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Negotiating a customer’s code-of-conduct compliance request in a contract

Last week I helped a software-company client negotiate a software license agreement with a global corporation. The customer’s standard contract form included a requirement that the provider comply with the customer’s code of conduct. 

The customer’s code of conduct was some 84 pages long. My client has other customers, of course; purely as an administrative matter, it would have been difficult for them to monitor compliance with X different codes of conduct for X different customers. And we certainly didn’t want to take the time to try negotiate the code-of-contract requirements, even if that were possible (which it very likely wasn’t).

I had a feeling I knew what the customer really wanted from the code-of-conduct requirement. Several years ago, I was helping another software-company client negotiate a contract with another company. The company’s negotiator told me that their main interest in the code-of-conduct requirement was in case my client got itself into trouble of some kind. In that case, the negotiator said, they wanted to be able to minimize any spatter from bad publicity. Toward that end, they wanted the right to terminate the contract and disassociate themselves from my client.

We proposed, therefore, in last week’s negotiation, that my client would agree to comply in material respects with the customer’s code of conduct, but with an important limitation:  If the provider’s uncured noncompliance with the code of conduct did not otherwise constitute a breach of the agreement, then termination of the agreement would be the customer’s exclusive remedy. The customer agreed to this. I was able to splice in some of the Drafter’s Choice code-of-conduct clause, the current version of which I’m reproducing below:

(1) The provider will comply in material respects with any code of conduct timely furnished by the acquiring party, so long as: • the other party prescribes the code of conduct for its suppliers generally; • compliance does not require violating applicable law; and • the code of conduct does not deviate unreasonably from standard business practices.

(2) IF: The provider does not cure a material noncompliance with the acquiring party’s code of conduct, after notice and opportunity to cure (in the same manner as set forth in the breach provisions of this Agreement); THEN: The acquiring party may terminate this Agreement by following the same procedures as set forth in the termination-for-breach provisions of this Agreement.

(3) IF: The provider has not otherwise breached this Agreement in a manner that would give the acquiring party the right to terminate for breach; THEN: Termination under this clause will be the acquiring party’s EXCLUSIVE REMEDY for the provider’s noncompliance with the customer’s code of conduct.

Some might say that there are too many “material” and “reasonable” qualifiers in this clause, leaving too many matters open for interpretation. This subject, however, is one where leaving things open for interpretation, and for case-by-case negotiation in the actual event, may well be an acceptable business risk.

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  • Dan Waldron July 9, 2008, 1:16 pm

    I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.