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Don’t Let Vendors Hold You Hostage by Joe Auer

The following onerous provision regarding a customer’s payment obligations was uncovered during a review of a vendor’s proposed software licensing contract: Licensee shall pay vendor the fees set forth. . . . Without limiting vendor’s remedies, if licensee fails to pay in a timely manner any amount due, vendor may, in its good-faith determination, place licensee on “hold.” During any hold period, licensee will not receive any support or updates. Licensee shall reimburse vendor for any and all collection costs (including attorneys’ fees) incurred by vendor in the collection of past due amounts. The vendor, in its self-proclaimed infinite wisdom, is demanding a unilateral right to cease its performance obligations if it perceives that the customer has an unpaid balance.

Never agree to such a provision. You have an obligation as a user of a vendor’s intellectual property to pay all valid amounts when due, but a vendor shouldn’t have a unilateral right to cease performance without notice if it believes you haven’t paid some amount.

Several issues need to be dealt with in this vendor’s boilerplate language. A vendor’s fundamental objective is to make sure it gets paid, and we, as customers, should provide assurance that we will pay. But that assurance shouldn’t require that we assume any additional and unreasonable risk.

Clarity Beats Faith

A big problem in this provision is that the vendor can cease providing support and updates if it believes money is due. It would be more reasonable if, after providing appropriate notice, the vendor were to invoke a hold period only if the customer fails to pay a support bill.

What if the unpaid invoice is for consulting services or shipping charges? Then suspension of support shouldn’t be tolerated. In an equitable agreement, the remedy must match a vendor’s loss but isn’t intended to give it any additional benefits or create additional risk or hardship for a customer.

Another intolerable part of this provision is the vendor’s right to act “in its good-faith determination.” A vendor’s idea of good faith may be very different from yours. Both parties must define and agree to what’s being said in such good-faith provisions. Clarity beats faith every time.

Under this standard vendor boilerplate, the vendor also retains all other remedies, such as the right to go to court and obtain an injunction.

Don’t be inclined to give a vendor multiple remedies for a single infraction on your part. The remedy should attempt to make a vendor whole for a single infraction and nothing more.

Here’s a better way to write the provision—one that gives a vendor adequate protection but isn’t overly restrictive for a customer.

Licensee shall pay vendor the fees set forth. . . . If licensee fails to pay any valid amount due according to the specified payment terms, vendor will so notify licensee and licensee shall have a 10-day period to pay any such valid and undisputed invoice.

After such 10-day period, if licensee fails to pay any support invoice, vendor may cease to provide support for the licensed software. All other fees remaining unpaid after the notice and 10-day grace period will be subject to arbitration.

Although such wording provides one solution to the problem, there are several variations that can be just as effective. The key is to work with your vendor to arrive at fair and equitable terms that neither automatically place your applications in jeopardy nor provide excessive remedies to the vendor.

In general, the goal of all supplier contracts should be to make a customer’s payment obligation totally dependent on satisfactory vendor performance.

As much as possible, avoid customer payment obligations—such as a monthly due date, signing the contract or receiving an invoice—that are triggered by something other than an acceptable act of performance.


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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