Show me

Many times a Supplier may want to have commitments tied to their internal process, specification or data sheet. Frequently there may be a disconnect between what the Supplier’s negotiator thinks exists in those internal documents and what is actually there. Let me give you a couple of examples:

I had a Supplier want to have a the safety warranty and Intellectual Property indemnification be contingent upon use in “intended or authorized applications”.  When I asked to see the data sheet there were no intended or authorized applications listed.

I had a Supplier want to have product warranty voided if an outside laboratory that the Supplier had not previously approved tested the product. I asked to see the list of approved laboratories and they couldn’t produce it.

I’ve had Supplier’s want me to follow their internal process. When I asked to see it so I could review it, they couldn’t provide it.

I’ve had Supplier’s want me to agree to use their internal processes for notifications to change lead-time or their process for end of life notifications. When I asked for them to provide me a copy, some made no sense, many were incomplete, and most were unacceptable.

Rather than just say no, I ask them to show me exactly what they are referring to.  If they can’t produce it, it eliminates the issue. If they can produce it and its acceptable I don’t have any problem pointing to it as long as it’s under revision control and I have a copy of what’s being referred to so they can’t change it and I can make it part of the contract. That's very important in these days where everything may be electronic copies. The key is it has to be acceptable and for you to agree that its acceptable you need to read through the entire document!  Some Suppliers have been known to try to include additional legal terms as part of their specifications or data sheets. I can remember one where on the very last page of a ninety-page product specification, and in much smaller print, there were a number of legal terms that weren’t acceptable. If I didn’t read it and had made it part of the agreement they would have applied.

The state of Missouri in the U.S. is referred to as the “Show Me” state.  It’s good advice to follow if you are a negotiator. Don’t assume that what they are referring to exists or is acceptable. Ask them to show it to you so you can make the determination.    

Softening / Qualifying Words

Suppliers use qualifying words or qualifiers in conjunction with their commitments to reduce the commitment and try to manage their cost, risk, and potential liability.  Most qualifying words do not help clarify the contract.  They create confusion as to the intent as two parties can easily disagree on what each party considers to be reasonable, material, prompt, substantial, etc

Standards of commitment that are less than absolute (will / shall) qualify performance you can expect from the Supplier.

• Best efforts
• Reasonable Efforts
• Commercially reasonable efforts
• Intend
• Agree to agree
• May

There are a number of other potential qualifying words that a Supplier may try to use to qualify their commitments.

All, Only, Sole Arising out of / related to At its sole option, carve outs Conditional commitments Conditions precedent Consistent with prior practice Direct Exceptions Exclusions to avoid doubt Finally or finally Floors or ceilings Form, fit and function Formula Goals Good faith Gross

In accordance with our standard proceedure Including without limitation Knowledge Material Materially adverse May, but shall not be obligated to Not less than Ordinary course of business Out of pocket Point in time language Promptly Reasonable / Unreasonable Standard Substantial Triggering events Trumping / precedence provisions Willful

Let's review all of these.

All, Only, Sole.

These words are used to limit or exclude

            Examples:

• “This Agreement replaces all prior oral or written agreements or other communication between the parties with respect to the subject matter of this Agreement”.  This excludes any prior communications.
• “Due to the sole negligence of the Supplier”.  This would limit the Supplier’s liability for negligence to only situations where they a solely negligent
• “This shall be Buyer’s sole remedy”.  This would preclude any other remedies than the one specified         

“Arising out of”  or “related to”

These phrases are intended to limit liability to only contractual liability.

• Supplier’s liability arising out of this agreement shall not exceed $____. This would preclude recovery under tort law.

At its sole option.

This allows the party that has the option to decide which option they want.

• For all defective Products Supplier shall, at its sole option,  repair or replace the Product or provide Buyer with a refund or credit.. This would allow the Supplier to determine which option to take and all options may not be of the same value to the Buyer. For example if you need the product you wouldn’t want a refund or credit.

Carve outs.

A carve out simply excludes an item from the commitment.

• Except for samples and prototypes,  Supplier warrants the product against defects in material and workmanship for three (3) years. This carve out excluded samples and prototypes from the warranty against defects leaving them with no warranty.

Conditional commitments.

These usually describe commitments in the future which require certain facts or events needing to occur for the commitment to be effective.

• If Buyer purchases 10,000 units by January 1, 2011, Supplier shall provide a rebate of 10% of the purchase price. The commitment to provide the Ten Percent rebate is conditioned in this situation by two actions. The Buyer must purchase at least 10,000 units and those purchases must occur before the cut off date of January 1, 2011.  

Conditions precedent

A condition precedent means that the commitment is not final until the conditions have been met.

• Upon successful completion of the development,  Buyer will purchase a minimum pf 10,000 units. This means that the commitment to purchase exists only if the development is successfully completed.

Consistent with prior practice

This is intended to have prior practice between the parties become part of the agreement and potentially override specific language in the agreement.

Direct

This may be used to avoid having to pay for any costs other that what would be considered “direct.”

• Supplier shall reimburse Buyer’s direct costs associated with the removal or the defective Product from the Customer site. This would eliminate the Buyer’s ability to recover any indirect costs associated with the activity.

Exceptions

Exceptions are the same as carve outs

Exclusions to avoid doubt

This is the same as an exclusion.

• For the avoidance of any doubt,  all Prototype Products are excluded from this warranty.  The impact of this exclusion would be to eliminate the coverage under the warranty for Prototypes  which leaves it open as to what the commitment is for those. Is it nothing? Is there a commitment to re-work them if they are repairable?

Final or finally

This is used in language that talks about when the Supplier must make a payment.

• Supplier shall pay all costs finally awarded. The impact of this is Supplier would not be obligated to make the payment until the costs are finally awarded which means after the Supplier has exhausted all appeals which could be many years away.

Floors or ceilings

Floors are usually used to try to avoid liability until the floor amount is met.

• Epidemic Defects shall mean 1% of failures for the same root cause in a 30 day period based on a minimum purchase amount of 500 Units.  In this case the floor may have been to try to avoid having a small number trigger the epidemic defect. The problem with it is what if you bought 499 and all were defective?  If 1% or 5 units worked when there were 500, why wouldn’t you want a different floor such as “For purchase of Less than 500 units, the rate must exceed 1% and 5 units.

Form, fit and function

This is frequently used in language about the right to make changes.

• Supplier may make changes to the Product as long as they do not affect the form, fit or function of the Product. This type of qualifying language would allow the supplier unlimited rights to make changes to their product as long as the changes meet those three criteria.  If the Product no longer worked in your application it would be your problem. If the changes impacted the value (such as substituting much cheaper materials), quality or reliability of the product they could still make them.

Formula

Formulas can be structured to be broadening or narrowing by the way they are described in words.

Always check any formula by using real numbers to see if it works in all situations. If there can be multiple interpretations, include an example with actual numbers to show how its is intended to be interpreted

Goals

Goals are substituted to avoid making real commitments as the failure to meet a goal is not a breach of the agreement that triggers remedies.

• Supplier’s goal for warranty repair is five (5) days. For things that they cannot commit to 100% of the time, a goal may be acceptable as long as its linked to a firm commitment for example” Supplier’s goal for warranty repair is five (5) days. All warranty repairs shall be completed in no greater than ten (10) days.

Good faith

Used most frequently in describing obligations for future negotiations.

• Buyer and Supplier agree to meet in One Hundred and Twenty Days to negotiate the final price in good faith.  This is no commitment as it doesn’t require the parties to come to agreement or establish parameters in which the agreement must fall. If you are dependent upon coming to agreement, always manage your potential risk by agreeing in advance the formula that will be used or establish a maximum so it isn’t totally open ended.

Gross

Used in commitment relation to negligence which imposes a much higher standard.

• Supplier shall indemnify Buyer against personal injury resulting from the gross negligence of Supplier and Supplier Personnel”  This would limit the Supplier’s liability to only those situations where they were grossly negligent and would exclude ordinary negligence.

In accordance with our standard procedure

Used in situations like material return authorizations.

• Buyer may return defective product in accordance with Supplier’s standard RMA Process. Any time you are asked to follow an process, you need to do several things. First, you need to review the process they are referring to to make sure that you agree with all the requirements it may contain. Second, if you agree you don’t want it to be able to be changed in the future so you would want to document what the date or revision number was for the process you agreed upon.

Including without limitation

This is a broadening statement so when you list things they are not considered to be all inclusive.

• In the event of a termination without cause,  Buyer shall reimburse Supplier for all costs associated with the termination which includes but is not limited to …..  Any time you include a list you need to identify whether the intent is for the list to be just examples or an inclusive list. If the goal is to provide examples, you would want the broadening statement. If you want it to be the all inclusive list, you would use limiting language such as “this includes and is limited to”

Knowledge

Knowledge is a limitation to a commitment where for the commitment to be enforceable the party had to have knowledge

• Supplier warrants that, to the best of Supplier’s knowledge, the Products do not infringe the Intellectual Property rights of any 3^rd party. This means that if they didn’t have knowledge of the infringement they wouldn’t be responsible under the warranty.  Ignorance should be no excuse.

Material

This is frequently used in conjunction with the right to make changes

• Supppier shall not make any material changes to the Product. The insertion of material would allow the supplier to make changes as long as they aren’t “material”. What is a material change can only be determined by the Buyer. For example a minor change in a product could cause it to not work in the Buyer’s application/

Materially adverse

This is frequently used in conjunction with the impact a change would have.

• Supplier may _____ unless there is a materially adverse impact on Buyer.  The standard this is creating is the Supplier may do something that impacts the Buyer. They would only need to stop if the action created a materially adverse impact to the Buyer.

May, but shall not be obligated to

This describes a right rather than a duty.  If it’s a right, you can choose to exercise it or not. If it’s a duty you most exercise it.

• Buyer may, but shall not be obligated to, exercise an option to purchase and additional 10,000 units at $ _____” This describes an option the Buyer may exercise but is not obligated to exercise.

Not less than

This make a commitment open ended.

• Supplier shall provide a replacement in not less than five (5) days. All this does is tell you that it won’t be less than, but it doesn’t address when.

Ordinary course of business

This is an attempt to have the Suppliers practices in their normal operations be the standard for the commitment.

Out of pocket

This is used in an attempt to exclude any Buyer internal costs from a claim.

• Suppliers shall reimburse Buyer for its out of pocket costs associated with the repair.  Out of pocket means that the Buyer had to pay for the costs and would exclude the cost of any internal resources that were used.

Point in time language

This attempts to limit a commitment to only a specific point in time.

• “At the time of execution of this Agreement Supplier warrants that ……  This is limiting the warranty commitment to only that specific point in time, not during the duration of the agreement or the duration of all obligations under the agreement.

Promptly

This attempts to establish a time period that isn’t clear and open to debate as each of the parties have a different interpretation of what prompt may mean.

• Supplier shall promptly provide repair under the warranty

Reasonable / Unreasonable

This attempts to establish a commitment that isn’t clear and is open to debate as each of the parties have a different interpretation of what reasonable may mean.

• Changes to Suppliers shall be subject to Buyer’s approval, such approval not to be unreasonably delayed or withheld. 

Substantial

This word is used to expand potential compliance.

• If the product fails to substantially conform to the specification.…… The concept of substantial conformance leaves it open to argument as to whether something is meeting the Specification.

Triggering events

Triggering events will decide when a specific commitment come into play.  For example release of materials from escrow requires a triggering event. Many clauses require a triggering event before the remedies will apply.

• A defect of the same root cause in excess of 1% of the Product shipped shall be considered and Epidemic Defect and for Epidemic Defects Supplier shall reimburse Buyer for …..”  In this case the 1% is the Triggering event. Below it, Buyer has no rights to the reimbursement, above it Buyer’s right for reimbursement is triggered.
• If Supplier’s shipment of  Product is more than ___ days late,  Buyer may exercise its rights to have the escrow materials released and commence production under the license to make or have made the Product.  In this the triggering event is the late shipment of more than ___ days. In negotiating triggers you need to make sure that they provided you what you need when its needed as a rate or number that is too high increases the impact of the problem.

Trumping / precedence provisions

This is a carve out from the specific commitment that follows it.

 “Except as otherwise provided for in Section ___ of this Agreement, Supplier shall” .  This would have the commitment in the section where it is used be overridden by the other referenced section .

Willful

Traditionally used in negligence language where they want to limit liability to only willful acts of the Supplier or Supplier Personnel

• Supplier will indemnify Buyer against willful negligent acts of Supplier and Supplier Personnel. This would mean that if the act was inadvertent, and not deliberate, the indemnity would not apply.