Why Mergers Should Prompt Vendor Review

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Each credit union has contracts with a significant number of vendors. In the process of executing a merger, each contract of at least the merging credit union must be reviewed to determine which relationships will continue unchanged, which will be allowed to expire at the end of their term, which will be terminated early, and which, if any, need to be amended to accommodate the additional credit union.

A uniform, one-page summary reporting all of the major elements of each contract is a useful tool. Completing the summary requires a careful reading of the entire contract by someone who understands the issues involved.

The summary should contain all of the basic contract information: function, vendor, vendor's representative and contact information, term of the contract, basis for fees, and terms of payment. Other elements are helpful and three are particularly important.

Element 1: Renewal

Does the contract automatically renew? If so, what are the notice requirements to stop the renewal? The notice period can be as long as a year.

Element 2: Early Termination

What are the penalties associated with early termination? These will seldom affect the merger decision, but they can have a material impact upon the merger budget. Contracts with no provision for early termination are a special concern. Vendors have been known to take the position that the contract cannot be terminated before expiration and have forced litigation to determine "the intent of the parties."

Element 3: Breach

For both the vendor and the credit union, what constitutes a breach of the contract and what remedies are available? What duty does one party have to notify the other of a breach? Does a party lose the right to assert a breach by not reporting it within a specific period of time?

A complete, concise inventory of contractual obligations has continuing utility, beyond merger activities.

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