By: Jordan Gerheim CEO – Outside Chief Legal LLC
Vendor agreements can look routine, especially when presented as “standard terms.” Yet the details in these contracts often determine whether a vendor relationship supports your business or exposes it to unnecessary risk. Here are some common red flags to look for and practical guidance on how to respond.
One‑Sided Limitation of Liability
Many vendor contracts include a limitation of liability that caps the vendor’s exposure to a small amount (for example, one month of fees) while leaving your potential losses without a ceiling. This can be a serious problem if the vendor’s failure could disrupt your operations, damage your reputation, or expose you to claims from your own customers.
- Red flag: Vendor limits its liability to a nominal amount but excludes nothing.
- Better approach: Seek a higher cap (for example, 12 months of fees) or specific carve‑outs for data breaches, confidentiality breaches, IP infringement, or gross negligence.
Broad Indemnity: You Give But Do Not Get In Return
Indemnity clauses decide who pays when a third parties sue. A common issue in vendor agreements is a broad indemnity you owe to the vendor, with little or no reciprocal protection for your business.
- Red flag: You must indemnify the vendor for almost anything connected to your use of the service, but the vendor does not indemnify you for its IP infringement, data security failures, employee or other misconduct.
- Better approach: Narrow your indemnity to your own negligence or actual contract breaches and require the vendor to indemnify you for claims based on its technology, employees, and data practices.
Auto‑Renewal and Difficult Termination
Auto‑renewal (evergreen) terms are not inherently bad, but when combined with long notice periods, hidden increase in charges or limited termination rights, they can lock you into relationships that no longer make sense.
- Red flag: Multi‑year terms that auto‑renew unless you give notice 60–90 days before the end of a term, with no termination for convenience.
- Better approach: Shorter initial terms, reasonable notice periods, and the ability to terminate for convenience with notice, especially for critical services.
Vague Service Levels and No Remedies
If a vendor provides a critical service, such as software, payment processing, or logistics, vague performance obligations are a warning sign. Without clear service levels, you have little leverage when performance drops or fails.
- Red flag: The agreement describes the service in marketing language but does not define uptime, response time, or support obligations.
- Better approach: Add measurable service level commitments, credits, or other remedies when the vendor does not meet those standards.
Unclear Data Ownership and Usage Rights
For technology, marketing, or SaaS vendors, data is often one of your most valuable assets. Contracts that blur who owns data or how it can be used should be examined closely.
- Red flag: Vendor claims broad rights to use or share your data, or the contract is silent on who owns customer or operational data.
- Better approach: State clearly that you own your business and customer data, limit how the vendor may use it, and address return or deletion of data at the end of the relationship.
Overly Broad Confidentiality and Non‑Compete Style Restrictions
Confidentiality obligations are appropriate, but some vendor agreements go further and restrict your ability to work with other vendors or serve particular customers.
- Red flag: Provisions that effectively function as non‑competes or exclusive arrangements, especially if not negotiated.
- Better approach: Limit restrictions to what is reasonably necessary to protect true confidential information or a defined collaboration, and avoid unnecessary exclusivity.
One‑Sided Amendment and Assignment Rights
Some vendor contracts let the vendor change key terms unilaterally (often via an updated online policy) or assign the agreement freely, while restricting your ability to transfer the agreement in a merger or sale.
- Red flag: Vendor may change pricing or core terms by posting a new version, and you have no right to object or exit.
- Better approach: Require notice and, for material changes, a right to terminate. Ensure you can assign the contract in connection with a sale or reorganization of your business.
Outside Chief Legal Can Help
Most business owners and executives do not have time to dissect every clause in every vendor contract, but ignoring these details can be costly. Outside Chief Legal helps by:
- Flagging one‑sided risk‑shifting terms before you sign.
- Prioritizing which changes are worth negotiating based on your risk, leverage, and budget.
- Creating playbook language and standard positions you can apply across vendors to keep your portfolio of contracts consistent.
Our role is to act as outside general counsel so you can move deals forward quickly with confidence while still protecting your business.
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