Wednesday, November 2, 2011

Ten Legal Mistakes Made By Start Ups: Vendor/Customer Agreements (#7)

Continuing with the discussion of ten common legal mistakes made by start-ups, mistake number seven focuses on the importance of vendor/customer contracts.

Myth #7:  I don't need vendor/customer agreements or I can just copy one from a similar business.

OK, on your way to work you dropped off some shirts at the dry cleaner, and the proprietor was astute enough to give you a ticket with detailed terms and conditions relating to the laundry service provided.  When you get to work, you are happy to see one of your web developers has just finished signing up a new customer who wants your company to design an expensive website.  The customer signs your order form, which details the specs for the site, and payment terms.  Then, you start thinking: why is it that your neighborhood dry cleaner has more detailed terms and conditions with respect to dry cleaning your shirts than your company has for a several thousand dollar project?   

The problem is that small businesses often think that they don't need contracts with their customers or that a very simple order form is all that is needed.  Returning to our web developer above, think of some of the possible issues that can arise without a properly drafted customer agreement:

     1.  After three weeks work, the customer wants to terminate the project, stating it is unhappy with the progress.

          Comment:  A properly drafted customer agreement, whether for a website developer, or for any other product or service provider, should detail payment terms (i.e., progress payments), grounds for termination by each party, and may even spell out liquidated damages in the event of a breach of the contract by the client.

     2.  With each delivery of website versions, the customer asks for change, after change, after change or argues the website does not reflect what was ordered.  Does the customer have a right to require multiple changes or reject every version arguing it is just not satisfied?

         Comment:  Customer agreements should detail all material terms relating to customer changes, delivery and acceptance of the product/services.  In addition, the agreement should detail the rights of the client to review/test the deliveries and the method for requesting changes.  

     3.  What if six months after the website goes live, a feature stops working, the customer claims extensive business losses, are you responsible?

        Comment:  Any customer agreement needs clear representations and warranties and a limitation on liability provision.  Consider the following issues and include clear terms in the customer agreement:

                  a.  What representations is the vendor willing to make?

                  b.  What warranties, if any, is the vendor willing to give?

                  c.  If there is a claim under the warranty, what are the obligations of the vendor? 
                  d.  What is the scope of the limitation on liability; can you restrict liability to actual fees paid to  vendor? 

    4.  The customer is from California and the vendor is from New York; the customer breached the contract; service of process has been difficult and expensive to pursue.

         Comment:  In addition to choice of law and venue for any lawsuit, the contract can include terms for service by mail and even the right for the prevailing party in any lawsuit to recover legal fees.

    5.  The vendor copied a contract found on the Internet or purchased one from a legal website.

         Comment:  You get what you pay for!  Don't learn the hard way (i.e., after the fact) that the vendor agreement is inadequate for your business, for example:

                  a.  The form does not state anything about who owns certain features or content included in the website, some of which are proprietary.  The question becomes who owns those features/content when the vendor intended to retain ownership and simply provide the client a license to use them.  

                  b.  A well constructed customer agreement will detail terms as to any rights the vendor wishes to retain in certain intellectual property.

                  c.  Is there an indemnification provision in the event a thrid party seeks a claim against the vendor based on a product or service delivered to the customer. 
BotTom Line:  The above are just some examples why a handshake or a simple customer receipt/order form is a mistake.  The absence of clear terms can lead to disputes and expose the vendor to liability unnecessarily.

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