CONTRACT NEGOTIATIONS AND EXPOSURE FOR YOUR CREDIT

UNION

Leslie F. SpasserLeClairRyan, P.C.

Norfolk, VirginiaLeslie.spasser@leclairryan.com

WHAT IS A CONTRACT?

Law School Definition• A contract is the meeting of the minds.• Basic elements:

–Offer–Acceptance–Consideration (value)

Practical Definition

The roadmap for a productive relationship between two parties• Defines each party’s rights and responsibilities• Aligns each party’s expectations

Method to put in place legal and business protections for each party

Vehicle to allocate risk and exposure

Pre-Contract Considerations

Set the table for success• Know your goals and objectives for the

relationship– Define your “must haves”

– Determine your budget

– Identify any danger points

• Understand the importance of the relationship to your credit union

Pre-contract Considerations

Perform due diligence on other party• Financial stability• Operational capability• Technical capability • Past performance/references• Regulatory compliance (if applicable)

Develop “term sheet” Communicate core terms to vendor before

ever looking at or drafting the contract

Pre-Contract Considerations

Begin with the end in mind• Your leverage is never greater than when you are

negotiating with the vendor• Think about what your organization will need when the

contract expires or terminates– What additional actions will you need the vendor to

perform?– What type of notice or transition period do you need?– What are your vulnerabilities if the contract ends due to

poor performance or disagreement between the parties?• Define up front any termination/deconversion fees and

payment structure

Contract Nuts and Bolts

Preamble and “whereas” clauses• Identify parties accurately

– Know what party you are dealing with

– Know whether you are dealing with affiliates, subsidiaries, d/b/a’s

• Summarize key background info and purpose of Agreement

– Not binding

– Helpful for laying framework for agreement

Contract Nuts and Bolts

Duties and Obligations of the parties• Describe clearly what each party is supposed

to do.• Include deadlines and schedules where

necessary (or reference an exhibit where details are set forth)

• Define what “performance” means • Describe any linkages between one party’s

obligations and the other’s

Contract Nuts and Bolts

Define what happens if a party fails to perform• Monetary or non-monetary remedies• Repair or replacement of goods or re-

performance of services• Relate remedies to economic impact of failure

to perform and over-all economics of deal• Termination is the “nuclear option” - so create

credible remedies with termination as last resort

Contract Nuts and Bolts

Term• Specify start date and end date• Use automatic renewal with care

– If auto-renew, address price increases Termination

• For cause and/or for convenience• Cure period• Effect of Termination

– Payment of outstanding monetary commitments– Transition/support/deconversion period– Return/destruction of materials– Termination fees

Contract Nuts and Bolts

Representations and Warranties• Promises on steroids• Promise that product/service will perform for

specified period of time– Exclusive remedy: repair, replacement or refund

• Assurance that certain facts are true– No infringement; authority to enter contract

• A party is legally entitled to rely on the other party’s representations and warranties

Contract Nuts and Bolts

Disclaimer of warranties• Typically applies to warranties that are

otherwise implied by law–Merchantability; fitness for a particular

purpose• Buyer Tips:

–Beware of “as is” disclaimer–Be sure to exclude all reps and warranties

that are expressly provided in Agreement–Where both parties make warranties,

disclaimer should be mutual

Contract Nuts and Bolts

Indemnification• Promise by one party to compensate the

other party for a particular loss• Promise to make the other party whole• Method of allocating risk and exposure

between the parties

Contract Nuts and Bolts

Indemnification – Key Considerations• Scope of indemnification• Is there a duty to defend/control defense• First party or third party claims• Obligations should be tied to each party’s role

and responsibilities– Example: Indemnity for data breach; indemnity for

intellectual property infringement; indemnity for general “acts and omissions”

• Indemnity is a way for vendors to stand behind their products or services

Contract Nuts and Bolts

Limitation of Liability• Limits types of damages recoverable• Limits dollar amount of liability• Key Considerations

– Relate to economic value of deal– Exclude certain types of liability

• Indemnification• Breach of confidentiality

– Evaluate costs to credit union if vendor breaches and ensure dollar limits provide meaningful relief

– Vendor traps • One-way vs. mutual• Low dollar limit

Contract Nuts and Bolts

Fees/Payment Terms• Define fee structure clearly• Define schedule for payment

– Beware of paying in advance for ongoing performance– Monthly or quarterly payments give buyer greater control

over vendor’s performance

• Define rights to increase fees– Important where contracts are long-term or contain

automatic renewal clauses– Be sure notice provisions give sufficient time to terminate

Boilerplate

Force Majeure Assignment Choice of law/jurisdiction/venue Integration clause Survival Relationship of parties Rights to publicity

Case Study

Sunny Day Credit Union (“Sunny Day”) seeks to enter agreement with UServ Solutions, Inc. (“UServ”) for the provision of online banking and loan processing services.

UServ presents Sunny Day with its 100 page standard form agreement with a 10 year term.

UServ tells Sunny Day that if the agreement is signed within the next week, UServ will provide implementation services for free – a $100,000 value.

Case Study

What are UServ’s motivations?

What leverage points does Sunny Day have in the negotiations?

How should Sunny Day handle UServ’s proposed timeline/discount offer?

What should Sunny Day have done differently to set stage for negotiations?

Case Study

UServ’s Standard Contract – select provisions:• Termination fee of 100% of the monthly

minimum fee x months remaining in the contract.

• Obligation to pay then-current “standard” deconversion fee and any associated costs in full and in advance.

• Exclusivity – cannot use another vendor to provide the same services; cannot contract with another vendor during term of Agreement.

Case Study

UServ’s Standard Contract – select provisions:• Limitation of liability: Sunny Days’ liability is not

limited at all; UServ’s liability for any claim is limited to 6 months of fees.

• Indemnification: UServ will indemnify Sunny Days if UServ’s technology (unmodified by Sunny Days) infringes third party intellectual property.

Case Study

Terms to Protect Sunny Day:• Service Level Agreement

– Standards for uptime/availability– Standards for time to respond/fix problems– Financial consequences for missing service levels– Right to terminate without termination fee for chronic

failure to meet service levels• Regulatory compliance requirements

– Require UServ to comply with applicable regs– Require cooperation by UServ as necessary to

enable Sunny Day to comply

Case Study

Terms to protect Sunny Day:• Data security/confidentiality requirements

– Comply with applicable law– UServ obligations in the event of breach

• Disaster recovery/backup• Audit provisions (fees/services provided; SSAE 16 for

data security processes)• Insurance requirements (cyberliability)• Payment limitations (any fees not assessed within 12

months after being incurred are forfeited)

Moral of the Story

A contract is a business tool for you to structure a productive and equitable relationship

Up front preparation is key to negotiating favorable terms

Clarity is essential to successful operational agreements

Contract terms must be read together, not in isolation

Begin with the end in mind

Questions?

Leslie F. Spasser

Leslie.spasser@leclairryan.com

757-217-4535