Updated October 30, 2020:

A third party vendor agreement is a contract between two parties that later adds an outside party. In general, the third-party provides goods or services to help one of the parties fulfill its contractual obligations.

Provisions to Consider in Third-Party Vendor Agreements

Many different industries may use third-party vendor contracts, which usually contain common provisions. These relate to the following:

  • Term and termination
  • Assignment
  • Exclusivity
  • Liability limitation
  • Indemnification

Financial institutions depend a great deal on third-party vendor agreements. These businesses can outsource financial services to a third party, but they can't outsource their responsibility for the services.

Not only are third-party vendor contracts important in the banking industry, but they're also becoming widely used in the state and federal bank regulation field. These agreements face a lot of scrutiny due to increased attention to cybersecurity and the complex nature of bank-vendor relationships.

Some vendor services are riskier than others, so it's important to review key provisions before you sign a contract.

Term and Termination

It's important to know the length of the contract and if it will automatically renew at the end of its term. Parties should have appropriate methods to terminate contracts if needed.

Many vendors don't let financial institutions terminate contracts at will. However, vendors might allow them to do so if a regulator directs them to or if they believe that continuing the contract could jeopardize the soundness and safety of the institution.

All business owners want these strategic relationships to last, but you should always make sure your contract has an exit clause that covers both fault and no-fault situations. Decide if auto renewals should be part of your vendor philosophy. Set clear expectations upfront, especially in terms of confidentiality breaches or breaches of the law.

Assignment and Venue Exclusivity

In many instances, vendor contracts may give the vendor permission to assign the contract to a third party without the financial institution's consent. However, institutions should do their due diligence and thoroughly research their third party vendors.

It's important to revise a vendor contract's assignment provisions if a financial institution wants the ability to review and consent to any assignment from a third party vendor.

When reviewing such an agreement, look at the “governing law” section of a contract to find the provision that specifies where a party can bring suit. Most of the time, the contract states that suits must be filed in the jurisdiction identified in the contract. There should be provisions that identify a jurisdiction where it's most reasonable and convenient to file a lawsuit or defend against one.

Liability Limitation and Indemnification

Many vendor contracts contain a provision that prohibits a party from seeking damages from the vendor in amounts that exceed the fees the party paid to the vendor. You may want to negotiate this liability limitation because expenses that may arise due to an error on the part of the third-party vendor could be more than the fees paid to the vendor.

Limits could be unreasonable, and when the vendor is the at-fault party, there shouldn't be limits in place.

The commercial team should manage the indemnification provision, but it might have an impact on your privacy concerns. Consider what's spelled out, including actions out of your — and their — control.

Some people prefer to take a rigid approach in regards to business associate agreements and won't permit anything in the contract outside of what's proscribed under HIPAA. Otherwise, the terms of such an agreement may be too complicated when it comes to subcontractors and other third parties.

Contracts can be complex documents, so you may want to consult with a professional in the contract law field. He or she can explain some of the more complicated terms and provisions so that you know exactly what you're signing.

When it comes to third party agreements, things may be even more complex. Although third-party vendor contracts have their benefits, make sure you completely understand what you're getting into. You don't want to deal with any surprises down the road, as the results can be damaging and costly to your business.

If you need help with vendor agreements or other contract types, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.