The Lowdown on Third Party Agreement Formats: The Full Guide

The Basics of a Third Party Agreement

The term "third party" in the context of an agreement indicates that the transaction in question entails elements related to three parties instead of two. The first party enters into the third party agreement with a second party so that the third party can begin the specific aspects of the transaction in question. In other words, a third party is someone that a contract is written for or against but who is not a direct signer. That third party may or may not be involved in the agreement itself; the important thing to remember is that the third party has a stake in the agreement as a member of the tertiary group.
This is different than a bilateral agreement , which grants a direct legal liability to both the seller and the purchaser in the situation. With a third party agreement, the signer is not an individual but instead represents an organization or other entity as its legal representative. This person cannot be a direct agent of either the buyer or seller. In addition, a third party provider is not allowed to have any direct role in overseeing the transaction in question.
A third party agreement and third party provider are an important part of capital projects involving a variety of interrelated parties or organizations in which third party providers can impart helpful third party assurance through risk management when utilized properly.

Why Have a Third Party Agreement?

It is important and advisable, when entering into a business transaction, to have appropriate agreements in place that protect your interests. Oftentimes in business transactions there are multiple parties to the transaction and multiple agreements that need to be considered. These third party agreements are important to ensure that all parties are on the same page at the time of the transaction and throughout the term of their business relationship with one another. Third party agreements help ensure that all aspects of the transaction have been negotiated and documented accordingly, which avoids disputes down the road.
When considering various types of third party agreements in the context of a business transaction, there are several agreements that should be reviewed. For example, delivery agreements, operating agreements, distribution agreements, supplier agreements, warranty agreements, payment agreements, and any other types of agreements that may be necessary depending on the type of business transaction at hand, may be required. The key thing to remember is that it is usually more beneficial to everyone involved in a transaction to have these documents in place to ensure that they are fully aware of all of the obligations required of them and the other parties to the transaction.

Third Party Agreement Format – The Standard Template

The standard format of a third party agreement typically includes several key elements, including the identification of the parties involved, the scope of the agreement, obligations for great claims, terms and conditions, and termination rights.
In most, if not all, instances, third party agreements are entered into by the taxpayer and a party other than the IRS as part of a settlement of a tax or regulatory dispute. Inasmuch as this is so, third party agreements are generally structured to deal with the taxpayer’s obligations to the other party, rather than the taxpayer’s obligations to the IRS. Because of that, in the tax context the IRS is rarely, if ever, a party to a third party agreement. However, regardless of the precise identity of the parties to the agreement, the agreement ordinarily contains a broad statement of purpose, provides certain specifics regarding the obligations of the various parties to the agreement (which may include obligations to the IRS), a set of general terms and conditions that include certain representations and warranties, a last will and testament section, and a section entitled "Miscellaneous." The entire agreement is usually between 5-25 pages long, depending on the complexity of the transaction.
It is very important for a taxpayer to read carefully the third party agreement, because there are frequently joint obligations that arise as a result of the agreement, including obligations to the IRS. Further, because a third party agreement is usually quite lengthy, the taxpayer might miss certain key contractual commitments that it ought to be aware of, or may fail to grasp the context or meaning of certain contractual provisions that might affect its legal liability.
The joint obligations may include obligations to report on a particular issue, to make a payment of money (i.e., taxes and interest) to the IRS as a result of a transaction, or to undertake some form of requisite remedial action. In short, the third party agreement itself can, in certain circumstances, create a complex plan for settling the entire matter and covering all of the bases between the parties.
It is also important to understand that only a small percentage of third party agreements contain indemnification provisions. This is likely attributable to the fact that, as noted above, the third party dispute may often be positioned entirely outside the IRS and even outside the tax context. Some agreements contain specific releases of the taxpayer in the third party agreement to the non-IRS party. It is relatively easy to have such releases included in tax settlements.
A usual component of the third party agreement is the limitation on future liability. Similar to a typical closing agreement, the third party agreement will often provide that the parties agree not to seek any further compensation from one another, so long as the non-breaching party complies with the terms of the agreement.
The requirements of a typical third party agreement, as well as the coverage of a typical, broad, and comprehensive third party agreement, are therefore not dissimilar from those of a typical closing agreement. However, a third party agreement is far more likely to be structured to include compliance with the reporting and payment obligations of a taxpayer to the IRS, than with the third party beyond the IRS. Accordingly, the taxpayer should scrupulously review any proposed third party agreement to ensure there are no surprises or unexpected obligations. In addition, to the extent feasible, the taxpayer should negotiate the inclusion in the third party agreement of an IRS covenant not to sue.
Also, because third party agreements are generally contracts between taxpayers and the other party (or parties), it is open to the taxpayer to try and negotiate specific indemnification, hold harmless, and contribution language with regard to the agreement, in the appropriate circumstances.

Types of Third Party Agreements

Third party agreements are a necessity in business transactions. To meet the needs of their customers, organizations often depend on other companies to carry out certain functions. In many cases, instead of hiring an employee, it is often better to hire an independent third party to provide services, materials, or perform activities for your organization. This allows for an exchange of employment costs (benefits, taxes, and insurance), in exchange for the fee that the company charges for its service. The fee charged by the third party entity may be less than the cost of employing an employee to perform the work in-house.
There are many types of third party agreements. The most common include service agreements, vendor contracts, and partnership agreements.
Service Agreements are designed to provide contractual obligations governing the conditions of the relationship between the organization and the service provider. The details of the services, cost of service, duration, and termination are some of the key components of these agreements. Service agreement guidelines vary, depending on the business sector, complexity of the services, and requirements by type of Service Agreement. For example, if the agreement is a quality assurance agreement, the contract may require the service provider to comply with specific regulations that are applicable to the company receiving the services. A pharmaceutical company may enter into a third party agreement with a clinical research organization (CRO) to complete a clinical trial study. The agreement will contain terms that govern the relationship between the organizations. For example, site visits, communication, protocol compliance, ICH Compliance, Drug Accountability, and Confidentiality are some of the topics that can govern the agreement. In most cases, when a third party agreement is used to supplement organizational services, it will have no impact on the organizational documents or policies. However, in some cases, it will require amendments to Organizational policies (SOPs), privacy policies, or other related guidelines or policies (for example, Records Retention).
Vendor Contracts are typically used in various Healthcare, Clinical, Pharmaceutical, and Research Organizations (as well as other business sectors) to procure specific services. The Vendor contract contains the terms and conditions that will govern the relationship between the organization and the vendor. It is important to take into consideration if the entered into agreement may impact any compliance, risk management, auditing, or policies and guidelines, and include terms in the vendor contract, to reflect that the vendor will need to abide to those policies. Organizational policies & procedures may need to be amended, if necessary.
Partnership Agreements are generally used when two or more entities are creating a partnership or association. In some cases, it will require modification to Board bylaws, and will also require that the Board approve the partnership.

How to Draft a Third Party Agreement

When creating and entering into a third party agreement, whether it is an asset purchase, stock purchase, or other agreement, one of the most important things to keep in mind is that the agreement is not only compliant with the law, but also specific enough to cover all bases. This includes discussing the scope of the transaction in as much detail as possible, in plain language that everyone can understand. In the case of a minor asset transfer, parties should consider simply using the simplest of forms such as a bill of sale and doing a thorough job of explaining to each other the purchase price, if any, and what is included and excluded from the transfer (for example, are there leases involved or is the buyer going to receive marketable title to real estate?). If the parties are sophisticated, they already know what aspects need to be covered and can likely proceed with nothing more than a hand‐shake, no formal written documentation.
Frequently, however, it is a good idea to have the parties execute simple but clear documentation. In the case of a major acquisition or sale, time and detail are of the utmost importance. Even if everyone involved is familiar with the issues and how they are to be handled, sometimes having it all down on paper helps jog someone’s memory about what is being sold, the purchase price, any contingencies, and if closing is contingent on financing, whether there are any conditions to the release of the financing . Even the most sophisticated parties often do not know, unless explicitly written out, that in the case of a financing contingency, the release of the financing may rest on the bank’s controlled disbursement system. What does that mean? The closing attorney needs to have funds at closing which will allow him or her to confirm receipt of a particular amount of cash and to then release the funds to the seller and to pay off existing debt. For example, years ago, a seller and buyer agreed that the buyer would close on a property purchase contingent upon the closing of a loan on the same day. The closing attorney caused the loan proceeds to be wired to the bank’s controlled disbursement system. The closing proceeds were not funded. While the seller was willing to allow the buyer sufficient time to obtain the required funds, the bank would not release the proceeds without the seller first executing a new note for the loan proceeds plus interest and fees. Obviously, the seller was not in a position to execute two promissory notes which would require the seller to pay double interest on the loan. What should have happened: same day closing, minimum three hour advance notice of the loan proceeds funding, and closing of both transactions should have occurred simultaneously.

Legal Considerations with Third Party Agreements

The legal implications of not executing third party agreements correctly or of breaching an executed agreement are significant. Failure to have the necessary written agreements in place can lead, among other things, to violation of the privacy rights of users of the third party software and violation of customer privacy rights, loss of proprietary information, theft of trade secrets, and in some cases, liability for damages.
Consider as an example, an outsourcing of certain business processes to a third party vendor. Take, for example, a HRcloud Software-as-a-Service ("SaaS") provider with access to all personal and payroll information of its customers’ employees and/or applicants for employment, or a web-hosting service with access to the website of its customer and the privacy rights of that website’s users, or an analytics service that using "cookies" may be able to track the online account and activity of all of a customer’s customers and/or leads. Data leaks or privacy violations could not only expose the SaaS provider, the HR outsourcing vendor, the web-hosting company and/or the analytics service to claims for damages, but also expose the third parties whose data they process. For example, their customers, and in the case of the SaaS provider and the HR/business process outsourcer, millions of individuals.

Avoiding Mistakes in a Third Party Agreement

Common mistakes companies make when creating third party agreements include vague language (i.e., poor drafting) and a lack or absence of supporting documentation (i.e., insufficient hardware receipts and invoices). Generally, vague language in an agreement can be construed in a way that makes third party tools ineligible for R&D benefits. For example, if software development is initially included in the scope of the agreement but later a separate development agreement constitutes half of the R&D; and the other half was classified as manufacturing costs under the agreement, then vague wording regarding who does what and to what extent in the agreement can result in the rejection of any attempt to claim that any portion of the manufacturing costs is eligible. As a best practice, keep all records related to a project together in a folder (real or virtual) and secure notes from conversations and/or meetings.

Tips for Managing a Third Party Agreement

The successful negotiation of third party agreements often only sets the stage for the final act. How to implement and maintain them becomes a central question for management as the legal framework between the parties is set, but the substance of the business relationship continues to evolve. Here are some recommendations to consider when dealing with new or existing third party relationships.
Some companies have extensive procedures in place to ensure that frequently used forms have pro forma provisions that meet the company’s business model goals and comply with risk profile standards managed by the company’s legal and/or risk management departments. Many companies also have disclaimer language that they feel will adequately protect a company against various states’ new "disclaimer" laws (while this is a relatively new development , its presence can sometimes displace contractual liability provisions).
Examine the dispute resolution procedures carefully and determine whether litigation in the courts or binding arbitration (which is generally more developer-friendly in complex contractual deals) is appropriate.
Some companies have significant vertical integration in different parts of the world. In this context, it is important to consider the "one-stop shop" nature of the transaction and how it fits into the company’s larger global compliance requirements (antitrust, export control, anti-bribery, inheritance, etc.).
Third party agreements can take a long time to draft and finalize. Likewise, they can lose their value if not reviewed regularly, ideally at least annually. Make sure that someone in your company – ideally an individual who is responsible for keeping track of all agreements – periodically reviews them and notes whether the business terms and the associated risks remain acceptable. Then update your archives.