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The typical vendor agreement is often one-sided and fundamentally unfair. I don’t sign them and neither should you.
I don’t mean to imply all agreements should be avoided. We use them in our coaching and digital marketing businesses. We strive to make them fair to both parties and easy to understand. There are many situations where written agreements are unavoidable, like real estate transactions.
The problem
Vendors often use a “standard” agreement or one drafted by their attorney. They are intended to protect the entity that paid for the drafting. They make no pretense about being fair. Unfortunately, many people will just sign these agreements, without understanding the consequences.
Unreasonable clauses
There are a number of unreasonable clauses in “standard” agreements. This is just a sample.
Indemnification
These clauses shift the risk from the vendor to you. You agree to hold them “harmless” from various types of liability. This can include liability for their attorney’s fees.
I never agree to these clauses. If I do something wrong and cause harm to the other party, prevailing law gives them a claim against me. Under the American Rule, each party pays their own attorney’s fees.
Indemnity clauses are inherently unreasonable and often unnecessary.
Paying attorney’s fees to the prevailing party
For the same reason, I never agree to pay the other party’s attorney’s fees. Not only is that obligation inconsistent with the American Rule, I have no control over those fees. If I have a legitimate claim, I don’t want to be deterred in pursuing it by the possibility of having to pay massive attorney’s fees incurred by the other party.
Dispute resolution clauses
I frequently see agreements that provide for all claims to be brought in the courts located in the city and state where the vendor resides. Why is that fair?
Personally, I never want to see the inside of a courtroom again as a litigant (I was previously a practicing attorney). Instead, when I must sign an agreement, I insist on a “mediation/arbitration clause.” Here is one I recently drafted:
MEDIATION/ARBITRATION/LIMITATION OF LIABILITY.
In the event of any dispute arising out of or relating in any way to this agreement, including the breach thereof, the parties agree to first submit such dispute to mediation. The mediator shall be designated by the American Arbitration Association. The location of the mediation will be -----. If mediation is not successful, the parties agree to submit such dispute to arbitration, before one arbitrator, pursuant to the Commercial Rules of the American Arbitration Association. The arbitration shall take place in ------. The arbitrator shall apply ---- law. The arbitrator shall have the power, upon application of any party, to make all appropriate orders for production of documents by any party. There shall be no discovery depositions.
Any claim under this agreement shall be time-barred unless the claiming party commences arbitration with respect to such claim within one year after the basis for such claim became known or should have become known to the claiming party.
The arbitrator shall not have the power to alter the terms of this agreement or to award any non-monetary or equitable relief, consequential damages, punitive damages or attorneys’ fees to the prevailing party or to award any amount in excess of $---- against either party. All fees, costs and expenses of the arbitrator, and of the American Arbitration association, shall be borne by the parties equally.
The arbitrator shall not set forth the reasoning for his or her decision and shall make reasonable efforts to reduce costs and fees of the arbitration.
The benefits of this clause are multi-fold.
By requiring mediation before instituting a formal proceeding, you increase the likelihood the dispute will resolve early and at a fraction of the cost of a formal proceeding. There is no valid reason why anyone should refuse to enter into an agreement requiring mediation. The mediator has no power to impose an agreement on the parties.
If someone tells you they won’t agree to mediation, you should reconsider doing business with them.
By requiring arbitration (which has pros and cons), you may reduce the cost of a court proceeding, especially one involving a jury trial. Even if you can’t get agreement to arbitration, both parties should still be willing to engage in mediation.
By limiting the time when an action can be brought, you reduce the possibility of a dispute.
By specifying one arbitrator and limiting the amount of the award (where practical), you reduce uncertainty.
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You can provide a location which is not your home state or the home state of the other party, or stipulate that the parties will attempt to agree on a location and, failing agreement, the American Arbitration Association may select one.
If you can’t get agreement on arbitration, you still have the ability to designate which courts will have jurisdiction over a litigated dispute.
My experience
I have found many vendors react favorably when I tell them I won’t sign their standard agreement. Instead, I propose an exchange of e-mails limited to the scope of what their services will entail, the fee to be paid and when the payments will be made. Often, these are the only issues they care about.
If they insist on an agreement, I send them my proposed clauses, together with a list of objections to their agreement.
For all legal issues, you should rely on your legal counsel. My advice is limited to cautioning you against casually signing agreements when you don’t understand what’s in them.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives
