IT contract templates commonly favor the party who wrote them, typically the seller. A meaningful minority of companies, however, have chosen to offer balanced, or even customer-favorable, terms in the interest of removing legal friction from getting business done.
Source: TermScout analysis of 759 public IT vendor contracts
TermScout Certify helps buyers quickly identify what type of contract their vendor is offering, often allowing the parties to avoid the negotiating process entirely.
How Certification Works
TermScout offers IT vendors the opportunity to have their contracts independently reviewed against objective criteria and certified as being either Balanced or Customer Favorable where the data supports certification.
In order to qualify for Certification, an IT contract must meet the following criteria:
- Achieve a TermScout rating of Balanced or Customer Favorable, and
- Be free of all designated Deal Breaker clauses.
The difference between certified Balanced and certified Customer Favorable is the TermScout favorability rating achieved by the contract.
Each of these criteria is more fully described below.
1. Balanced Or Better Rating
A contract is balanced when it allocates risks between the parties in a roughly equal manner, as determined by TermScout’s two-step, data-driven analysis. First, we use our proprietary AI to abstract over 750 defined data points from each contract we analyze. Then, we use an algorithm to objectively score that data. Because TermScout looks at the exact same set of data points and uses the exact same scoring algorithm in every contract analysis we conduct, you can now compare contracts on an apples-to-apples basis. (You can read more about the data points that TermScout analyzes in every IT contract here.)
This enables us to objectively rate contracts at both the agreement level and by key topic area (e.g., limitations of liability, indemnification, warranties, etc.) and show you which contracts are vendor favorable, which are customer favorable, and which are balanced. Here are some examples of what contracts look like that fall into each of these categories.¹
Did You Know?
You can view the answers to every question that matters in every public contract reviewed by TermScout, including all contracts certified by TermScout, for free? Each answer comes with a citation to the source language in the contract so you can see exactly what we relied on when making our assessments.
2. No Deal Breakers
Not all risks are created equal. Even if a contract shifts only a single risk to the buyer, the contract still may not merit certification if that risk is material enough. Examples of these types of Deal Breakers include exclusivity, complete disclaimers of liability, etc. Accordingly, TermScout will not certify a contract if it contains any of the following Deal Breaker clauses,² which TermScout identified by reference to market data and input from prominent buy-side and sell-side legal experts from TermScout’s Innovation Advisory Council:
|Deal Breaker Clause||How Often Buyers Using TermScout Triage Consider the Clause to be a Deal Breaker||Prevalence in Negotiated Contracts Analyzed by TermScout||Prevalence in Vendor Forms Analyzed by TermScout||Why This Matters|
|Vendor Disclaims all Liability||100%||2%||14%||This makes it nearly impossible for a customer to recover from a vendor, no matter what goes wrong - even if the vendor violates other provisions of the contract.|
|There is some form of restriction on Customer’s right to compete with Vendor (broader than a restriction on use of the service to compete)||88%||4%||9%||Signing non-competes means contractually promising not to engage in a certain line of business. This is something most businesses want to avoid where possible.|
|There is one or more restrictions on Customer’s right to solicit||75%||6%||7%||Agreeing not to solicit a vendor’s employees, customers, or vendors sounds reasonable, but it places challenging burdens on the customer to ensure they comply. Most companies aren’t willing to incur these obligations except in rare cases.|
|There are restrictions on Customer’s ability to procure similar products or services from other vendor||75%||2%||0.5%||Agreeing not to procure similar services from other companies can severely hinder a company’s ability to do business by limiting the scope of vendors it can work with and granted effective monopoly power to the vendor in question.|
|Vendor receives broad usage rights in data provided by Customer||88%||3%||13%||Privacy laws require companies to follow strict rules with respect to how they handle certain types of data. These laws often cover how a company’s vendors use data. This clause presents major risks to a company’s ability to comply with such laws.|
|Customer assigns some work product or other IP to vendor (other than feedback)||38%||5%||6%||It’s extremely rare for a customer to need to assign IP rights to an IT vendor. Doing so can materially jeopardize a company’s rights in its own IP.|
|Vendor is not obligated to protect customer’s confidential information||88%||5%||34%||Since most IT services today are delivered “as a service”, customers often upload wide varieties of information onto vendors’ servers. Confidentiality commitments are expected by most customers to ensure the vendor does not misuse such information.|
¹ Ratings reflect contract terms in effect as of June 2022.
² Each individual company may have its own views as to what constitutes a Deal Breaker in light of its own use cases and levels of risk tolerance. You should consult your attorney to determine how TermScout’s list aligns with your individual circumstances.
Did You Know?
Anyone with a free account on TermScout has access to a Deal Breakers filter that enables the user to instantly see whether a contract in TermScout’s public database of hundreds of vendor agreements contains a Deal Breaker.