Don't Overlook These 4 Provisions in Vendor Contracts

It is important to clarify which party owns which documents upon termination of the business relationship so that there is no confusion down the road. If an advisor's data will not be easily accessible to the advisor once the agreement with the vendor terminates, the vendor contract should ideally contain a provision requiring the vendor to transfer such data to the advisor upon termination of the contract and/or to cooperate in good faith with the advisor to ensure that the advisor has access to its data after termination of the contract.

2. Outsourcing

Some vendor contracts contain provisions allowing a vendor's affiliates or agents to perform certain services to be provided under the contract. Advisors should carefully review such provisions to determine the scope of services that can be outsourced and to whom such responsibilities can be outsourced to determine if they are comfortable with such arrangements.

If you are contemplating permitting a vendor to outsource some of its responsibilities, it may be advisable to conduct due diligence not only on the vendor, but also on the third parties to whom the vendor can outsource its responsibilities to ensure that you adequately protect your firm and your clients.

3. Liability and Indemnification

These are typically some of the most important sections of a vendor contract to review. Often first drafts of vendor contracts will contain liability provisions where the vendor disclaims most, if not all, responsibility for any of its acts or omissions under the contract and indemnification provisions where the vendor requires an advisor to be responsible for, and compensate, the vendor with respect to a broad range of issues should something go wrong. Failure to adequately consider and negotiate these provisions could lead to severe consequences for an advisor should a dispute between the advisor, on the one hand, and the vendor or a third party, on the other hand, arise down the road.

Ideally, an advisor should try to narrow its indemnification obligations in the contract and include or expand the vendor's indemnification obligations. At the very least, an advisor should aim to ensure that both sides have equivalent indemnification obligations for delineated acts or omissions. Even in situations where a vendor has agreed to assume liability and indemnification obligations, they may limit such obligations to circumstances where the vendor has acted egregiously (e.g., with gross negligence, willful misconduct, or bad faith), and an advisor must determine whether it is comfortable with such a limitation. Separately, where a vendor has agreed to assume certain indemnification obligations, an advisor should aim to require the vendor to defend the advisor should an indemnifiable claim arise because an advisor does not want to come out of pocket for expenses associated with defending a claim.

 4. Termination of Contract

Any provisions dealing with termination of the agreement are important to consider because, where properly negotiated, they can provide a failsafe mechanism for terminating the business relationship with a vendor should something go awry.

Ideally, the amount of notice required to terminate the contract should be minimized to allow the advisor to walk away from the relationship, particularly where the vendor has engaged in wrongdoing. Nonetheless, this may not always be a viable alternative, depending on the amount of work that a vendor is required to perform in winding down the services it provides. Properly negotiated termination provisions should also clearly spell out each party's obligations in the event of a contract termination in order to ensure a smooth transition.

Conclusion

Ultimately, depending on the bargaining power in the advisor-vendor relationship, it may not be feasible for an investment advisor to get everything it wants from a vendor when negotiating a contract. However, an advisor should carefully consider the issues addressed above (as well as many others) and conclude whether it has the risk appetite to move forward with a business relationship with a vendor given the vendor's positions on such issues.

Disclaimer: The foregoing information is provided for informational purposes only and does not constitute legal advice. Readers should consult an attorney if they require advice regarding their particular circumstances. Please contact Richard Chen at [email protected] with any questions.

Richard Chen is an investment management attorney who has been practicing for nearly two decades with several top multinational law firms and a leading compliance consulting firm. He now runs his own law firm practice, which serves independent wealth managers, hedge and private equity fund sponsors, financial planners, and other financial institutions. He can be reached at [email protected].