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Many hands make light work

01 Dec 2009

What customers should consider when vendors partner.–  By Sean Lynch, Hesketh Henry, Partner.As a strategy to gain all of the business from customers, or simply to maximise revenue or market growth opportunities, technology vendors often look to partner with other technology vendors. This article looks at some common partnering models, and what customers should be considering in this regard, when negotiating their supply arrangements.Some basic partner modelsFirstly, the word ‘partnering’ means one thing to business people and another to lawyers. Legally, a partnership is a model under which each partner can be jointly and severally liable for the liabilities of the other partners along with other potentially onerous obligations (including tax obligations). These are the very things that most vendors want to avoid in their proposed partnering relationship. Lawyers acting for vendors will tend to structure the supply model as a joint venture (JV) by distinct and separate entities, where each perform obligations and gain returns, on an independent, arm’s-length basis. Depending on the commercial context, this can be done in a number of ways, as demonstrated in the three possible vendor joint venture models depicted.Under Model 1, Vendor 1 has the stronger market facing position out of the two vendors, and will want to ‘own’ the customer relationship and stamp its brand on the supply. Vendor 1 carries the prime supply risk with you, the customer. Vendor 2 supplies its component of the overall supply (maybe on a white label basis), and is essentially interested in gaining increased revenues, building new relationships, and growing a foothold in a market to be exploited when it is able to. Vendor 1 essentially becomes a reseller of the products of Vendor 2, and simply pays Vendor 2 for its supplies, which might be delivered directly to the customer on agreed terms.Model 2 is the classic incorporated JV model. Either vendor’s brand could be applied to the new company offering, or a new brand. This can be a legally more complex and expensive model for vendors to set up and run (than model 1, for example) given the range of corporate structuring legal issues to be addressed, and is often better suited to longer term ventures. Model 3 is less common, but involves a contract between the customer and both vendors, as well as a contract between the vendors themselves. Depending on the supply, the customer-facing contract should separate out each vendor’s responsibilities, clearly demarcating boundaries to the customer. Points for customers to consider1 If a vendor partnering relationship is not apparent from the negotiations or the documents with a single vendor, the customer could simply ask whether the vendor plans to engage with or otherwise use other vendors to deliver, and assess things from there. 2 Customers should look closely at any clauses to do with subcontracting and assignment to ensure that, to the extent you require, your prior written consent is obtained before any proposed subcontracting or assignment takes place by the vendor (ie: to ensure that you, as customer, are satisfied with Vendor 2 in Model 1 above).3 Customers should consider whether they want certain key services (eg: vendor project management) to be supplied by one or more named individuals who should be specified in the contract. This guards against those services being performed by a less capable person, either in that organisation (or as a contractor) or another organisation if point 2 above is not addressed.4 If Model 1 clearly applies, the customer needs to ensure the contract clearly makes Vendor 1 (ie: the main and, hopefully, deeper-pocketed vendor) fully responsible as prime vendor for all vendor acts and omissions.5 In Model 2 above, often a Companies Office search will assist with determining whether this type of vendor joint venture is occurring. Such entities are often ‘hollow start-ups’, and so the customer should ensure that the joint venture company is worth powder and shot (or you have suitable parent company guarantees or other security from that joint venture vendor) to ensure that any claim you may wish to bring later will be economically worthwhile. The joint venture company should also provide clear warranties and indemnities regarding any intellectual property it will be supplying (as it is unlikely to be the owner of such).6 If Model 3 applies, the customer should be concerned about vendor responsibility falling between the cracks, so very clear drafting is required, possibly with a guarantee by either party in support of all vendor supply obligations (leaving the vendors to sort out their own liabilities between them). Also, the customer needs to ensure that performance of its obligations (eg: payment) to one vendor legally equates to performance to all.