What You Need to Know about Third-Party Contracts: Basic Components and Example Templates
What is a Third-Party Contract?
A third-party contract is a legally binding agreement between the two parties to a transaction, which designates either a trusted person or organization to help settle or fulfil an obligation from that transaction on their behalf. Such a contract will list specifically who the third party is, what their obligation is and how often they must fulfill that obligation .
The sole purpose of a third-party contract is to ensure that the process of maintaining the promise put into the original contract stays intact, to ensure that the sender is held to their end of the bargain and to maintain the integrity of the delivery and promise being made.
The third-party contract is similar in nature to a multiple party contract, which also names an emissary to perform a transaction or share a benefit. Third-party contracts are most often found with service contracts, in which one party will simply have someone else do the work instead of doing it themselves.
Components of a Third-Party Contract
When dealing with any type of agreement with a third-party company, it is essential that you have a standard set of elements and components you include within the contract. In particular, when it comes to information technology agreements, those key areas are of particular importance to understand and incorporate within your agreements, as they’re not as straightforward as other types of contracts.
There are typically six elements included in a third-party IT agreement that you must be aware of:
- Parties – Who will be included on the agreement? You should make sure to include any other vendors or third-parties that will be involved here.
- Obligations – This is where you need to specify the scope of the work and the terms of the contract. Make sure it clearly states when the obligations end so there is no confusion or poor expectations after the contract is signed.
- Payment – Clearly define the compensation here, especially with how and when it will be distributed to third-parties, as there are federal regulations that state how these things must be handled.
- Confidentiality – Incorporating a confidentiality agreement is essential in these types of contracts, as it addresses issues such as trade secrets, intellectual property rights and other proprietary information.
- Termination – There are two types of termination you’ll need to define in your contract with third-parties, as the business relationship could end before the completion of the contract or it could be terminated even after the project is finished.
- Warranties – Be sure to indicate what types of warranties will be provided by the parties involved, especially with regards to the work of the third-party.
By including a workable contract with objective language, as well as all of the key elements, it will be easier to navigate many of the difficulties that can arise with third-party relationships.
Why Use Third-Party Contracts
The importance of third party agreements to both legal and business dealings cannot be overstated. In fact, it is vital to address issues of regulation and liability in any deal between companies, or individuals, to avoid potential pitfalls that may impact one or both of the signing entities. With that in mind, attorneys should be sure to review the basic elements of any third party contract to ensure their client’s best interests are being upheld and the agreement is worded correctly according to industry specific regulations.
The purpose of a third party agreement is to set the terms and conditions of a deal between an individual, group, or company where that entity or person is a business partner, where services are exchanged, or goods are being distributed. It also helps to protect the member of a deal from unforeseen consequences that can stem from a partner’s decisions during the course of a business arrangement. For example, a generic agreement could put your company at risk, if the other party breaches the terms of the contract, you may have no recourse to defend yourself and bring a lawsuit against any damages. Equally important, failure to control the use of proprietary information could lead to the unfair loss of intellectual property rights.
However, these agreements also exist to protect the business relationship and the parties involved in them. While the language is usually subjective to the agreement itself, it may include terms of confidentiality, exclusivity and nondisclosure to safeguard sensitive information. It may also define the behaviors and actions of both parties as they relate to the contract, and an explanation of how they will handle the material obligations of the agreement to decrease the risk of loss or liability.
While the content of third party agreements will vary based on the type of business, the mutually agreed upon terms and conditions are standard. In addition, the third party agreement template will likely become part of third-party contracts in the following areas:
As with any contract, written or implied, there is a certain level of liability when it comes to third parties. However, understanding the risks and benefits associated with creating, negotiating, and implementing these developed business relationships can assist in both avoiding legal ramifications and strengthening business models.
When to Use Third-Party Contracts
Typically, third-party contracts are most commonly engaged in several different contexts. These contexts include the following:
Vendor Agreements
Businesses—large and small—need multiple vendors to help them run their daily operations, whether it’s a contract company for front office or back office support, contractors to perform various types of construction projects for tenant/landlord situations, service providers for building maintenance and repairs, equipment providers for machines, furniture and computers, and many others. As such, the scope of service and the terms agreed to between the businesses and the vendor need to be set forth in writing in a way that protects the business and clarifying its responsibilities to the vendor. For instance, the purchase order can provide the scope of work, services and warranties and protections that are agreed to. The business should also look out for liability protection.
Partnerships
Businesses need to have partners, and there are many relationships that a business may want to enter into that require a contractual agreement with partners. Some examples of partnerships include referral agreements, outsourcing contracts and joint ventures. Sample third-party contracts are useful for businesses that are just starting out in a new partnership and providing a way to control the terms of the relationship. Language then is included describing how to handle the termination of the relationship, how profit sharing will take place and how to resolve any disputes that arise between the partners.
Contractor Agreements
Contractors have become more popular for big and small companies in recent years. A contractor is someone who agrees to help a business with certain jobs, tasks and responsibilities, and for which the business compensates the contractor for his or her work. These contractors are not employees of the business, but the business may treat them like employees, hence the need to enter into third-party contracts with contractors to spell out the roles, responsibilities, compensation, expectations and privacy rights of the parties.
How to Write a Third-Party Contract
When considering a third-party contract, one of the key factors that come into play is how well the agreement is written. With the importance of both parties relying on the terms of the agreement to clearly lay out their obligations, it’s critical that when drafting a third-party contract, you take the time to be as clear and concise in your language so that all parties can have a thorough understanding of their obligations under the contract, as well as make provision for any contingencies. This is especially important in health care agreements, where the implications of not adhering to the contract can be substantial.
Following best practices in drafting a third-party contract , including utilizing standard contractual terms and having legal counsel review the requisite legal clauses, can go a long way in determining whether everyone involved will stand by the terms of the agreement until its expiration.
When it comes to drafting a third-party contract, there are several elements of best practices that you’ll want to keep in mind, including: And the most important best practice of all: While preparing a third-party contract involves many best practices, perhaps the most important is that you seek the advice of an attorney who has experience drafting and helping businesses navigate contract disputes. Their knowledge can help ensure that you are protected from issues with the third-party contract once it is signed and begins to be implemented.
Third-Party Contract Review
When analyzing a third-party contract, make sure analysis begins with the terms. Before entering into a contract, both parties need to have a clear understanding of the terms of that contract. Depending on complexity of the deal and the industry, this may be a fairly easy task or make take some time to ensure there are no issues. While a less formal approach may be sufficient for some industries, especially non-competitors, ensure that the parties have a clear idea of what the other party is agreeing to. Leave no room for confusion.
How terms are defined and interpreted in contracts can vary widely based on industry and state law. It is important to use proper definitions for the industry, and to absolutely avoid an ambiguous or unintentionally broad term that can later be relied upon. There are generally two ways to define a term in a contract: a parenthetical definition or something like "…as that term is commonly understood in the industry". Parenthetical definitions are preferred, as you can use words with specific legal meanings without fear of having an unintentional ambiguity. However, if you do use an industry definition, make sure you are using one that is commonly understood. Some terms, like "time is of the essence", mean very different things in different industries. If your industry does have a specific meaning for a term, be sure to use it expressly. Additionally, be sure to define with aliases. For example, if your new client refers to consultants as "officers" instead of "consultants", be sure to define who this refers to as "consultants, or alternatively "officers". While it is natural to use simple words that mean different things in different contexts, consider that your other party might have a different conception of what those terms mean.
Another red flag to look for when reviewing a contract is whether the contract gives the manufacturer liability for the entire product, the individual component, or only the material used in that component. In most cases, you should not agree to be responsible for the entire device, as your component is just that – a part of the overall product and equally the responsibility of the manufacturer.
In addition to seeking to clarify term definitions, you should also verify whether the agreement allows the manufacturer full control over design changes. If they do, that will significantly increase your risk and exposure. You should always make sure that you are involved in these important changes and can weigh in on their merit. The manufacturer should not be able to alter the specifications on a whim.
While these are just some considerations for reviewing a third-party contract, doing so in advance can save you a great deal of difficulties. Structuring your agreements to stay out of court whenever possible is one of the key steps to being a successful business.
Example Templates for Third-Party Contracts
There are a wide variety of third-party contract templates available online, which can be customized to meet your individual circumstances. When customizing third-party contract templates, important provisions to consider include:
Scope of Work
What is the scope of services or products? Include a detailed list of what is to be provided and any deadlines for delivery.
Compensation Arrangements and Payment Terms
How much will be paid for the services or products? The compensation arrangements should clearly detail how much will be paid, for what services, and when they will be paid. In addition, there are a variety of other compensation options that can be considered, such as an equity investment.
Representations and Warranties
What representations and warranties can or should be made to mitigate risk? Depending on the nature of the products, services or relationship, there may be various representations and warranties that should be presented. A scope of work and detailed limitations of liability can help mitigate risk.
Termination
What is the termination provision?
Depending on the circumstances, a mutual termination may be appropriate or a right of termination triggered by certain events may be considered.
Governing Law
What is the governing law? Where will disputes be resolved?
Consequences of Using a Third-Party Contract
Section 3: Legal Implications of Third Party Contracts
Contracts in a third party agreement include the obligations, rights, and responsibilities of the parties. If this is violated or disputed, party three may have the right to take the matter to court. Whether or not a contract is enforced is determined by a number of things such as the parties capable of entering into an agreement, the regulations that should be followed, and what written provisions are in your agreement. Something that may be complicated about a third party agreement is how various jurisdictions are going to interpret a written contract. The degree of uniformity of these contractual terms will vary and differ from situation to situation. An example of a third party agreement would be a contract between a parent and a plumber who has agreed to install a new plumbing system in the home however if the new plumbing ends up being defective, the parent is not the party who can file a claim against the plumbing company. In most cases, a parent can only bring claims if he or she is known as the insurer. The parent must explain this relationship in their complaint so that an appropriate remedy can be awarded. In some states, the parent can be regarded as the insurer for the child . In that situation, the parent can make a claim even though the plaintiff was the child. The statute of limitations applies to claims filed under third party contracts which takes place at the time the parties have an agreement entered into. If an action is not taken that has to do with this type of agreement, then the claim must be bought against the alleged violator of the agreement within the time limit established for that claim by that state’s law. Depending on the jurisdiction, the statute of limitations may vary. The elements necessary to enter into this kind of contract include an offer, acceptance, and consideration. An offer is something that one contract partner proposes to another. A contract is formed when the other party accepts that offer. Even just an offer is a contract. The acceptance may be communicated orally or in writing and the consideration is the compensation that is expected as a result of the contract. Offers, acceptances, or any arrangements or communications to offer or acceptance that are not formal would not be a contract. When it comes to the acceptance of the offer, there are some forms of acceptance such as silence that will not enforce an agreement.