“Mutual” is a surprisingly dangerous word in the world of service contracting.
Agreements between clients and their service suppliers are often full of provisions that are written with the concept of mutuality in mind. Among the most common:
- Mutual confidentiality requirements;
- Mutual rights for termination;
- Mutual indemnification obligations;
- Mutual non-solicitation of employees; and
- Mutual rights for (and restrictions on) assignment of the agreement.
The allure of having mutual rights and obligations is obvious: both parties are placed on equal footing.
Here’s the rub: not all parties are created equal.
Simply relying on mutual provisions often means that parties are not engaging in the kind of thoughtful, transparent dialogue that yields an agreement that is more than a recitation of rights and responsibilities, but is a blueprint for a successful relationship.
Let’s take each of the provisions identified above to demonstrate how relying on mutuality can cause the parties to overlook some important discussions and distinctions.
A mutual confidentiality provision essentially boils down to: (a) the parties are going to give each other non-public information; (b) they both agree that this information will be used only for the purposes of their work together; and (c) the information will not be given to anybody who doesn’t need it for that purpose. Simple enough.
But it is important to think about what information will actually be exchanged as part of the work and determine whether any of that information requires additional safeguarding.
For example, if a client is giving its marketing agency the top-secret plans for a new product that has yet to hit the market, perhaps the client will want to be more explicit about who is entitled to get that information and whether those folks need to provide written acknowledgement that they understand the sensitivity of the material.
It is not uncommon to see a termination provision that gives each party equal rights to end the agreement. For example, the deal might give both parties the right to terminate as a result of the breach of the other or the right to terminate at any time upon giving X days’ notice. It is this latter example that can be especially problematic.
A client and its service supplier are often in very different positions as a consequence of termination. As a general matter, a service supplier can be made whole as long as it is paid for the work it completed (and project expenses it incurred) up until the termination. However, things are not so simple for the client.
When a service supplier terminates an agreement, the underlying project is not necessarily completed. In those instances, the client is now put in a position to have to find a suitable replacement supplier on little notice to try to keep its project on track.
So, it is vital that the parties consider the potential consequences of termination and craft termination rights that make sense for their specific engagement.
Indemnification provisions define circumstances when one party will protect the other from liability. In simple terms, a mutual indemnification provision is structured to say that Party A will shield Party B from responsibility for any claim that results from the actions or omissions of Party A. Fair enough.
But that approach does not take into consideration the extent to which a client and its service supplier might influence each other’s actions or omissions and creates massive gaps for potential claims to fall through.
Imagine a particularly snake-bit product sampling campaign. An experiential agency has been engaged by a snack brand to hand out thousands of snack samples outside a commuter train station. On the first day of the campaign: (a) a consumer gets ill from eating a tainted sample; (b) the municipality shuts down the activation and fines the brand because the agency did not secure a necessary permit; and (c) a local photographer claims that a poster created by the agency and used at the event contains his copyrighted material.
So, all in all, a pretty awesome start.
Who is responsible for these claims under a mutual indemnity? How does that answer change if we find out that: (a) the samples were all pre-packaged and provided by the client; (b) the agency warned the client that permits would be required, but the client insisted on moving forward with a “guerilla” activation; and (c) while the agency designed the poster, the copyrighted photo was provided by the client?
All of this illustrates the point that the client and supplier should take the time to think through how they will be interacting and influencing each other and craft an indemnification provision that appropriately defines liability obligations.
Non-Solicitation of Employees
Employers (at least the good ones) invest a great deal of time and money in training their employees. So, it makes sense that each party would want to protect that investment and restrict the ability of the other to poach its employees.
But, again, the parties are not created equal.
First, much of a service supplier’s value resides in the expertise of its staff. Second, in many cases the client’s organization is much larger and operationally diverse than its service supplier. Third, a service supplier is often reluctant to solicit employees of its clients for at least one obvious reason: they don’t want to upset their client.
The parties should thoughtfully consider the extent of the non-solicitation protections it requires. Does the client even require protection? Should the restriction be limited on one or both sides to those employees who are involved in the performance of the agreement?
An assignment provision establishes the parties’ rights to transfer the agreement to a third party. A mutual assignment provision can come in a variety of flavors, including: (a) neither party can assign the agreement at all; (b) either can freely assign the agreement; or (c) either can assign under certain enumerated circumstances (e.g. if consent is provided, if the assignee assumes the assignor’s obligations, if the assignee has been bought by or merged with another company).
But – say it with me now – the parties are not created equal.
A client often enters into a supplier agreement with a specific supplier because of that supplier’s skill. The supplier is likely less picky about its client. As long as the bills are paid, does it really matter whether the client is Alfredo’s Pizza Café or Pizza by Alfredo?
Therefore, it often makes sense that there are greater restrictions placed on a supplier’s ability to assign the agreement than on its client.
Be Mutually Thoughtful
So, while it can be tempting to rely on mutual provisions, it is crucial that the parties to a service agreement carefully consider – and draft agreements that take into account - their relative positions.
This requires thoughtful deliberation and transparency. And those are two key ingredients to outstanding agreements.
Broad Cove Advisors LLC (“BCA”) is a consulting firm that provides strategic advice to brands, agencies and other service suppliers. Among the services that BCA offers is advice on negotiation strategies designed to improve transparency, collaboration and service outcomes. BCA is not a law firm and does not provide legal advice.