Tuesday, December 21, 2010
Every once in a while in negotiations you may run into a Supplier that wants to mirror the terms in the agreement. There are two approaches to the mirroring tactic. One is for them to produce a copy of a sales agreement where they purchased from you, with them wanting you to agree to the same terms they had to agree upon. A second mirroring approach is for any requirements that you want the Supplier to meet, the Supplier wants you as the Buyer to make so the commitment is mutual. For example, if you want them to provide you with an indemnification against personal injury or property damage caused by their negligence, they want you to provide them with an indemnification for personal injury or property damage caused by your negligence.
When I encounter this I usually rely upon several things to eliminate those requests.
First, I highlight the obligations of the parties under the Contract. In the vast majority of purchase contracts the Buyer’s primary obligation is to make payment for the goods or services they purchase. The parties do not have the same obligations so similar terms are not required.
Second, I usually highlight the differences between the risks and costs in the two situations. That is to reason and explain why the two are and should be different. For example, I had a Supplier that had purchased Computers and Services from the Company and who wanted to mirror the terms of that agreement, in an agreement where they would be selling electronic components. The first example I gave them for why they needed to be different was warranty. If their computer broke, we would send an engineer to their location at no cost during the warranty period. I then asked them if they would do the same for their components. I then described all that we would do to ensure that they would be able to use their purchase during the life of the product. I then asked them if they would make the same commitment for our purchases that would be used in those products. The answer was that of course they wouldn’t. After giving them a few examples it become clear to them why the terms are and should be different.
Third, I highlight the difference in the legal relationship. While a Buyer can potentially be liable for the actions of a Supplier under the concept of agency, a Supplier usually will not be liable for the actions of the Buyer. If a Buyer specifically directs what the Supplier must provide or how they must implement their design, the Supplier is not going to be responsible for the implementation unless they were negligent in their own acts. In fact most indemnification clauses are drafted in a manner that takes that into account. Suppliers are only required to indemnify the Buyer for the Supplier’s negligent acts or omissions, not the Buyer's. Intellectual Property Indemnification clauses normally include a number of exceptions to the indemnification and one is normally buyer provided designs or instruction.
If they still insist on trying to mirror terms then my next step is to suggest that instead of mirroring only selective terms we look at mirroring most and the example I give is if they want the Buyer to Pay a no problem found or no defect found charge every time the Buyer returns a good product to them, then the corresponding mirror is they should be paying the Buyer a similar fee each time they ship defective product to the Buyer. In both cases its just a matter of not managing quality control. To this date I’ve never had a supplier want to sign up to that and it usually dramatically reduces their requests for mirroring down to only those that are really necessary.