How Customers Manage Risk When Vendors Can Terminate at Will

"Today’s contract data discussion is on a vendor’s right in IT contracts to terminate for convenience.

When you look at vendors' starting positions, vendors reserve the right to terminate for convenience 31% of the time. When you look at customers' purchase terms, they only offer this term 3% of the time. When you look at negotiated contracts, customers only agree to this clause 12% of the time.

It makes sense that most vendors want this right if they can get it. Why not? It allows the vendor to get out of a deal that’s no longer profitable or restricts their freedom to act.

While customers clearly resist giving this right up in most cases, they are finding themselves agreeing to it in 12% of the negotiated contracts.

These provisions can create problems for the customer, so we need to be thoughtful about when we agree to it. First, you need to consider the nature of the product. If it is integral to a critical business function or there is no readily-available alternative, you may need to push back. You also want to consider your backup plan because you have to be ready if the vendor suddenly decides to terminate.

As with all provisions, our job as lawyers and contract managers is to evaluate the risk in our contracts. If we can’t eliminate the risk (by removing this provision when we are a customer), we need to mitigate or manage it. If you as a customer find you have to agree to the vendor’s right to terminate for convenience, here are ways to do that:

-- Ask for a longer notice period - Most clauses allow the vendor to terminate with 30 days’ notice. You can ask for 60, 90, or even 180 days. I typically try to match the notice period to the time needed to transition to a new solution.

-- Back up your data regularly - You should be doing this anyway, but it’s even more critical when the vendor can terminate at any time.

-- Identify other solutions you can implement if needed - Be ready before receiving that termination notice. You can require the vendor provide transition assistance in exchange for agreeing to the termination for convenience.

For more contract data, head over to TermScout."

This was originally published on Laura Frederick's LinkedIn page. If you want to get more of Laura's tips, join over 33k lawyers and professionals following her on LinkedIn.