Financial institutions may outsource services to third parties, but they cannot outsource ultimate responsibility for those services. As a result, third party vendor contracting is critical to financial institutions. While some vendor services pose more risk than others, here are five key provisions that should be reviewed in every vendor contract before signing on the dotted line.
1. Term and Termination
Financial institutions should know how long the contract will be in effect and whether the contract will automatically renew at the end of the initial term. Financial institutions should ensure they have adequate methods by which to terminate the contact. While many vendors will not allow financial institutions to terminate at will, vendors may agree to allow financial institutions to terminate upon the guidance or direction of a regulator or upon a determination that continuing the contract would undermine the safety and soundness of the institution.
2. Assignment
Frequently, vendor contracts purport to allow the vendor to assign the contract to another party without the financial institution’s consent. Financial institutions have an obligation to conduct appropriate due diligence on third party vendors. Thus, assignment provisions in vendor contracts should be carefully revised to ensure financial institutions have the ability to review and approve any assignment of the contract to a new third party vendor.
3. Venue Exclusivity
Buried in the “governing law” section of many contracts is a provision that determines where the parties to the contract may bring suit. In many cases, this language provides that lawsuits over the contract must be exclusively filed in the state named in the contract (which is usually not South Dakota). Financial institutions should ensure that any venue exclusivity clause identifies a state where it would be convenient and reasonable for the institution to file (or defend) a lawsuit.
4. Limitation on Liability
Many vendor contracts contain language that prohibits a financial institution from seeking damages against the vendor in an amount that would exceed the amount of fees the institution has paid to such vendor over the course of the last 12 months. Financial institutions should negotiate to eliminate or modify this limitation on liability since the expenses a financial institution could incur as a result of a third party vendor error are often in excess of the fees paid to such vendor over a short period of time.
5. Wind-Down Provisions
One of the most overlooked issues in vendor contracts is how the parties unwind their relationship. Similar to a pre-marital agreement, financial institutions should consider “who gets what” in the event a relationship with a third party vendor deteriorates. Who owns the customer information upon termination? Will the vendor cooperate in transitioning information to a new vendor? Financial institutions should consider these questions and more to determine what would be required of both parties to effectuate an orderly termination. Provisions outlining the termination and wind-down process should then be incorporated into the contract.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.