Monday, February 21, 2011

Negotiation - Thoughts on Negotiating Delivery And Remedies For Late Delivery.

There are many reasons why a Supplier could be late in delivering you a product or service.  Sometimes the delay in delivery could be caused by the fact that one of their Suppliers was late in delivering. It could be caused by a production problem. They could have an emergency where they need to be working for another customer. The one area that you need to be concerned about is when your delivery is late because of a financial business decision made by the Supplier.  When there is limited supply Suppliers have a choice as to what customers they ship product to. Different customer sales, and sales to distribution may be more profitable than their sales to you. The natural tendency of any company will be to ship available product to customers that provide them with the highest profit and revenue. The less pain they have in doing that, the greater the potential risk. Other times the decision to delivery product late could simply be an investment decision. The supplier could be weighing the additional cost that would be needed to deliver on time (such as paying workers overtime) against the risk and cost if they fail to deliver on time.

Many times standard contracts have language that provides the Buyer with the ability to cancel the order or exercise the right of cover that would allow you to collect from the Supplier any additional cost of re-procurement. If you really need the product, neither of these may be adequate remedies. Ordering from someone else just places makes delivery even later as you have their lead-time to take into account, so that may not be
a good remedy. If the product or service is custom there may be no one else that is able to provide it.

In negotiating on-time delivery the key points negotiated are:
1) What is the delivery point at which you are measuring performance?
2) What (if anything) is acceptable in terms of early or late delivery?
3) What are the remedies the Buyer has in the event the Supplier fails to ship on time?
4) What is the maximum Supplier’s liability in the event of late delivery?

The point at which you measure delivery should be tied to control. If the Supplier manages and controls the shipping,  I would measure it when it is delivered to your receiving location. If the Buyer manages and controls the shipping, it should be tied to delivery at the Supplier’s location.

For early or late delivery parameters you need to consider the impact. I might agree to a small window that they may ship early if that didn’t cause a problem and as long as the payment obligation in that instance runs from when it was scheduled to be delivered. What you want to avoid is having the Supplier ship a high quantity well before they are needed simply because the Supplier has them so they transfer the cost of inventory from them to you. I’ve always been of the position that there be no tolerance for late delivery as part of the standard of measurement.

In negotiating the remedies the Buyer has you may need to consider whether alternative remedies will provide the Supplier with greater incentive to ship on time. In some situations having liquidated damages for late delivery may be appropriate. In other situations, you might include requirements that if they are late, they pull product out of any distribution channels they may have and ship it to you at no cost. You always would want the right to require the Supplier to ship late deliveries by premium freight at their cost so it isn’t delayed further.  You could also consider including different remedies based upon how late the delivery is as incentive for the Supplier to pull in your delivery. For example if the delivery is only a day or two late you could require payment for premium freight, if its longer then liquidated damages apply.

Suppliers frequently want to cap their liability for late delivery to some small amount such as the value of the purchase. The thing to consider is what your direct damages would be if they were late. For example if the same product could be purchased through distribution what would the cost be? It could be a multiple of what you had contracted to pay and that would be the minimum I would want.

The last thing to remember when negotiating delivery remedies is there are costs to you from a total cost perspective in both situations.  In situations where you have early delivery you may be accruing an inventory carrying cost. If a supplier is frequently late in delivering you probably are carrying a higher safety stock inventory as a result.

Negotiation - Thoughts on Insurance

Insurance is a language all its own and it’s always wise to involve your company’s insurance expert in any insurance negotiations. Individual countries will have different requirements and may describe things differently. This is based on U.S. insurances coverages.  As a negotiator there are a number of things that you should know about insurance. Insurance is described by the types of “Lines” that are required.  Think of a line as a form of risk or risks the insurance policy is designed to provide financial protection against. There are a number of different “lines” that provide protection against different risks. Most contracts will include indemnifications and many losses would be a breach of the agreement. What insurance does is provide financial backing behind indemnification for the types of risks the insurance is designed to protect.  It also means that you aren’t solely dependent upon the assets of the Supplier for certain recoveries.

Here’s a listing of the most common types of insurances that may be required:

Comprehensive general liability is a policy that is designed to protect a business from a wide variety of potential liability such as accidents on their premises or operations, liability from products they sell or services they perform, liability for operations completed and  contractual liability.

Comprehensive Automobile Liability is a policy that covers potential liability for bodily injury or property damage caused by an automobile.

Workers Compensation is a policy that that covers potential liability of an owner that is imposed by a workers’ compensation law for injuries sustained by the worker in the performance of their work.

Employers Liability is a policy that covers against common law liability that an employer has for accidents and injuries to their employees.

Crime or Employee Fidelity is a policy that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees. These policies protect from losses of company monies, securities, and other property from employees who have intent to cause the company loss.

Property Liability is a policy that covers loss of damage to real and personal property caused by something your business does or doesn't do damages someone else's property. Even if you don't physically injure that property, you may do something that actually prevents its owner from continuing to use it. Coverage usually includes the physical damage to the property; or the loss of use of that property.

Professional Errors and Omissions is an insurance which gives physicians, attorneys, architects, accountants and other professional coverage for claims by patients and clients for alleged professional errors and omissions which amount to negligence.

Umbrella Liability is a policy that covers losses above the limits contained in underlying policies and coverage may be broader than the underlying policy. An umbrella policy is issued under the same terms and conditions as the policy(s) is sits above.

Excess Liability policy covers losses above the limits contained in underlying policies. Coverage may not have the same terms. Like an umbrella policy it provides coverage amounts over and above the primary liability policies.

As other potential risks arise, many times insurance is sought to provide protection against the risk. For example a recent requirement that I have seen is coverage for loss of Personal Data that was entrusted to a company.

The main issues in dealing with Insurance are:

a)             Coverage limits. The primary issue is making sure that the coverage limits are adequate enough to protect against the risk. Coverage limits may be expressed in different ways such as total liability, total liability within a limited term or liability on a per incident basis.

b)             Financial Stability of the Insurer.  Insurance is only as good as the financial stability of the Insurer. Therefore its important that the insurance be from a viable insurance company.  There are companies that provide financial ratings of insurance companies such as AM Best. When an insurance provision requires that the insurance carrier have an AM Best rating of A- or better, it is requiring that the insurer must have that independent rating.

c)             Additional insured.  As an additional insured it makes you a party to that agreement. Being a party to the agreement, you would need to be notified of any cancellation or non-renewal of the insurance.  In the event the primary insured was fraudulent in their application for the insurance, their insurance may be cancelled, but as an additional insured, and provided that you were not fraudulent, you would remain protected even though the insured would not.

d)             Buyer as a loss payee.  This would create the situation where in the event of a loss, the insurance company would pay you directly so you are not dependent upon getting subsequent reimbursement from the Supplier

e)             Primary and non-contributory. A request that insurance be primary and non-contributory is seeking assurance that the Buyer’s own insurance policies will not be asked to contribute to a covered loss such as under a theory of contributory negligence.

f)              Waiver of subrogation. Subrogation is the right of an insurer who has paid the insured’s loss to pursue remedies against third partiesAs a condition of the payment the insured needs to assign all rights to the Insurance company who can then make a claim against any parties that contributed to the loss. As a Buyer would be a third party to that insurance loss claimed by the policy holder against the insurance company, a waiver of subrogation is needed to protect the Buyer against the Supplier’s insurance company pursuing remedies against the Buyer. In a waiver of subrogation the insured would give up the right of subrogation against the Buyer but would still be free to pursue remedies against other parties involved.

g)             Severability of interests. Buyer’s requesting that insurance coverage include severability of interests is requesting that each insured’s interest under the policy are treated separately for purposes of coverage under the policy.

h)             Subcontractor Coverage:  Many Buyers request that Supplier’s subcontractors maintain the same coverage and conditions as required.  Most Supplier policies do not cover Subcontractors so this requirement is more of a contract obligation than and insurance requirement.

i)               Copies of Insurance Policies:  Buyers may request copies of the actual insurance policies or “certificates of insurance” which are the standard industry method of evidencing insurance coverage. 

j)               Insurance Coverage Period:  Virtually all insurance policies have a one year term. This is because insurers transfer risk to other insurers via re-insurance agreements that are renewed and re-negotiated annually.  As a Buyer you will want the coverage to remain in effect for the term of the agreement. Suppliers may want to avoid the responsibility by having the requirement subject to coverage being commercially available.

k)             Notice of Cancellation and/or Notice of Material Change:  Buyers often request that Suppliers provide notice of cancellation of, or notice of material change in insurance policies within 30 days. If the Buyer is named as an additional insured this is not needed as Buyer, as an additional insured will get such notices.

l)               Limitations of Liability vs. Insurance. Potentially the parties could agree to higher insurance limits than they agree for a limitation of liability between the parties.  As a Buyer it is important to ensure that the Limitation of Liability does not limit the insurance liabilities and that any payments under insurances not be counted towards a total cap on liability for breaches. To do that as part of the section of the agreement that required insurance you can make the intent of the parties clear by saying  “The provisions of this section are in addition to the other rights and obligations of the parties in this Agreement."  or as part of the limitation of liability you could specifically carve the insurance section out of the limitation.

m)           Companies that self-insure.
Some companies, especially large companies will self-insure against certain perils. In that situation, it is only the assets of that Supplier that you can look to in the event of a problem. The requirements for the insurances should be the same, the only difference is that you allow them to self insure to provide that coverage. To ensure that they have the finances to meet those commitments you would require them to provide evidence of their ability to self insure. Further a commitment for self insurance will usually require that the Supplier provide a bond or other financial guaranteed acceptable to the Buyer in there is a claim. The amount of the bond or guarantee would be either the amount of the claim or the amount of the self insurance limit, whichever was less.

Negotiating Insurance.
One of the most frequent issues that arise in the negotiation of Insurance provisions is the amount of the individual limits that the Buyer may require for individual coverage or the applicability of certain insurances to the business. For example, a Supplier may not carry the required amount of coverage and may want Buyer to pay for any additional premium cost to meet the limit.  Before rushing out to do this the first thing you want to do is see if the Supplier has either an Excess or Umbrella liability policy. If they have an umbrella policy where the insurance policy has the same term as the other policy the values of the two can be added to see if they exceed the desired amount. If they do simply include the requirement for the Umbrella Liability policy as part of your insurance section, If they have an excess liability policy I would have your insurance person review it to see if you will still be protected under the different terms that could be in the excess liability policy. If they agree, add that insurance as a requirement for the agreement.

A second common issue is Supplier’s may say that they do not carry a certain policy such as Automobile liability as they don’t use vehicles in performance of the work. Rather than delete the requirement you could simply include a pre-condition such as “In the event vehicles will be used in the performance of the work….”.  This doesn’t force them to have insurance that they don’t need, or won’t use, but provides you with the protection that if they ever use vehicles in performing the work contractually they are required to carry the insurance.

Many Suppliers in negotiations want to avoid
1)    Having the Buyer named as an additional insured.
2)    Having the Buyer named as a loss payee.
3)    Having the insurance be primary and non-contributory
4)    Waiver of subrogation

The best way of dealing with their objections it to explain why you need the individual requirement.
·       You want to be named as an additional insured so you get notices of changes or cancellations. You want to be protected in the event they fraudulently applied for the insurance.  You also want it so the Insurance Company can’t come back and sue your company as they can’t sue a named insured.
·       You want to be named as a loss payee simply because you don’t want to be concerned about if or when the Supplier would pay you the proceeds.
·       You want the insurance to be primary and non-contributory to avoid all the time and expense determining contributory liability.
·       You want waiver of subrogation simply because you don’t want to receive the insurance proceeds only to turn around and be sued by the Insurance company.
Insurance coverage provides protection based upon when the cause of action arose. If a third party was injured, they have a statute of limitations in which to bring the claim. The insurance that would cover that is the insurance that was in effect when they were injured, not the policy in effect when the claim is made.  If the Supplier went bankrupt and no longer had insurance coverage that shouldn't impact your recovery as the claim would be made against the insurance policy that was in effect when the injury occurred.  That may be one reason to ask for and maintain copies of insurance certificates.