- You can have the third party be fully responsible.
- You can have the Supplier agree to extend the Buyer’s terms to the third party.
- You can have the Supplier agree that Buyer may enforce the terms of its agreement directly with the Supplier even though the Third Party is making the purchases
Sunday, December 19, 2010
Third Party Purchases
When a Buyer wants a third party to make purchases directly from the Supplier, the third party would traditionally not have privity of contract with the Supplier unless the Buyer’s contract provides for it. If those third party purchases are not made under the Buyer’s contract, the Buyer would have no privity of contract with the Supplier for those purchases and any terms and conditions that exist between the Buyer and Supplier may not be enforced.
When you deal with third parties there are three basic approaches:
Making the Third Party Responsible
To do this your agreement with the third party would need to have equal or better terms than what you have with the Supplier or you are losing protection. The third parties would need to negotiate their own terms with the Supplier. Common issues with this approach are:
1. The Supplier may not be willing to offer the Third Party the same terms.
2. The third party may not have leverage to deal with them as the Buyer is directing them to use that Supplier.
3. If there is a cap on liability in the agreement with the third party, problems with that Supplier will count against what the Third Party is liable for.
4. The third party may also be concerned that if there is a problem with the Supplier, they (the 3rd Party) will be liable to IBM and would have to get recovery from the Supplier adding to their risk.
5. The Buyer has no privity of contract with the Supplier for those purchases and Buyer’s sole recourse would be against the Third Party.
Extend the terms to the Third Party
To do this you would need specific agreement from the Supplier that the Third Party can make purchases at the same terms as the Buyer. To ensure that you don’t lose any of the contract protections that you have with the Supplier either the agreement with the Third Party needs to have equal or better terms than the agreement with the Supplier or you also need the Supplier to agree that the Buyer will be a third party beneficiary under that agreement so the Buyer may enforce those terms directly against the Supplier on those purchases. The advantages of this approach are: You can place full responsibility with the Third Party; you have the right to go against either the Third Party or the Supplier. The disadvantages of this approach are: Many Suppliers may be unwilling to provide third parties with the same terms they provide to the Buyer; the Third Party may do significant other business with the Supplier and would want those terms to be extended to all their business which would add additional risk or loss of profit on those other relationships with the Supplier. Further if the Buyer had preferential terms with the Supplier, in disclosing the Supplier’s terms, the Buyer runs the risk of losing any competitive advantage it has in those terms.
Agree that Buyer may enforce the terms of its agreement directly.
To do this Buyer’s agreement with the Supplier would need to agree that the Buyer might enforce the terms of its agreement with the Supplier even though the Third Party would be purchasing them on behalf of or for use with Buyer that effectively creates a form of third party beneficiary. The advantages of this approach are: It allows the Buyer and Suppliers to mask the terms from the Third Party; the Supplier’s sales model with the Third Party for other business is not impacted; the Buyer keeps the competitive advantages it has and it facilitates Supplier’s being willing to provide the Buyer with the best terms. The disadvantages of this approach are: you don’t have a single point of responsibility and would need to determine whether the Third Party or the Supplier are responsible; Suppliers may be concerned with potentially being liable to both parties or may want the specific clause that may be only enforced by the Buyer.
One further set of caveats. When you authorize a third party to make purchases its important to disclaim any liability for their actions or inaction. Those relationships need to be separate independent agreements between the Supplier and the Third Party. I would also require that purchases made under those terms be exclusively used for the Buyer. A Supplier may provide certain volume allocations knowing that the products will be for the Buyer and you don’t want the third party using those allocations to potentially support other customers.