Note: This article is for educational purposes only and does not replace individual legal advice. You should speak with an expert attorney for any legal advice to assess individual contracts and needs—managing commercial contracts is a complex undertaking and every company needs to evaluate and produce contracts that work best for their unique situation.
Why is it important to manage your commercial contracts properly?
They’re a vector for limiting risk – commercial contracts are tools that help you and your customers delineate who takes on specific obligations, liability, and risk. Having a contract in place decreases ambiguity, which is particularly helpful if there is a dispute or disagreement.
They can be sales and marketing tools – commercial contracts can help you differentiate yourself, or keep pace with, competitors. For instance, if you offer a limitation of liability that is above industry standard or a simple, straightforward agreement when most competitors have a complex, lengthy contract, this can be a tool to help close a sale with a customer.
What are the different types of commercial contracts that B2B businesses commonly use and encounter?
Note: the below commentary relies on generalizations (for example, a company may call their master agreement “Terms of Use” even though a master agreement is more often referred to as a “Master Services Agreement”).
| Category | Key documents | |
| Usage and Privacy | • Terms of Use – these outline the rules and guidelines for using a product or service and are often set terms linked to on a company’s website. • Privacy Policies – these documents detail how a company collects, uses, and protects customer data. • Data Protection Agreements – these documents are put into place to comply with applicable data privacy and security laws and regulations. • Business Associate Agreements – these are documents that outline how companies will handle protected health information to comply with HIPAA and other applicable regulations. | |
| Sales | • Master Service Agreements (MSAs) – these are the main agreements for the purchase of software and other services. They outline the terms and conditions under which the software is provided and used. • Professional Services Agreements (PSAs) – these typically involve professional and consulting services, where an individual or team is hired to provide a specific service. • Statements of Work (SOWs) – these documents outline the specific tasks, deliverables, and timeline for a particular project or service, including cost, payment, and renewal terms, usually under the terms of a PSA. • Order Forms – these documents detail the specific products or services being purchased, including cost, payment, and renewal terms, under the terms of the MSA or PSA. • Change Orders – these are used to document any changes to the original SOW or Order Form, such as changes in scope, price, or timeline. | |
| Partnerships | • Partnership Reseller Agreement – these govern the terms of a reseller relationship (e.g., you agree to allow Acme Corp. to sell your product in exchange for a percentage of the sales made). • Partnership Agreement – these govern the terms of a partnership beyond reselling (e.g. a co-marketing agreement). | |
Contracts Governing Websites/Tech Product Usage
What legal documents governing product usage should your organization have?
| Terms and Conditions of Use | |||
| What it is | Legal agreements, typically found at the bottom of a website – they apply to all users and are not negotiated on a case-by-case basis. They’re accepted by users when they create an account or use the website. | ||
| Common terms / clauses | They’re often one-sided and drafted to protect the company providing the service – they limit the company’s liability and outline the user’s agreement to certain conditions. • Limitation of Liability – this clause limits the damages, often to the amount the user spent in the year preceding the event giving rise to the claim. • Intellectual Property (IP) – this clause states who owns the IP, including the IP created as a result of using the services. • Governing Law and Jurisdiction – this clause specifies the governing law and jurisdiction for any legal disputes. • Representations and Warranties – this clause states the representations and warranties made between companies and their customers. Examples include: that the services will comply with applicable law, that the services are provided “as is,” and that the customer will not use the services to compete with the company. • Termination of Accounts – this clause gives the company the right to terminate a user’s account, either at-will or for specific reasons. | ||
Tips on when to use and when to customize Terms and Conditions:
- Avoid custom T&Cs for small customers – some companies set a spending threshold for negotiating contracts. If a user spends less than the threshold, they agree to the T&Cs. If they spend more, the company may agree to negotiate a contract.
- For larger customers, specify alterations in an MSA or Order Form – if a large value client objects to something in the T&Cs for their users, the company can specify an exemption in a separately executed MSA or an Order Form.
| Privacy Policy | |||
| What it is | Privacy policies are in place to ensure that your company is complying with privacy laws – such as the General Data Protection Regulation (GDPR) and California privacy laws. It’s crucial to include the required language in your privacy policy to avoid legal complications. They provide transparency about data usage – privacy policies are also designed to clearly lay out what your company does with people’s data and information. This transparency helps build trust with your users and protects your company from potential legal issues. | ||
| Common terms / clauses | • Detail exactly how you’re going to use the data you collect – this includes whether you’ll be reselling it or not. • Details how you’re going to collect the data – Privacy Policies often contain terms stating how companies will collect a user’s data. | ||
Certain companies might require additional privacy agreements like:
- Data Protection Agreements (DPAs) for businesses with European data – DPAs help to ensure compliance with the General Data Protection Regulation (GDPR), outlining the commitment to data protection, including actions to be taken in the event of a data breach. If your business handles customer data, such as personally identifiable information (phone numbers, email addresses, names, addresses, social security numbers), consult with a privacy attorney to establish the right policies. Failure to do so can result in substantial fines.
- Business Associate Agreements (BAAs) for protected health care information – if you’re handling health care information, it’s important to consult with a privacy attorney to ensure you’re complying with all necessary regulations.
Sales Contracts
What legal documents supporting sales should your organization create?
| Master Service Agreement (MSA) | |||
| What it is | An MSA is often the primary agreement if you’re selling software or some other type of service – it governs the entire relationship between you and your client and typically lasts for 5-10 years. You don’t have to call your master agreement an MSA – it can sometimes be named a SaaS Agreement, Software Agreement, Technology Agreement, etc. | ||
| Common terms / clauses | • Intellectual Property (IP) Rights – outlines who owns the IP rights to the product or service being sold and IP created as a result of using the services. • Limitation of Liability – limits the amount of liability a company and customer can be held responsible for. • Representations and Warranties – outlines the promises made by both parties. • Indemnification – creates an obligation that a breaching party will need to defend the other party in a lawsuit and cover losses and expenses for the breach (i.e., you might indemnify your customer for a breach of a 3rd party’s IP rights – meaning that if the customer is sued because you breached a 3rd party’s IP rights, you’d defend the customer in a lawsuit and pay for related losses and expenses). Indemnification is often capped in the limitation of liability • Governing Law and Jurisdiction – this clause specifies the laws that will govern the contract and the venue where any lawsuit will take place. • Arbitration Provision – outlines the process for resolving disputes outside of court. • Payment Terms – outlines how and when payments will be made (though it could be in the Order Form instead of an MSA). • Termination Provisions – outlines the conditions under which the contract can be terminated. • Customer Responsibilities – outlines the responsibilities of the customer(such as “Customer agrees to maintain and secure its passwords and to not allow access to the platform to third parties”). • Integration Clause – states the signed contract is the agreement between the parties and outside communications do not alter it. | ||
Tips on MSAs:
- You might have a standard MSA (published on your website) or an MSA for each client based on their specific needs and concerns – customization is more common with larger contracts and strategic customers and allows you flexibility to negotiate terms and reach an agreement with prospects.
- Think of sales and marketing implications when crafting your MSA – create a contract that is easy to read and focused on the main concerns for you and the customer. Make it concise to focus on your product and the actual concerns
| Service Level Agreement (SLA) | |||
| What it is | SLAs express a commitment to a certain level of service – they outline the level of service a company is committed to providing. This can include aspects such as software running time, response times to outages, and other service-related commitments. | ||
| Common terms / clauses | They typically include three key elements: • Service Availability – the uptime of the service, or how often it will be accessible to the client. It sets the client’s expectations regarding the service’s reliability. • Response Time – this is the time it takes to respond to a client’s request or issue. It’s an important measure of the service’s efficiency and the provider’s commitment to client satisfaction. • Remedies – these are the actions you will take if the service is not available as promised. This can include specific response times and the actions the company will take to remedy the situation—like providing a credit, refund, or other compensation to the client. | ||
Tips on when you may need an SLA:
The decision to offer an SLA can be influenced by several factors:
- Sales Tool – it can be used as a sales tool to attract clients. It can highlight the service provider’s commitment to quality and reliability, which can be a competitive advantage.
- Setting Client Expectations – it helps set clear expectations about availability, response time, and remedies. This can help prevent misunderstandings and disputes in the future.
- Protecting the Service Provider – by defining the limits of their responsibility and the remedies they will provide in case of service disruptions.
- Competitive Landscape – if other companies in the market are offering SLAs, it may be necessary to offer one as well to remain competitive.
Some companies offer tiered SLAs – in some business models, companies offer the option to purchase enhanced SLAs. For example, a company may offer a faster response time for an additional fee.
| Professional Service Agreement | |||
| What it is | PSAs are the MSA corollary for consulting or advisory services – a PSA may instead be called a Consulting Agreement. While some companies may sell software under a PSA, they are generally separate from MSAs. | ||
| Common terms / clauses | PSAs often contain many of the same terms as MSAs – this includes provisions like limitation of liability, governing law, IP rights, and termination. PSAs may have differences depending on the services provided: • Indemnifications – if the professional services will take place onsite, indemnification will often include indemnification for any physical harm or injury caused while on premises. • Different language around IP – while the company selling the service still owns the IP, there will sometimes be language stating that the customer will have a license to use whatever was created solely to implement the product. • Different Payment Terms – PSAs may also have different language around when payments are due. For example, while software may have net 30 terms, professional services may require payment in advance. | ||
Tips on PSAs:
- It is possible for a company to have both an MSA and a PSA – the specific agreements a company needs can vary depending on the nature of their business and the services they offer. For example, a software company selling a self-serve software product may have different needs than a company selling a high-value software product.
| Order Forms (Often paired with an MSA) | |||
| What it is | Order Forms detail the specific products or services being purchased – they are the documents that outline the specifics of the transaction. They list the products or services being purchased, the cost, the term, and the payment terms. Order Forms are governed by a master document – this could be a Master Service Agreement (MSA) or terms and conditions. The Order Form should clearly state which document governs it. | ||
| Common terms / clauses | Payment terms can be included in the Order Form – while some businesses may rely on the MSA for payment terms, including them in the Order Form can be helpful for clarity or to revise the payment terms in the MSA. Order Forms can include additional terms not in the MSA – as businesses grow and expand, there may be additional product terms that were not anticipated when the MSA was first entered into, which can be included in the Order Form. | ||
Tips on Order Forms:
Order Forms are typically used in conjunction with an MSA – while some businesses may include commercial terms in the MSA and forgo an Order Form, it is more typical to have both documents. The MSA outlines the general terms of the business relationship, while the Order Form details the specifics of each transaction.
| Change Order | ||
| What it is | A Change Order is used to modify the terms of an Order Form – this could involve altering the price, quantity, or other terms in the Order Form. For example, if a customer initially purchases six licenses, but decides halfway through the year to increase the licenses to eight, a Change Order would be implemented to update the Order Form and reflect the increase in licenses and the additional cost. | |
When structuring B2B sales, what combination of MSAs, PSAs, SOWs, and Order Forms do you need?
While the exact setup may vary on a company-by-company basis, often they’re paired:
- For software – MSA + Order Form for the commercial details (e.g. number of seats)
- For services – PSA + Statement of Work for the commercial details (e.g. number of people staffed)
The specific combination of documents used can vary, depending upon the company and sale type, for example:
| Self-Serve Software (Simple, online purchase) | Mid-Market Software (Medium complexity) | Enterprise Software + Professional Services (Most comprehensive Agreement) |
| • Terms & Conditions • Privacy Policy | • Master Service Agreement • Professional Service Agreement (PSA) • Order Form | • Master Service Agreement (MSA) • Professional Service Agreement (PSA) • Statement of Work (SOW), • Purchase Order (PO) |
You might link to a master online MSA or PSA from your Order Form – to help ensure a quicker sales process and to push for customers to accept MSAs and PSAs without edit, companies will sometimes have their online MSA and/or PSA linked to in the Order Form
If you sell both software and services, you might combine an Order Form and SOW – for some sales, the Order Form and SOW can be combined into one document. This is sometimes done when selling software and implementation services together.
Companies can create a hybrid agreement – some companies may choose to include their governing legal terms as part of their MSA or, alternatively, include terms you’d typically see in an Order Form (number of licenses, cost, etc.) as part of an executed MSA. There is no one set way to set up an MSA, Order Form, PSA, or SOW, so it’s important to work with an attorney to determine which setup is right for your company.
When should you make modifications based on a prospect or client’s requests, and when should you hold firm?
A few factors play into the decision to alter terms:
- Economic Considerations and Risk Tolerance – the decision to modify a document based on a client’s request largely depends on your company’s economic situation and risk tolerance. New companies that need clients might be more open to revisions. As a company matures, risk tolerance might decrease, and certain terms may look unappealing.
- Stage of your company – early-stage companies can sometimes be often more open to revisions than mature companies.
- Client documents – larger companies might insist on using their paper instead of yours. In such cases, you need to make a business decision on whether it’s worth it for you to go through that document and hire a lawyer to update the agreement.
- Future considerations – terms you agree to in the early stages of your company might need to be renegotiated in the future, especially during financings and acquisitions.
Terms your current or future investors might not want to see include:
- Termination for Convenience – allowing a client to terminate the agreement at any time, even if you haven’t breached anything. As a seller, you generally want to avoid this term as it could lead to losses if the client decides to terminate early.
- Unlimited Liability – this can be risky, especially for new companies. This term might need to be renegotiated in the future if you’re looking to get venture funding or to be acquired.
- Broad Indemnification – overly broad indemnification, such as agreeing to indemnify for all claims instead of just third-party claims, can be problematic.
- Varying Governing Law – having contracts governed by more than a few states can be difficult to comply with and expensive to litigate if anything goes wrong.
- Lack of Privacy Documents – not having the right privacy documents in place can be a red flag for venture firms and acquiring companies.
- Overly Broad Representations and Warranties – you want to limit your representations and warranties to avoid potential legal issues. For instance, you might want to include language that says the products are provided as-is.
How should contracting documents work with invoices?
Invoices follow Order Forms – typically, a company will have a customer sign an Order Form before issuing an invoice. This Order Form will detail the product or service being purchased, such as $50,000 worth of software. Once the customer has signed on the dotted line, the company will issue an invoice.
Invoices contain less information – they are usually straightforward documents that simply state the amount due, such as $50,000, and the due date, such as 30 days from today.
Invoices are not typically legal documents – while some companies may have more involved invoices, most are not considered legal documents. They are simply a request for payment based on the agreement outlined in the Order Form.
How should you handle multi-year and auto-renewing deals?
Customers might put a cap on renewal price – inflation has led to a common trend where customers want to put a cap on the price at renewal. This can be addressed proactively by agreeing to renew the contract at a price no more than a certain percentage increase, such as 5% or 7%.
Make sure the Order Form is for the term – for multi-year deals, ensure that the Order Form clearly states the term of the contract. This could be represented as a specific number of months, such as 36 months, or even specific dates.
Include yearly pricing detail – for contracts spanning multiple years, it’s common to list specific yearly pricing details. For example, the first year could be $100,000, the second year $110,000, and so on. This provides clear expectations for both parties. You may want to include additional language around potential price increases to give yourself pricing power and prevent disputes.
Partnerships
What legal documents should your organization create when forming partnership relationships?
| Partnership Reseller Agreement | |||
| What it is | Reseller agreements are contracts between a business and a third-party reseller – these agreements allow the reseller to sell the business’s software or other products to their established network of clients, expanding the business’s reach. | ||
| Common terms / clauses | • Pass-through terms to their customer – the reseller should be required to pass through your terms and conditions to the customer. This ensures that all customers agree to your terms, even though they are purchasing through a third party. • Reseller’s cut – the agreement should clearly state the percentage that the reseller will earn from each sale. • Payment schedule – specify when the reseller will pay you if the reseller is the one collecting the money from the sales. • Audit rights – the agreement should grant you the right to audit the reseller. This allows you to verify the number of sales and ensure you are receiving the correct percentage. • Limitation of liability – as with all contracts, the agreement should include a limitation of liability clause. | ||
| Partnership Agreement | |||
| What it is | The partnership agreement outlines the roles and responsibilities of each party working together on a project – this is different from a reseller agreement, as the partner engagement may extend beyond sales. | ||
| Common terms / clauses | • Roles and responsibilities – the agreement should clearly define what each party is expected to do. • Termination rights – the agreement should specify the conditions under which the partnership can be terminated, especially in the event of a breach. • Revenue split – if the partnership will generate revenue, the agreement should clearly outline how this will be divided between the parties. | ||
Procurement:
What processes should you establish in reviewing and signing vendor contracts?
Before signing any contract, answer these questions:
- What is the spend? – determine the amount of money that will be spent on the vendor.
- Will the vendor have access to sensitive/confidential information? – it can significantly impact the level of risk involved in the contract.
- Will the vendor be creating intellectual property for your company? – it can have implications for ownership and rights to the created IP.
- Will the vendor be processing, storing, or accessing personally identifiable information? – this is a key consideration in light of data protection regulations.
- Will the vendor have access to our internal systems? – this has implications for security and data integrity.
Depending on your resources and risk tolerance, if the spend is low and the answer to other questions is ‘no’, then it might be acceptable to sign the contract as is (provided that you’ve read with and agree with the terms) – however, if the spend is high, or the answer to any of these questions is ‘yes’, then companies will usually want to have a lawyer or a trusted business associate review and negotiate the contract.
What terms should you look for and push back on during procurement negotiations?
There are several key terms to be aware of and push back on if necessary:
- Automatic Renewal – the automatic continuation of the contract after its initial term. It’s essential to be aware of this clause to avoid being locked into a contract for longer than intended.
- Payment Terms – these terms dictate the schedule and method of payment. Ensure these terms are clear and manageable for your business.
- Limitation of Liability – this clause limits the amount a company can be held liable for in case of a breach of contract. You should aim to keep your liability as low as possible.
- Indemnification – the obligation of one party to compensate the other for any harm, liability, or loss arising from the contract. It’s crucial to understand the extent of this obligation.
- Price Increase – be wary of clauses that allow the vendor to increase the price significantly. This could lead to unexpected costs for your business.
- Neutral Governing Law – the governing law clause determines which jurisdiction’s laws will govern the contract. It’s best to choose a neutral location or one where your business is located.
- Termination Rights – these rights allow you to end the contract under certain conditions, such as a breach of contract. You should push for a pro-rata refund for services paid for but not received in case of termination due to breach.
Overall
What are the most important things to get right?
Square away your IP and liability – two of the most common concerns for companies when it comes to commercial contracts are intellectual property (IP) and liability. These are areas where a single mistake or oversight can have significant consequences, so it’s crucial to ensure that your contracts provide adequate protection.
Avoid entirely one-sided contracts – while it might seem beneficial to your business to have a contract that only favors your company, this approach can deter customers. A contract that doesn’t offer any protection to the customer may lead to heavier negotiations or even loss of business.
Listen to your customers and update your legal documents – pay attention to the feedback you receive from your customers and make necessary updates to your legal documents. If you notice that most of your customers are requesting IP indemnification, for instance, it may be beneficial to add this to your MSA to avoid constant negotiations. Your MSA and other legal documents should be living and breathing—updated regularly to reflect your business and customer feedback.