Developing A Form Customer Contract And A Contract Review Program

Posted on January 26, 2012


No business can survive without customers. As opposed to employment and shareholder agreements which are irregular and typically customized, customer agreements either need to be significant monetarily (i.e. businesses who have large contracts) or plentiful (i.e. businesses who have multitudes of customers). Managing these relationships is a core requirement of the business, and survival depends entirely on the revenue generated from these customers.

With the possible exception of retail[1], contracts are needed between the party who is the customer and the party who is the supplier. Each industry has its own unique form of contracting and its own internal (some written, some not written) rules, which are commonly referred to as industry practice. Industry practice is important for a number of reasons:

1)     The party (supplier or customer) upon whose form contract the relationship is based is often determined by industry standard. For example, in the home building industry, the home builder will typically supply their contract. When a party provides professional services to a large customer, the supplier typically provides their form documentation.

2)     If a term is left undefined in a contract, the ‘industry practice’ will fill the gap. For example, if a contract does not specify what are the customer responsibilities for a service contract (for example, if dedicated personnel is needed), then industry practice will help a court or other arbiter decide what customer responsibilities are necessary when and if it becomes an issue.

3)     The standard of performance is often governed by industry practice. If a good or service is to be provided to the ‘reasonable satisfaction’ of a customer, the industry practice and standard will help determine whether a customer is being reasonable.

Because industry practice is so fundamental to customer/ supplier contracts, my counsel for developing a form contract is typically to first go to a trade group or trade association. Often, they will have a contract that they will provide to members. Sometimes this contract is not only the starting point, but the finishing point as well. In home building, the industry standard is the AIA (Architecture Institute Association) form. Deviations from that form are rare.

On the other end of the spectrum, a more complicated situation arises when a company is in a new or developing industry. Not only are there no industry standards, the relative rights between customer and supplier are not yet clearly defined. Additionally, the risks associated with the relationship have not yet manifested themselves.

In these situations, the business developing the contract will begin with a standard form of service or sales agreement. From the standard form, a good description (even if taken from marketing material) is helpful. However, oftentimes people inexperienced with contracting will not work through the implications of the marketing promises. Usually a lawyer is necessary and a good investment at this point. (Just have a concise, but complete, summary of the business transaction.)

Over time, as issues arise, the contract can and should be modified. Remember it is a fluid process. As you go forward, a business should continually adopt the contract form to the business process and modify the form to account for business issues. As a business modifies the contract, care should be taken to keep the contract precise and concise. Often issues that crop up need to be handled outside of the contract (in a policy for example) instead of having a complicated contracting method. A contract that is too complicated is a deal that does not get done.

Mike Goodrich
Goodrich Law Firm, LLC

[1] While the contract between the retail customer and the retail store is often performed entirely in the store (when you buy a coat, the contract has been formed and performed), retail often has warranty issues.  The warranties, and the limitation of warranties, require written disclosure.