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The Essential Lawyer: Contract Remedies for Vendor Failure

Make sure your contract outlines the consequences of vendor failure.

Recently a new client called me with a familiar story about a vendor that had failed to perform. To complete the project, the vendor demanded more time and money. In reviewing the contract between the client and vendor (which I did not draft), I discovered that the parties had not clearly defined the consequences if the vendor failed to carry out its obligations. The contract neglected to anticipate the vendor's breach and contained no remedies to help my client complete the project without spending more time and money. Also absent was any monetary compensation for damages resulting from the vendor's nonperformance.

My client faced four undesirable options: (1) sue the vendor; (2) accept the vendor's demands and hope to finish the project; (3) amend the contract to include adequate remedies; or (4) find another vendor to complete the project. Each of these options is costly and lacks a guarantee that the project will be completed. Under any scenario, a vendor's failure to perform will cost you time and money, but a contract that defines remedies for a breach can help ease your pain and keep you out of the courtroom.

As you consider contract remedies, first identify the effect a vendor's failure to perform its obligations would have on your company, then determine what your company would require if these breaches occurred. Second, consider whether money is adequate compensation, whether some some form of performance by the vendor is required (i.e., an equitable remedy), or whether a combination of money and performance is appropriate.

The Elements of a Remedy

There are two elements to any contract remedy: (1) the event giving rise to the remedy; and (2) the remedy itself. For example, consider the following: Either party may terminate the agreement if the other party breaches a material provision of the agreement and fails to cure the breach within 30 days. In this case, the event giving rise to the remedy is a material breach, and the remedy is the termination right. When drafting a remedy, determine the appropriate response to the vendor's breach, and should the breach occur, outline precisely what your company requires. Termination of the agreement is often the wrong answer.

A Three-Prong Test

A properly drafted remedy provision satisfies three requirements: (1) it applies to an area where the vendor's breach will cause harm; (2) it describes the event giving rise to the remedy; and (3) it describes the remedy. Here's an example from an IT services agreement sitting on my desk: Vendor warrants that the Services shall be performed in a timely manner and in accordance with all milestones and deadlines set forth in the Statement of Work. Vendor shall promptly re-perform at no charge to Customer any Services that fail to satisfy the foregoing Warranty in a manner that does satisfy such Warranty.

Even when a breach occurs, companies often prefer to work toward resolving the conflict and getting the project done than taking the vendor to court. Anticipating a vendor's breach and defining specific remedies for that breach can help to ensure the vendor's performance, compensate your company for any resulting monetary damages and keep the parties out of the courtroom.

Next: Keeping up to date with security breach notification laws.

Matt Karlyn, J.D., M.B.A., is a member of Foley & Lardner LLP's Information Technology & Outsourcing Practice Group in Boston. Write to him at [email protected].

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