Saturday, August 6, 2011

The contractual impact of who you buy from.

In sourcing decisions buyers have many choices.
The can buy from a supplier.
They buy from a supplier subsidiary.
They can buy from an authorized distributor.
They can buy from an authorized reseller.
The can buy from a supplier representative company
They may be able to buy excess from another company
They can have a third party buy for them.
They can buy from a broker.

In making the sourcing decision who you contract with will impact the protections you get contractually.

Contracting with the Supplier offers the best protection, as you have direct privity of contract with them and you can look to the supplier’s resources and assets to meet the obligations under the contract.

Contracting with a Supplier subsidiary means that you have privity of contract only with that subsidiary. You do not have privity of contract with the Supplier. The only way the Suppliers resources and assets can be looked to is if you also had the supplier provide what is called a parent or company guarantee which then give you privity of contract with the Supplier.

Suppliers usually give Authorized Distributors specific terms that they can pass thru to the customers. Most of the time those are limited to warranty and warranty redemption.
This means that for the items they passed thru you can go back to the Supplier to honor. For all other terms in any agreement you can only look to the Distributor. The same applies for authorized resellers.

In Buying from a Supplier representative company the key will be who the contract is with and how the orders flow. To be best protected the agreement needs to be with the Supplier and the orders need to be made to the supplier although they could be written
in care of the representative firm. If orders were made on the representative firm, that is who you are doing business with. The only exception to that would be if the contract with the Supplier made the representative company an authorized agent to receive orders on their behalf.

If you buy excess from another company, there is no privity of contract with the Supplier and there is no pass thru of terms, so your total contract commitments are only coming from that company.

If you have a third party buy products or services on your behalf there is no privity of contract with the supplier and your terms are what the third party has committed to you.
The exceptions to this are when the third party includes your company as a third party beneficiary to their agreement with the Supplier which then give you privity of contract under those terms to deal directly with the Supplier. A second exception is when your agreement is directly with the supplier and the supplier agrees that they will sell to that third party and further agrees that you can enforce your terms directly on those purchases, again making you a form of third party beneficiary to those purchases.

In buying from a broker you get the worst protection. You do not have privity of contract with the supplier. In buying from an unauthorized channel, terms that would have been
passed thru to the authorized channel to you don’t pass thru. All you get is for terms is what you negotiate with the broker and the only resources and assets you can look to in the event of a problem is the broker’s assets and resources.

I’m not saying that you shouldn’t buy from any one of these potential sources, what you should do is simply take the contract protection into account in deciding what’s the best solution. Sometimes you may not be able to buy directly from the Supplier because you don’t meet their criteria for direct sales. Sometimes you can run into Suppliers that do not do any direct sales or purchasing from a distributor makes sense to use for inventory management purposes. When you run into those situations you may need to change your contract strategy. I’ve had times where to get the protection I felt was needed, I needed to write two agreements. One with the Supplier covering specific terms I needed them to provide direct and agree that I could enforce them directly with the Supplier. The other was an agreement with the distributor that would cover all the other terms I needed.

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