As a technology vendor, you may be eager to get that new customer relationship started. Don’t let that tempt you to get underway without taking care of the details first. Technology vendors should avoid working without a signed contract. Here are three reasons why.
Working without a signed contract makes it harder to deal with overly-needy customers.
Working without a signed contract makes it hard to deal with overly-needy customers. Say you have entered into an arrangement where you are going to provide support and maintenance services. You get into the relationship on a handshake basis, and after a few months, the continues making requests, never satisfied, and always wanting services performed “on the cheap”. You finally recognize this business relationship is not bearing fruit and that you need to walk away. If there is no written contract in place making clear the conditions under which you as the vendor can terminate the relationship, when you try to disengage from this customer, you might run into trouble.
A situation like this happened recently in a case that came from Kansas (Straightline HDD Inc. v. Smart E-Solutions, Inc., 2020 WL 2296941 (Ct. App. Kansas, May 8, 2020). In that situation, the parties litigated for several years over the question of whether there was an implied contract for the defendant software reseller to continue to provide support to its customer (with whom it did not have a signed contract).
The trial court found that defendant had to provide some value for the software customer. Fortunately, the appellate court overturned that on appeal, finding that there really was no implied contract, so the reseller was able to separate from that needy customer. In that situation, the reseller ultimately avoided liability. But it is unfortunate that the parties spent all those years and all those resources litigating the issue. If there had been a written contract in place from the beginning of the relationship, there would have been more clarity and there wouldn’t have been those issues to litigate. The parties could have handled the situation much more quickly and efficiently.
Having no signed contract means missing out on protective contract provisions.
A technology vendor should not want to start work before it has a signed written contract because that written contract that was not signed should protect the vendor. For example, you want to make sure that the agreement has the appropriate disclaimers of warranty. A vendor does not want to promise that the technology solution is going to solve all the world’s problems. There should be certain express warranties, and that is all.
Another kind of provision that you want to make sure is in the agreement is a limitation of liability. Let’s say you as the vendor are only getting a small amount of revenue from this engagement with the customer. If the technology solution fails for some reason – maybe even through no fault of yours – and the customer suffers millions of dollars worth of damage or business loss or some other form of consequential damage, you want to make sure that you are not on the hook for that just. It does not make sense for a vendor to enter into an arrangement where it is only going to get a little bit of revenue while at the same time putting the company on the line with the exposure to potentially large damages.
Going without a signed contract makes it more difficult to get paid.
A third reason for having that written contract in place before you start doing the work is so that you will get paid. The contract should be clear on how much customer will pay, what the payment is for, and when the payment is due. If it does not, do not be surprised if your customer remembers differently about cost, deadlines and specifications.
About the author: Evan Brown is a technology and intellectual property attorney in Chicago. Follow him on Twitter and Instagram, connect on LinkedIn and subscribe to his YouTube channel for videos on interesting topics about law and technology.