Monday, March 7, 2011
In most situations the negotiator is not alone and there are a number of resources and tools available to them to assist in preparing for the negotiation. For example, you probably have people who assess the credit of potential customers who you could use to help assess the financial stability of the Supplier. There are usually subject matter experts who can help you better understand the commodity. There are engineers and quality personnel who should help you assess the supplier to determine the Supplier’s capabilities and identify potential performance issues that may need to be addressed. I’ve used financial analysts to help evaluate the financial impact between different options. Companies usually have insurance experts you can get advice from if an issue comes up with insurance and you will usually have Import and Export compliance people who you can go to for issues in those areas. Service people can help evaluate a product or service and provide guidance on concerns they may have with serviceability of a product or time to repair a product. Manufacturing engineers can look at a product and understand how is made, the processes used and what potential manufacturing issues may exist with manufacturing the product. If they are not part of the direct negotiation team they should be someone you can contact if there is a problem.
Most companies have tools that can also assist in negotiations. For example, contracts systems should allow you to compare what you have for terms with other suppliers or what precedent you already have with the existing supplier. Transaction systems should allow you to understand the historical spend data for the commodity or with the supplier. Performance tracking systems are always a great tool to use with re-negotiations with the Supplier where you can highlight problems with their past performance, the cost to you and allow you to tell the Supplier what they need to do if they want to keep or grow the business.
Every company has their own processes that cross the Supplier relationship. For example, there will be accounts payable processes, royalty payment processes, receiving processes, product return processes, order management processes. The simple reason why its important for the negotiator to understand these is because what you agree to with the supplier needs to be something that operates within those processes. For example if your accounts payable group makes payments twice a month and has specific cut off dates to be included in those payments, if you promise something different one of two things will happen. First you may not be able to do it and will need to go back to the supplier to negotiate something different, or you may need to have the processing done specially, and that adds more work and cost for the AP group to manage. Exceptions are things groups want to avoid unless they can see a clear benefit to the company and just because you agreed to it doesn’t constitute a benefit.
Policies and Procedures
Every company has policies and procedures that define the way they operate and this is especially true for Procurement that is involved in spending the company’s money. As with processes, its important to know what those policies and procedures are to ensure that what you agree upon falls within what you are allowed to do under those policies and procedures. You don’t want to have negotiate an agreement to later find out that the party who needs to sign it internally won’t because it failed to meet internal policies and procedures that involve source selection. For example many companies have policies on sole source, customer directed suppliers, requirements for supplier assessments, supplier performance evaluations, the type of contract that may be used, publicity controls, types of materials that can be used and legal or ethical requirements.
In the end, you never want to have to go back to the Supplier that you just finished negotiating with to tell them that you are sorry because what was agreed either won’t be signed or can’t be implemented.
The clear message in this is before your start to negotiate learn the parameters your company wants you to negotiate within! Many times in asking your management or subject matter experts what you can or can't do, they will have experience they can share to assist you in getting smoother approval by your management.
Many times a Supplier will want to insert a “knowledge qualifier” as part of a commitment. I consider knowledge qualifiers as a form of Ostrich Management where rather than see or look for the problem they bury their head in the sand. What knowledge qualifiers do is try to transfer certain risks to the Buyer. Instead of making the commitment that a certain fact exists or is true, they want include a commitment to the effect that they simply don’t know. For example: “to the best of their knowledge the Product does not have any claims or liens against it” is an example of a knowledge qualifier.
The impact of the knowledge qualifier is that the Supplier would only be liable if they had actual knowledge of the fact. In the example above if the Supplier didn’t know and there was a lien or claim against the product, they wouldn’t be responsible to correct it. The Supplier met their obligation, since when they sold it to you they had no knowledge of the problem.
You should always avoid knowledge qualifiers as they transfer significant potential risk to the Buyer.
If you must use the Supplier and the Supplier insists on a knowledge qualifier there are two things that need to be managed.
You should include an obligation for the Supplier to either perform or state that they have performed reasonable diligence to verify the fact. Simply including a knowledge qualifier places no obligation on the Supplier to check the fact or become knowledgeable on it. Terms should drive the Supplier to behave the way you want especially if you are going to accept any risk. With a knowledge qualifier alone there would be zero incentive for them to ask or perform any diligence as it could prevent them from making the sale and it would make them liable if they did know and still sold it to you. Requiring reasonable diligence should reduce the risk and it opens the potential to claim that they failed to use reasonable diligence if a problem arises.
The second issue is at what point in time is the knowledge commitment being made. If it is as of the date of signing the agreement and they subsequently gain knowledge of the problem, they have met their commitment because at the time of the signing they didn't know. If you will be entering into an agreement where products or services are being delivered over an extended period, a commitment that they have no knowledge as of the date of execution of the agreement increases the potential magnitude and cost of the problem for you. If you must agree to a knowledge qualifier you should make the commitment be at the time of delivery for each purchase to mitigate the risk. That creates the situation where if they do subsequently discover the problem, they would have the obligation to correct it before selling you any more. If they sold the item with the knowledge of the problem it would be a breach of the agreement and subject them to damages and potential termination of the agreement.
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In most jurisdictions there are seven situations where a contract may be voidable
- Mistake (such as a mistake in their Bid upon which the Contract is based).
- Misrepresentation by the other party.
- Fraud in the inducement by the other party.
- Illegality of purpose, or subsequently illegality of purpose where a new law makes certain performance illegal.
- Lack of capacity such as the contract being signed by a minor, someone with mental problems, under the influence or not having the authority to make the commitment on behalf of the party.
- Failure to comply with requirements of the statute of frauds, (see below)
- Unconscionable (contains terms that would not be enforceable as a matter of public policy).
In most cases only the Supplier would seek to void the contract by mistake. To make sure that your Contract isn’t voidable you should make sure that there were no mistakes in the Supplier’s bidding. Requesting that they verify the correctness of their bid or quote may do this.
For a Buyer to claim misrepresentation, the representation needs to be made part of the contract since most contracts will have merger clause stating that the agreement represents the entire understanding of the parties.
To manage a lack of capacity from voiding the agreement you need to make sure that the party signing the contract for the Supplier is authorized. We’ll discuss this in more detail in the blog on authority but in most situations authority to bind a company may be positional. For example Officers of a Corporation are considered to have positional authority to bind the company. For others, authority
needs to be either expressly granted by the Corporation or delegated by someone authorized by the corporation that as part of their grant of authority has the right to delegate authority. For example a Vice President of Procurement may have the authority to delegate authority based upon a Procurement Policy that identifies who may sign certain types of contracts and at what financial value. When in doubt, one way to verify authority is to ask for a “Secretary’s Certificate” that is signed by the Corporate Secretary that expressly describes the individual’s authority that the Corporation has granted the individual.