Mitigating Third-Party Risk in Technology Contracts: Assignments, Audits, Termination, Indemnification, Compliance

Description

In the contracting process, after completing due diligence of a potential vendor, the agreement should be structured in accordance with the scope and nature of that third-party relationship. Even though some specific transaction-based terms and the comprehensiveness of a contract will be designed to reflect the unique dynamics of each relationship, there are some essential clauses that should be included in every vendor agreement to minimize risks.

Compliance with applicable laws and regulations are the backbone of third-party relationships and should be a cornerstone of the vendor agreement. A compliance clause is where counsel can illustrate a company's commitment to its business ethics and compliance program, how the client considers compliance in every new business operation, and the expectations for a third party's compliance.

Counsel will need to include appropriate confidentiality provisions and consider requirements related to privacy and data security based upon the nature of the data and applicable industry involved.

A vendor agreement should include provisions related to the performance of the applicable service or product. A clause regarding a third party's responsibility to file periodic and on-demand reports is also required, including how often and to what extent these reports are prepared. Periodic reports should represent a third party's performance levels, and its compliance with undertaken service standards, as well as its financial statements, and any pending claims. Likewise, termination clauses are essential to provide a client with a mechanism to address changes in risk over time, or the risk-reward balance becomes reversed, and a relationship is no longer in the client's best interests. Not only should termination clauses state the circumstances that give the right to terminate, but also how termination is effective and specifics on termination assistance. The contract should also address the third party's ability to assign its responsibilities to an entity that has not been vetted or assessed.

Indemnification clauses provide the right to hold a third party responsible for the damages, losses, and claims that arise from its failure to fulfill its contractual obligations or resulting from other conduct of the third party. In addition, appropriate audit provisions are necessary to allow a company to confirm a third party is meeting its commitments.

Listen as our expert panel discusses how third-party risk management via contract drafting and negotiations can provide clients with the necessary information about business partners to help identify and mitigate risks. The panel will address the most effective and beneficial ways of implementing a risk management plan.