What Is a Third Party Agreement?
A third party agreement is defined simply as a contract made between a business and a third party. The third party may then be responsible for the execution of a certain task or the provision of certain goods, depending upon the terms of the contract.
Put simply, a third party agreement provides for a situation where a business doesn’t directly enter into a contract with the party providing the services or goods, but rather, makes an arrangement that will in turn allow them to obtain what is wanted or needed. For example, if a grocery store needs produce, they may make an agreement with a distributor, which in turn makes an agreement with a farmer. While the grocery store never has any interaction with the farmer , there is an agreement in place between the three parties.
Why would a business utilize a third party agreement? In the context of the example above, a grocery store could enter into an agreement with a distributor or a farmer directly. They may do so if the other party is located closer, if they need produce from a farther farmer than the distributor provides, or for any number of reasons. But in many circumstances, one of the parties already has a contract in place, making it easier and cheaper to utilize the already existing agreement rather than attempting to negotiate a new one. This is the result of third party agreements . . . making things quicker and easier when you need something provided by someone else.
Types of Third Party Agreements
The types of third party arrangements can vary widely, and include relationships arising from subcontracting; agency agreements; distribution agreements; franchising arrangements; joint marketing or collaboration agreements; partnerships; joint ventures; and consortium arrangements (which may be incorporated or unincorporated).
Subcontracting, for example, refers to the entering into an agreement with a third party to perform a portion of the service or work agreed to with the principal, who may not be able to fulfil all of its obligations without assistance. Subcontracting can arise from a direct agreement between the third party supplier and the principal (the main contractor) or may be imposed by the main contractor as a condition of the principal having been awarded a contract in the first place. Subcontracting is commonplace in many industries but particularly in construction.
Agency or distribution agreements are typically used to establish the relationship between a producer or supplier and a distributor of goods or services. Where certain thresholds in turnover (in the case of financial contracts) or size (in the case of any proposed investment in real property) are met, certain regulatory requirements may apply (e.g. under the Financial Services Act 2012 in the UK). Such regulatory compliance issues must be taken into account before entering into any third party arrangements.
In the case of franchising arrangements, the franchise document (whether in printed form or a website link) will contain a summary of the franchise package (franchise business format and operating manual), together with the various fees and / or guarantees required. The franchisor will often grant a license to the franchisee to use trademarks, business formats and systems upon payment of an upfront fee and franchising costs that allow the franchisee to operate a franchised business that is part of a larger network.
Joint marketing or collaboration agreements typically formalise the terms of the relationship between the parties involved and entail the parties working together for the purposes of selling or marketing their services. Such arrangements are often encountered in the pharmaceutical and life sciences industry where drug companies will regularly collaborate to promote, market and sell known products or drugs in joint ventures.
Partnerships are created by two or more persons to carry on business for profit. A partnership is sometimes the chosen form of a corporate business relationship. Partnerships can be valuable in terms of sharing costs, rewarding a partner with a share of the business or for providing technical know-how and training.
There are many other types of third party agreements. When considering entering into a third party agreement clients should be mindful of how that arrangement will ‘fit in’ with the rest of their group structure. Non-regulated groups do enter into third party arrangements.
Elements of a Third Party Agreement
When exploring the terms and conditions that must be met in a third party agreement, there are various factors that will be considered in order for the agreement to be valid between all parties involved. Essential inclusions will help protect each business from unfair business practices and ensure that all operations remain ethical. Because of the importance of these agreements, it is recommended that the following areas are clearly defined by the party writing up the contract so that the other party understands their obligations and liability. Obligations: Clearly defined obligations give the other party an understanding of what is expected of them from the start of the business relationship. Obligations might include sales targets, minimums for quality and quantity, and financial liabilities. When obligations are clear to all parties, it helps to eliminate dispute for misunderstandings in the future. Liability: When agreeing to a third party agreement, you must safeguard yourself with clauses that help protect your business from liability. Terms of liability often include limitations on the damages that can be covered by one party in the event of a disagreement and a clause that protects you from handling damages caused by the other party. Terms of Payment: The terms of payment should be defined in the agreement so that both parties are expected to make or receive payments that were previously agreed upon. Payments should include interests or penalties for late payments and the time frame in which the transaction will be made. Terms of Performance: Terms of performance provide information to the party that is being obligated. This may include a description of how the other party should provide the service offered in the agreement. Dispute Resolution: The agreement should outline the correct method that should be used in case a dispute occurs. In many cases, this will include alternative dispute resolution such as arbitrations or mediation instead of taking the dispute to court. This is to reduce costs and time lost for all parties.
Legal Implications of Third Party Agreement
When agreeing to any sort of binding contract or agreement with a third party, a company should consider how its specific industry will affect the contents and direction of that agreement. For example, medical companies like pharmaceutical labs must comply with a large amount of regulations and standards that are highly specific. Such regulations can be both state and federal. In this example, a pharmaceutical lab may require certain assurances or information from the manufacturer of a raw material. That way, the lab performs its own quality control to verify the information given by the raw material manufacturer. In some cases, it may not be possible for the parties to comply with certain regulatory requirements unless they agree to formal terms in their agreement or contract. This can include obtaining various compensations or indemnities on behalf of one party (e.g. the distributor) from a different party (e.g. the supplier). It also can involve more onerous terms for disclosure, which is more common if one party requires the other to disclose protected or valuable information (whether proprietary or the subject matter of a trade secret). Most importantly when it comes to the legal implications of third party agreements, there is the question of whether the agreement meets the legal requirements of the state where the business is located. Simply creating a generic document, particularly one based upon legal templates from online resources, runs the risk of being de facto void if the terms are not specifically tailored to be valid and enforceable in the relevant jurisdiction.
Negotiating Third Party Agreements
The drafting and negotiating of third party agreements are integral to the establishment of collaborative relationships with third parties, yet often they are approached as an ad hoc almost perfunctory process where one party simply provides a copy of its form of agreement to the other party and asks that it be signed. Clearly, that can result in misunderstandings and disputes.
One of the keys to an efficient negotiation and execution of a third party agreement is early engagement with your legal counsel at the beginning of the third party relationship. Early engagement ensures that the objectives and expectations of the parties are properly understood and reflected in the contract. The earlier all parties are engaged, the better the drafting and negotiating process will be.
For those agreements that are provided on a first draft basis by one party to the other , it is critical that the recipient of the draft take the time to read it and understand its terms. Each provision of the agreement must be carefully considered to ensure it reflects the context of the third party relationship. If there are aspects of the agreement that are unclear, or provisions that are just plainly unacceptable, the issues must be raised with the other party and clarified or re-negotiated.
In addition to the drafting and negotiating the terms of the third party agreement, there are a number of practical tips for ensuring that the terms of such an agreement do not lead to complications after the agreement has been executed. These include:
All of these issues are simply a question of good business practice and communication with respect to how the parties are to collaborate with each other. How much better would it be ending the relationship on good terms rather than a prolonged dispute?
Common Issues and Avoidances
Third party agreements often run into a host of problems that relate to the lifestyle and location of the parties. For example, unless all the parties are located in the same jurisdiction as you, service of process may be made especially difficult or even impossible. If the contract specifically states how the parties consent to jurisdiction, that may help prevent jurisdictional issues. Addressing choice of law provisions about jurisdiction in advance can be beneficial, especially if there is an issue with jurisdiction that would benefit the party required to respond. If the agreement does not contain this clause, it will be left up to interpretation by the courts, who may rule on the side of the party who did not draft the contract, namely you or the third party. Another common problem is simply getting everyone on the same page. There may be issues deciding what the documents mean or how they apply in a particular situation. Some contracts provide for mediation or arbitration of disputes, while others rely more on judicial resolution. In some cases, parties have provided for both options or a third option entirely. It is essential to know what the options are if a conflict arises. Making sure that the document is clear, concise, and properly formatted can help avoid future confusion and prevent litigation.
Examples of Third Party Agreements across Many Industries
Third party agreements are common in many fields. In the consumer product space, preferred retailers often receive deep discounted rates from vendors for a preferred placement, such as at eye level or end-cap displays. Grocery stores compete with each other by leveraging special pricing to push one vendor’s product over the other. Retailers often negotiate rates for shelf placement and choose which vendors they promote or heavily display. Pharmaceutical companies have similar arrangements with physicians, payors, and pharmacies. Traditional pharmaceutical companies pay sales representatives to promote their drugs to physicians. Physicians also receive remuneration from pharmaceutical companies based on how many prescriptions they write for a drug. The goal of the compensation is to get an end-user to favor one product over a competitor’s product. Over-the-counter drug manufacturers have similar arrangements with retailers, payors, and pharmacies to move their product. Payors often employ similar methods to promote certain drugs, forcing customers to purchase a certain version of a drug when their physician prescribes it.
In the healthcare world, third party agreements happen in almost every interaction between payors, providers, and pharmaceutical companies. From incentives from pharmaceutical companies to healthcare providers to refused claims and prior-authorization requests by payors , healthcare entities rely on third parties to make their business succeed (and be reimbursed appropriately). In fact, joint ventures and exclusive contracts between hospitals and physicians are now commonplace. Since hospitals have become the primary venues for physician services, physicians sometimes rely on their hospitals for management services. Hospitals also rely on physicians for referrals. As the federal government moves towards bundled payments for joint procedures, hospitals and physicians will have to work together to control costs. Even in an independent medical practice, arrangements with independent laboratories can involve some type of third party agreement. It can be a challenge to design any arrangement without violating a third party’s rights or creating an exclusive arrangement with a third party.
Even the pharmaceutical industry itself has a number of third party players. Manufacturers and distributors often rely on third party sales representatives to promote their products. Manufacturers use contract laboratories to conduct bioequivalence studies and promote new drugs. Many manufacturers also use contract packaging facilities to handle the packaging and labeling of drugs. Contract laboratories and manufacturing facilities often have their own arrangements with laboratories, package suppliers, etc. Internationally, manufacturers often work with brokers to promote their products.