The Risks of Closing a Deal by Signing the Customer Contract

Perhaps one of the very worst decisions I see digital health companies make is negotiating to close a deal by agreeing to sign the customer’s contract.

While it can potentially save time and upfront legal fees to agree to sign the customer’s proposed contract and perhaps get cash in the door faster, the legal fallout from making such a poor decision can have devastating consequences.

How does this happen?  Well, it has been my experience that it largely happens because the digital health company has not invested the time and money into developing a contract appropriate to the transaction, or perhaps has not found the right attorney with the skills to draft an appropriate contract.  Since the  customer is unwilling or simply unable to do the work for the digital health company, the customer instead proposes the seemingly easier solution of using one of its already approved templates.   The digital health company is often very eager to close the deal as soon as possible and therefore agrees to sign the customer contract.

Why is signing the customer contract such a poor decision?

Customer Contract Has Nothing to Do with the Products or Services

Well, typically the customer contract has absolutely nothing to do with the digital health company’s product and/or services.    So, there will be no terms in the contract to define how the product should function or to set any expectations about how the services will work.  The customer obligations will never be defined, and the terms of payment will be poorly defined at best.

Customer Contract Will Be Silent on Implementation and Specific Liability Risks

Additionally, the customer contract will likely be silent on the implementation requirements and process for getting the customer up and running, which will often be extensive in larger customer deals.  The customer contract will likely also be silent on the liability risks specific to the digital health company and the digital health company’s products and services.   Furthermore, the customer contract will also likely be silent on any terms about the process, expectations, and costs and expenses for transitioning to a new service provider when the relationship ends.

Customer Contract Will Be Drafted to Favor Customer

Finally, the customer contract will likely drafted only for the benefit of the customer and be full of terms that are favorable only to the customer at the expense of the digital health company.

Consequences of Signing the Customer Contract

While I would argue that the execution of a customer contract is actually bad for both sides, since the terms of the relationship are never actually agreed upon, I would also argue that the practice is particularly bad for the digital health company, which will deliver products and services without any memorialization of any essential terms of the relationship by which the company is working.

What can happen?  Well, what I have seen happen in the past is that digital health companies are put in a very vulnerable position when the customer decides to terminate the relationship and stop making payments previously understood to be due and payable.  Often the digital health company has little in the contract to fall back on in support of its position that it is owed the payments it was expecting, and often has no choice but to concede its position.

However, this is actually not the worst case scenario: in the worst case scenario, the digital health company not only loses fees that were due but also ends up with a judgment entered against the company on behalf of the customer, where the company is ordered to pay back the fees they already collected and even pay damages to the customer.

Digital health companies often rationalize poor decision-making by claiming that they do not have an available alternative to signing a customer contract in order to get a deal done, but the truth of the matter is that companies always have choices in negotiation.  The savvy digital health company will opt to spend the money to draft an appropriate contract for the transaction, and then refuse to do a deal that does not include the key terms and conditions memorializing the delivery of its products and services.  It is always better to avoid making mistakes that may save a few dollars up front but become very costly over the longer term.

So, if you are a digital health company who finds itself in this situation, you may want to rethink your inclination to execute your customer’s contract.  Perhaps you should instead opt to draft a new contract that better suits the terms of the proposed transaction.

Updated 6.1.24