The “Form Contract” Ploy

In the form contract ploy, the vendor’s marketing representative strives to make the contract the smallest, least significant part of the acquisition transaction.  In implementing this approach, the vendor’s salesman works to make the closing of the transaction a mere formality.  The vendor’s form contract – which contains the only legally-binding vendor commitments – is treated almost as an afterthought or, in the words of one marketer, an “oh, by the way.”

Although the form contract ploy can be used effectively by virtually any vendor, it is most easily employed by the large established equipment manufacturers.  These firms are generally better able to develop the sense of “trust” or “relationship” that increases the customer’s willingness to sign the vendor’s agreement with few or no questions asked.  Rightfully or wrongfully, the customer is more likely to act on the basis of the “business reputation” of the larger firms, thereby relegating the contract to a minor role.  On the other hand, the same customer is more likely to question the staying power and business ethics of the smaller, less established vendors, thereby increasing the importance of the contract when these firms are involved.

Implementing this ploy is relatively simple once the vendor sales representative has his/her standard form agreement and a typical customer.  Ordinarily, the marketing representative uses one or more of the following techniques:

  • Downplay the importance of the contract at every possible point.  Overlook it, if possible.  If the customer raises the matter, postpone it (e.g., leave the contracts at the sales office, put them “in preparation” or “in Legal,” or promise them next week).
  • Where possible, make the contract signing event very casual (e.g., “Bill, I’ll drop by at 10 on Monday to get your signature on the agreement,” or “Why don’t we play golf Saturday morning?  That way I can bring the contract along for your signature and we can have the gear shipped Tuesday”).
  • Never give the customer’s attorney or senior management the form agreements in advance.  If the customer insists on getting the agreement during or before the negotiations, try to keep the forms on the desk of the customer’s operations manager (e.g., “John, keep these until we get the deal worked out.  Then I’ll go with you to see your president and your attorney.  That way, I can present the terms and explain the agreements”).
  • If the customer insists on receiving copies of the agreements in advance, try to omit some of the equipment schedules or supplements and all of the software and maintenance agreements.  (Knowing customers will recognize that some of the largest vendors put the most onerous terms in the supplements.  Maintenance and software agreements are famous for their “gotcha” provisions.)
  • Present the form agreement at an opportune moment.  Often, this will be when the marketer has just met the customer’s “hot buttons,” where he/she has otherwise created a good sense of urgency in the customer, or where the marketer has maximized his/her “relationship of trust” with the customer.
  • When the IT manager presents the form contracts to his/her attorney (or to senior management), be sure the sales representative goes along.  Ideally, have the sales representative stay while the attorney or senior manager “reviews” the contract.  This approach forces a sense of urgency on the lawyer or manager, thereby limiting the detail of his/her review.  In addition, it permits the sales representative to use his/her superior knowledge of the equipment and related technical terminology to confuse the attorney or manager and, in many situations, to make him/her feel inadequate to challenge the vendor’s position.
  • Once the contract is signed by the customer, never volunteer to give the customer a copy.  This technique downplays the importance of the contract.  In addition, it keeps the customer from being able to review the contract (for the first time or more carefully) and possibly revoke it between the date the customer signs the agreement and the date the vendor accepts the contract at its home office.  Although most vendors voluntarily give the customer a copy of the agreement once it is fully accepted, a few do not.  The latter group uses this technique to make it difficult for the customer – or its attorney – to “check the agreement” in the event of a subsequent dispute.

This ploy can be a valuable sales tool for the vendor for any of several reasons.  First, it enables the vendor to avoid the problems associated with long, drawn-out contract negotiations.  If the customer will accept the vendor’s form agreement, the sales representative can close the transaction quickly, “while he/she is hot.”  Extensive contractual negotiations increase the risk that a customer will back out of the proposed transaction.

For example, the customer’s attorney may point out legal or business concerns that cause the customer to rethink the proposal (due to legal, financial, or performance factors).  At the same time, while the attorneys are negotiating the legal points, the customer’s comptroller may have time to reconsider his/her analysis and recognize that the customer overlooked an important alternative method of obtaining a better price/performance ratio.

Second, the ploy enables the vendor to use its own standard form agreement to document an important, expensive transaction.  As thoughtful customers recognize, a vendor’s form agreement is almost always an artfully worded document designed to give maximum protection to the vendor and minimum protection to the customer.  If no changes are made in this agreement, the customer will be at an extreme disadvantage in the event the system malfunctions or the vendor otherwise fails to meet its marketing commitments.  The form contract ploy serves as an excellent method of ensuring that the commitments made by the vendor’s marketing representative are not part of the contract and, therefore, not part of the deal.

Even if the customer insists on having the vendor’s form agreement “reviewed by counsel,” this ploy can help the vendor minimize its contractual commitments.  By treating the contract almost as an afterthought, the vendor’s marketer can virtually lock up the sales campaign before giving the agreement to the customer or its attorney.  If the sales representative is adept, the customer will be fully and firmly committed to the acquisition before the customer’s attorney is ever brought into the picture.  The customer will then be on the sales rep’s side, urging the customer’s counsel not to “blow the deal” by rewriting the whole agreement.

When the customer’s management has this vendor-created sense of urgency, counsel seldom has the time (or the strength and patience) to effect meaningful changes in the vendor’s agreement.  As a result, the customer receives some contractual protection, but the vendor still remains in a superior legal position.

Third, the ploy enables the vendor’s sales representative to separate the negative impact of the vendor agreement from the positive impact of his/her marketing pitch.  As suggested above, vendor agreements contain little for the customer except disclaimers of vendor liability.  These disclaimers generally conflict with the marketer’s assertions of “We’re the best people in the world, with the best equipment and maintenance anywhere, and we will do anything for you, our valued customer.”

Consequently, the sales representative’s job is made easier if the customer does not have a copy of the vendor contract at the outset.  If the customer does obtain a copy of the contract (for example, by special request or because of an earlier transaction), the vendor’s representative can still obtain similar but less effective benefits by downplaying the importance of the contract by such asides as “Oh, we’ll get to that later” or “Let’s leave that one for the lawyers.”

In each case, the basic goal is the same: Keep the customer’s attention focused on the sales pitch, not on the contract; don’t let the customer look for the marketer’s representation in the agreement.  (After all, it probably won’t be there.)

Avoiding the form contract ploy is relatively easy, if the customer is willing to follow a few simple rules.

First, the customer should always obtain copies of all relevant vendor contracts, supplements, and schedules (including equipment, software, and maintenance agreements) at the very outset of negotiations.  Of course, if the customer employs a good RFP technique, the vendor will have supplied copies of all such documentation as part of its initial proposal.

Second, the customer must ensure that all participants on its negotiating team review the vendor’s contracts before negotiations begin (which means before the vendor’s marketer makes any serious presentations to the customer’s staff).  It is essential for all members of the customer’s negotiating team – operations, legal, financial, and senior management – to understand just what commitments the vendor has and has not made in its proposed form contract.  For example, this technique permits the customer’s operations manager to interrupt the vendor’s sales presentation and ask, “Will you place that precise commitment in the written agreement?”

Third, the customer’s legal staff should review the vendor’s form agreements and prepare all necessary changes and addenda (or an alternative agreement) as far as possible in advance of the proposed contract signing.  Even if the customer’s attorneys cannot yet draft all relevant provisions (due to existence of continuing negotiations on substantive matters), this approach gives the customer’s lawyers time to “neutralize” and “counteract” the pro-vendor form agreement.

This process of neutralizing the onerous effect of the pro-vendor provisions in the form agreement, and drafting the dozens of pro-customer provisions required to counteract it, can be a painstaking and time-consuming task, particularly if the customer’s attorney does not have an extensive “data base” or form file of pro-customer provisions.  The customer should never be rushed into signing anything – much less the vendor’s form agreement – without adequate review by legal counsel.

In this regard, the customer must avoid the vendor’s sense of urgency ploys and keep the acquisition in proper perspective.  In effect, the customer’s negotiators must remember that neither the nation nor their company is likely to fail if their attorney takes a few extra days to review and redraft a vendor form agreement.  On the other hand, rushing into the transaction, on the wings of the vendor’s biased form agreement, may cost the customer thousands, if not millions, of dollars – and it may also cost the customer negotiators their careers.

ICN has been in the business of helping technology users do better and safer deals with vendors for more than forty two years.