be something wrong with the product you are re-selling.  To protect your company, you will need to get equivalent warranties from the company you are buying the product from in the first instance.

#5. Your Employees and Office Practices  

  • Depending upon the industry you’re in, it’s not at all uncommon for huge companies to require your employees to submit to a background check. This may include a criminal history check, drug testing and/or fingerprinting.  Background check requirements are often imposed if your employees will have access to the huge company’s data, financial information and/or computer system. 
  • Huge company contracts may include commitments for diversity in your workforce and in your suppliers’ workforces.  They may also seek commitments from you with regard to recycling practices or other practices regarding the environment.  Even though these provisions may appear in a large company’s contract, we’ve found that they will be flexible if it’s not practical for the smaller company to comply with theses demands.

 What’s the bottom line?

Contracts used by very large companies are not always a take-it-or-leave-it proposition. There can be room to negotiate. But even if you can’t get them to budge, it’s important for you to understand the contract terms so you can evaluate whether it makes sense for your business to dive in.

 

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Please note that this article is intended only as a general discussion of issues pertaining to contracts and that it should not be taken as creating an attorney-client relationship or as legal advice with respect to any particular person, business or situation.  Circumstances and the applicable legal principles vary and you should consult with an attorney regarding any questions you may have regarding your specific situation.