Monday, December 19, 2011

The Two Step

In Texas the two-step is a dance performed to country music. In negotiation what I call a “two step” is an approach that I like to use when I don’t like the commitment they supplier will accept. I might be able to accept the commitment they want if there was something more to it. That something more is what I call the second step. Let me give you a number of examples of what I mean.

A supplier is unwilling to agree to firm time to perform and will only commitment using reasonable efforts to perform by a specified date or within a period. For example they will only agree to use reasonable commercial efforts to meet your specified delivery date. You want them to try but you are also concerned with the fact that such a commitment doesn’t guarantee if or when when performance will occur. All the supplier has to do is exercise the required efforts. The second step would be to also include a firm commitment as part of their commitment. For example: “Supplier shall use reasonable efforts to delivery the product within thirty days. Supplier shall deliver the product in no greater than forty-five days.”

Your customer wants to include a pay-when-paid payment term. That type of commitment doesn’t guarantee you when you will actually be paid. You don’t want the obligation to make payment be open ended, especially since you don’t control when that will occur. In this case the second step would be to include a firm period. For example: “Prime Co. shall pay Sub Co. within ten (10) Days after receipt of payment from Customer Co, or net ninety days, whichever occurs sooner.

You want a termination for convenience provision and the Supplier wants to be reimbursed their actual and reasonable costs associated with the termination. If you agreed to only that the potential costs could be unlimited. The costs would only need to be actual and reasonable. The second step in this commitment would be to manage and limit those costs. “In the event Buyer terminates this agreement without cause, Buyer shall reimburse Supplier for its actual and reasonable costs associated with the termination. Supplier shall use reasonable efforts to mitigate the cost of the termination and the total cost of the termination shall not exceed the contract Price.”

Your warranty provides for four remedies repair, replace, refund or credit. Your language has you deciding upon which option you can select. The Supplier wants to decide which option they provide because they don’t want you demanding new product when they can repair it or they don’t want you to demand a refund or credit as a way of reducing your inventory. If you provide them with the right the second step is control or manage which options they Supplier can select. “In the event of a warranty defect, Supplier may, at their sole option, repair or replace the Product, Supplier’s option to refund or credit the purchase price shall require buyer’s approval.” That way if you needed the product they couldn’t take the cheap way out and simply refund the price, or worse provide you with a credit that you won’t be using any time soon. If you allow credits, you could either include a second step to that as part the term or include a second step as a condition of your approval. “If buyer makes no purchases within a sixty-day period, Supplier shall immediately refund the full amount of any credits.”

Second steps can also be used to increase the standard of commitment a party has to perform, or the level of effort required which increases their costs or impact. For example: "Supplier shall use commercially reasonable efforts to repair or replace materials under warranty in ten (10) calendar days after receipt". The second step could be "If Supplier is unable to delivery within ten calendar days, Supplier shall use its best efforts to expedite delivery. Supplier shall deliver the repaired or replaced product no later than thirty (30) calendar days.” In this example, commercially reasonable efforts is a low standard which means that if it would cost the supplier more to perform than usual, they don’t have to do it. The repair or replacement would follow their normal process. By including best efforts after 10 days, it would require them to perform the activity irrespective of the cost. By including the firm commitment to thirty days, it changes the standard from only efforts to a firm commitment.

Second steps can be used to make commitments that are not firm, firm. They can be a limiters or qualifiers. Supplier may have reasonable reasons for what they are demanding, but what they want to provide you as a result may not be enough. I use second steps to make sure I get what I need. If a supplier doesn’t want to give you that second step that should be a red flag. If the second step changes the parameters to what should be reasonable and they don’t want to agree I would be concerned their real intent. Second steps are a linking tactic where you are saying that I’ll give you what you want provided I get what I want.

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