The “cheap way out”

One of the most important things you need to do in contracting is never allow a supplier a cheap way out in the event of a problem, especially where doing so would leave you with a greater burden.

For example, do you give the supplier the right to terminate the contract for convenience. That may be the cheapest way out of the contract for them, but where will it leave you? If you sourced and invested in qualifying a supplier, can they refuse to accept orders? If they can you’re probably giving them the cheap way out of having to deliver what they promised at the price they promised.If a contract term has a number of alternative remedies, who decides which remedy will be provided. If it’s the supplier, you are offering them a cheap way out.

For example:
If under warranty redemption you allow repair, replace, credit of the purchase price or refund of the purchase price and you leave the total choice of which to do to the supplier, you are offering they a cheap way out. What if you really need the product repaired or replaced and they elected to provide you with a credit? You may need to allow them the ability to choose whether they want to repair or replace the item, but I would want to approve any refund or credit. That way if I needed it the would have the option to just refund the money which may be the cheapest solution for them, they would need to provide repair or replacement.

For example another common area where there may be multiple remedies in when there is a claim of infringement and the supplier has to indemnify the buyer. If the supplier contract or change to your contract said:
“In the event of a claim of infringement against the product Supplier shall either:
1. Procure and pay for a license to use the product.
2. Modify the product so that it is non-infringing
3. Provide a new product that is non-infringing, or
4. Refund the purchase price to the Buyer on an adjusted basis”

What this would be doing is potentially setting the supplier up to have the cheap way out. In reviewing this, the buyer would first consider what is the financial impact to the buyer for each of the options. If they are not all cost neutral to the buyer, you don’t want to allow the supplier to pick which one they want to provide as they would normally pick the one that is cheapest for them. That could be the most expensive for you. To avoid that establish a priority in which those remedies must be provided where the next remedy is available only if the prior remedy is not capable of being done. For example

In the event of a claim of infringement against the product Supplier shall perform the first of the following remedies that is practicable. (capable of being done):
1. Procure and pay for a license to use the product, or
2. Modify the product so that it is non-infringing, or
3. Provide a new product that is non-infringing, or
4. Refund the purchase price to the Buyer on an adjusted basis

If there is a remedy you don’t want, such as you may not want #4, don’t include it on the list.
In doing that, if they failed to do items 1,2, or 3 they have breached the agreement and would be subject to damages. The damages you incur would be more than just a refund. If you included #4 on the list, and they are able to exercise that remedy, that would be all you would be able to collect for the problem. You’ve accepted an agreed remedy. If a supplier wants to pay a refund on an adjusted basis they are seeking an even cheaper way out of a problem.