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Don’t Allow Vendor Disappearing Acts by Joe Auer

Most, if not all, vendors’ standard form agreements give the vendor the unilateral right to assign at least part of the responsibilities outlined in the agreement to a third party. This gives vendors incredible performance and financial leverage, and it gives them the ability to delegate responsibilities, cash out of deals or both. Let’s be clear on this issue: Never even think about giving your vendor the unilateral right to assign its rights or responsibilities to someone else. Why? There are two very ugly reasons.

The first reason is that the vendor can assign its rights to your payments to a financial institution that loans the vendor most of the value of the contract and then looks to you for the payments. In this case, the vendor has cashed out of the deal, its salespeople have received their bonuses, and you have to worry about how well the vendor will perform while you’re still legally obligated to make all payments. The vendor will probably continue to perform, but probably with less motivation, since there’s no longer any financial incentive. You’ve lost the “carrot,” and you’ve assumed the risk of nonperformance, which should belong to the vendor.

In that same vein, never agree to an unconditional obligation to pay your vendor in a results-based deal, especially when your payment obligation is contractually disconnected from the vendor’s ongoing duty to perform. Unconditional customer payment obligations are typically triggered by a monthly date or a vendor invoice and continue for a predetermined length of time. Your obligation to pay should be triggered only by the vendor’s acceptable performance of the work you have contracted for.

The second ugly reason is that the vendor can assign its responsibilities under the contract to a third party. You could end up having work performed by someone with whom you didn’t sign a contract. And again, you could be assuming a performance risk. Please note that this shouldn’t be confused with giving the vendor the right to subcontract part of the deal. If the customer understands and agrees up front to subcontracting, there’s no problem, especially if the primary vendor remains the single point of accountability. Generally, subcontracting doesn’t relieve the primary vendor of its performance responsibilities.

So, what do you do in a situation in which the vendor wants the right to unilaterally assign its financial interest or responsibilities and escape completely? The best protection is to refuse to allow your vendor to do this under any circumstances. In a case where you have some negotiating power, a vendor will agree but will want to reserve its “right to assign,” in case it’s bought out or merges with another company. Here again, exercise caution, because you may wind up with a vendor you don’t want to be with. This has become a way of life in the software industry, but there are companies on which you just may not want to be dependent for a critical part of your business. Some will take advantage of you and your dependence.

If you have to concede the assignment issue due to a merger or acquisition, allow your vendor to do so only with your consent. This will allow you time to perform due diligence and make sure you’re willing to allow assignment of your deal. If you elect to not go with the new vendor, you should have the right to get out of the deal, with all the appropriate protections to allow a smooth transition to a new supplier of your choice.

The bottom line: Make sure you or your legal representatives pay attention to “assignment” clauses, or your vendor could have the right to disappear with a mere stroke of the pen.


JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@nulldobetterdeals.com.

Copyright by Computerworld, Inc., 500 Old Connecticut Path, Framingham, MA 01701. Reprinted by permission of Computerworld.

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