This is part 2 of a Seven Part Guide to reviewing vendor contracts. Part 1 can be found here.

Recitals.

Some contracts will contain several “WHEREAS” clauses at the inception of the document followed by a recitation of various facts about the parties and what they are trying to accomplish by entering into the contract. From a pure legal standpoint, “WHEREAS” clauses are not required but many parties like to include them to properly set the stage for what is to come afterwards. If they are included, the bank needs to review them, particularly those that describe the parties and the services that the vendor will perform. The recitals provide for an introduction to the parties and provide a high level overview of their agreement. It is a bit like looking at a topographical map and following two streams as they wind their way through the mountains before finally coming together.

If there is a gap between the direction indicated in the recitals and the body of the agreement then there may be legitimate questions about what the true intent of the parties was when they entered into the contract. That becomes significant when a dispute later arises about the work actually being performed as well as the service level of the work. The gap can be created when the vendor uses a version of the contract that was heavily negotiated for a different party but forgets to revert back to its standard form contract when submitting it to the bank. Sometimes it is evidence of lack of sophistication by the vendor who may have simply downloaded the contract off of the internet and uses it without fully understanding the legal implications. Sometimes vendors will respond that they have used a particular form for years and never had a problem. That is confusing luck with carefully draftsmanship.

Nature and scope of the work to be done.

What exactly are the services to be performed? One would expect that the contract will specifically identify the frequency, content, and format of the service, product, or function provided. It is vitally important that the people at the bank, who have the substantive knowledge about the services in question, together with legal counsel, review the scope of services and understand how it relates to other contracts the bank has entered into or strategic initiatives the bank is looking at. A significant factor to keep in mind is whether any fee triggered by an early termination of the contract is of such a size that it becomes a material roadblock to doing a merger or acquisition. There have been instances involving smaller community banks where the termination fee was so large in comparison to the consideration being paid in a planned merger that the deal fell though. Thus, other corporate strategic matters may drive the bank to negotiate a shorter agreement than the vendor normally seeks or to seek out another vendor altogether.

It doesn’t matter how many discussions you have had with the vendor about the scope of the work, if you can’t tell from the contract itself, whether it is in a numbered paragraph or on an exhibit, exactly what the vendor is going to do, the contract is too vague and needs to be revised. This is not something to be shy about. We tell clients and younger lawyers who are drafting documents to imagine someone sitting in a windowless room reading the contract. If that person could not figure out exactly what work the vendor is doing from reading the contract and its exhibits, the contract is faulty. The trap many people fall into is that after having had numerous conversations back and forth, they mentally fill in the details when they come to a section in the contract that is vague and think they know what the “agreement” actually is, regardless of what is actually put on paper. What happens, of course, is that both the representatives of the bank and the vendor can have slightly different recollections about what had been discussed and those differences can pose real problems once issues begin to arise during the life of the contract.

The description of the nature and scope should be fairly specific. A lack of clarity here means that the vendor may not be held responsible if it fails to deliver the services the bank was expecting. The parties should be as comprehensive as they possibly can in describing the scope of the services. In some contracts the parties will utilize what is referred to as a “sweep clause” which provides that certain services that are incidental to providing the specified services are also impliedly covered by the contract. The sweeps clause ensures that all services not described in the Contract, but necessary to provide those that are services described in the Contract are included in the quoted price. Without the sweeps clause, the vendor is only obligated to perform those services that are specifically defined in the Contract.

Descriptions that seem to come from a marketing brochure or state that they will be agreed upon post-closing may be too vague as to be enforceable The Bank should not be afraid to push back and demand that the contract spell out in detail exactly what products or services the vendor is going to be providing.

Ancillary Services.

Include in the contract, as applicable, ancillary services as software or other technology support and maintenance, employee training, and customer service. Address whether training be onsite or remote. If the bank’s employees need to be trained onsite the contract should specify how much training is going to be required, i.e., is it something that is going to take an hour or do they need to set aside an entire day to complete. If the training will be on the premises of the bank you should consider security issues. For example, will the person doing the training need to access bank computers or networks? Will they be uploading any type of training software onto bank computers? The bank should have in place information security policies that the vendor must comply with. The fact that someone is doing training does not mean you should allow them unfettered access to computers and systems. For example, security protocols might include restricting vendor employees to computers that have no internet access, printers or devices for removable storage; limiting the use (or prohibiting altogether) mobile phones that have cameras.