contract basics for credit unions
DESCRIPTION
Discussion of basic contract principles and negotiation strategy for credit unions and other financial institutions in their agreements with outsourcing vendors. Focus on assessing risk, developing appropriate mitigation strategies and practical steps a credit union can take to obtain a positive outcome.TRANSCRIPT
CONTRACT NEGOTIATIONS AND EXPOSURE FOR YOUR CREDIT
UNION
Leslie F. SpasserLeClairRyan, P.C.
Norfolk, [email protected]
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