- Is there a contract?
- Is the contract enforceable?
- Was there a material breach?
- Is there anything that could void the contract?
- Is there anything that changed the commitment such as a modification or waiver?
- What are the remedies?
- What damages would be available?
- Types of damages.
- Limitations or caps on damages.
Tuesday, April 5, 2011
What happens when there is a contract problem?
Most of the time when there is a problem the parties to the contract will meet to try to resolve the problem amicably. If they are unable to do that and there is a dispute resolution process agreed in the contract, they may submit the issue to dispute resolution process.
If there is no dispute resolution process that has been agreed the non-breaching party will need to determine their course of action. On review of the facts they could decide that an issue is not worth pursuing; it’s worth continuing to try to negotiate; or it’s worth fully litigating. The breaching party will need to determine their potential course of action. In both cases both parties will go through a similar process to help determine the direction they will take.
A good example of a flow chart of what each would consider can be found at law.upenn.edu.groups under the file name “Contracts_flow_chart_1.doc”. It represents the legal reasoning a lawyer would go through in reviewing the agreements and the facts to determine the answers to the following basic questions:
In addition as part of the determination a number of business considerations will also be taken into account by both parties to determine the final direction.
1. What is the relationship we have with the other party?
2. Do we need or want to continue to do business with them?
3. How many resources and of what types will it require to pursue the claim?
4. What will it cost to pursue the claim?
5. Do we have the right to under contract to recover legal fees if successful?
6. What is the degree of confidence that we will be successful?
Sometimes there are lawsuits that are based on principle only where even after being advised of the chances of winning, the cost and the potential for recovery they will still proceed. Many times both parties may come to their own similar decision that it’s in their own best interest to try to settle things without litigation.
While I’m not a big fact of alternative dispute resolution such as having things be submitted to an independent arbitrator, one of the things I do think should be in every agreement is a formal management escalation process for problems. Many times the individuals that are “in the heat of the battle” may not be thinking clearly or may be taking things personally, so its best to have the ability to have the issue escalated up on both sides to people who can weigh the pros and cons from a simple business perspective.
When you see a redline change to an agreement made by the Supplier, the first thing you need to do is understand the impact of the proposed change.
a. Does it impact your costs?
b. Does it increase your risks?
c. Will it impact performance or your ability to manage performance?
For proposed changes that have a cost impact ask these questions”:
a) Is this a cost you can manage?
b) Is this a cost the Supplier can manage?
c) Is this a cost that neither can manage fully?
d) Who is best prepared to manage the cost?
e) If you accept the cost responsibility:
1. What additional terms do you need to manage the cost?
2. What investments do you need to make to manage the cost?
3. What concessions of equal or greater value would you want from the Supplier to agree to manage it?
For proposed changes with a risk impact ask these questions:
a) Is this a risk you can manage?
b) Is this a risk the Supplier can manage?
c) Is this a risk neither can manage fully?
d) Who is best prepared to manage the risk?
e) If you accept the risk:
1) What additional terms do you need to manage the risk?
2) What investments do you need to make to manage the risk?
3) What concessions of equal or greater value would you want from the Supplier to agree to manage assume managing it?
For any changes that would impact performance or the ability to manage performance ask:
a) What will be the cost impact of accepting the different performance commitment?
b) What risks can occur with the different performance commitment?
c) Before you accept the change consider:
1) What additional terms do you need to manage the performance?
2) What investments do we need to make to manage the performance?
3) What concessions of equal or greater value do you want from the Supplier to agree to manage it?
For all changes you also need to consider how the proposed change to that one section will impact any other sections that may be tied to or be dependent upon that section.
A simple example of this is when you change the delivery term. That change may impact a number of other terms.
- Payment is frequently tied to delivery.
- The warranty term is frequently tied to delivery.
- Rights of acceptance and rejection may be tied to delivery.
- Responsibility for costs and risk of loss depends the delivery term.
If you agree to change from DDP terms to Ex-Works the Suppliers dock where the transit time is 30 days for ocean shipment, this would mean:
- If payment is tied to delivery, the first 30 days of your payment period will be consumed while the product is in transit.
- The first 30 days of you warranty will be consumed while the product is in transit.
- Your period of time to accept or reject the product could be exhausted if it were 30 days, or reduced if more that 30 days while in transit.
- Instead of the Supplier bearing all costs and risks to get the product to the point of use, the Buyer is assuming all the costs and risks.
If you were to consider the change you might want to counter-propose that you will agree to ex-works provided the difference it time is added to your period for payment, acceptance and warranty periods and the price is reduced by the additional costs and risks you would be assuming that are associated with the change which would include the following:
- Value of money for the 30 days earlier they are being paid.
- Cost of freight, duties, shipping, clearance.
- Cost of insurance against the risk of loss or damage to the product.
I do not recommend that you rely strictly on red lines generated by Word Processing programs as showing all the changes that have been made to an agreement. In a fair number of times I’ve caught Supplier negotiators making changes to an agreement without highlighting them that can be done by turning the track changes functionality off and on. While some may have been done inadvertently, it’s clear that some were done deliberately in an attempt to slide something through under the radar. The other thing you should know is that word processing functionality also does not highlight changes that are made within a change. If you have some of the better contract management programs you may be able to catch those.
If you use Microsoft Word the only way to see everything what’s been changed is to take the prior version and do a save as to create a different document name. Then accept all changes in that version, Then take the Supplier’s redline, save that as another document and then accept all changes. Then use the comparison function in word to compare the documents by:
- Open the saved version of the Supplier redlines in word.
- Under tools, select Compare and Merge Documents.
- In the file name insert the name of the prior version that you saved as an accepted the changed.
- Next to the file name click on “Legal black line”
- Compare the two documents, it will highlight what’s been added or deleted between the two,
- Then manually compare that against the Supplier redline to see anything was deleted or added without it being highlighted.
The following is an example of the types of changes that you could see a supplier propose. To effectively negotiate you need to first see the issue, understand the impact it will have on you from a cost, risk, performance or enforceability perspective. Then you can use the appropriate tactics to respond to each of the proposed changes. To understand the full impact of a proposed change may require going through the Contract to check things like where is a defined term used to understand the impact of any changes to a defined term. It can also require considering the impact something will have on all the things that are linked to the issue as a change in one area can impact other areas.
This Agreement (“ Agreement”) dated as of _____________, ( the “Effective Date”) between Company X (“Buyer”) and Supplier X Pte. Ltd. (“Supplier”),
The insertion of Pte Ltd changes the Supplier from the Supplier parent company to in this instance a limited liability subsidiary based in Singapore. As this could affect the ability of they to stand behind the liabilities and commitments of the Contract you would either need to look at that specific companies assets and resources to determine if they are sufficient. If they weren’t, you might require the Parent to provide a Parent or Company guarantee on their subsidiary’s performance or not agree to have the contract be with that Subsidiary.
“Engineering Change” or “EC” means any material change(s) to Product.
"Prices" means the agreed upon payment and currency for Products, exclusive of Taxes but including all applicable fees and payments, as specified in the relevant SOW and/or PO.
"Products" means items that Supplier prepares for or provides to Buyer as described in a SOW and/or PO.
“Specifications” means the Supplier’s datasheet or the mutually agreed upon datasheet for Products.
The insertion of material is a softening word. If your contract required approval over any Engineering Changes, it would now be interpreted with this as having approval over only “material” engineering changes which completely changes the commitment
To understand the impact on the deletion of “agents” and “Subcontractors” from the definition. You would need to search the contract to see where the term “Personnel” is used in the contract. In the contract “Personnel” is used in two places. It’s used in the General Indemnity, and with this change the Supplier would not be required to indemnify the Buyer against negligent or intentional acts of either the Supplier’s agents or Subcontractors leaving the Buyer exposed in that area. It was also used in the Section on Supplier Personnel, and the impact of the change would be that the Supplier would not be responsible for managing those requirements with their agents of Subcontractors.
The insertion of their definition of Specification creates an inconsistency and also leaves it open to potential change. As written the Specification could be either their datasheet or the mutually agreed data sheet. If both exist, which applies? Also since Supplier datasheets are maintained electronically, which version of their data sheet applies? That question can be very important as many things tie to compliance with the Specification. For something like this you might want to define it to eliminate that inconsistency and potential for changing the specification by saying something like:
“Specifications” means the mutually agreed upon datasheet for Products. If no mutually agreed datasheet for the Product exists. It shall mean Supplier’s datasheet in effect on the date the Product was added to the contract
1.0 Statement of Work
Supplier will provide the Products as specified in the relevant SOW and/or PO. Supplier will begin work only after receiving and accepting a PO from Buyer. Buyer may request changes to a SOW and/or PO and Supplier will submit to Buyer the impact of such changes. Changes accepted by Buyer will be specified in an amended SOW and/or PO or change order signed by both parties
Supplier will notify Buyer of its intent to discontinue any Product and will continue to deliver such discontinue Products for the
The insertion of “and accepting” adds the concept that they must accept the PO and implies that they would have the right to reject the PO. This conflicts with the last sentence that requires them to accept all PO’s that conform to the terms of the Agreement. To eliminate the confusion you might counter by proposing adding a new last sentence.
“For any PO’s that do not conform with the terms and conditions of this agreement Supplier will begin work only after receiving and accepting the non-conforming PO from Buyer”
The issue of the period of time during which they can discontinue the Product may be presenting a significant risk for the Buyer. The key is how long will they have requirements to purchase that product for their long terms needs. If the Supplier can stop producing it and there are on-going needs, the Buyer would either need to go through the cost and expense of qualifying another product to replace it or they would need to make a last time buy which forces the Buyer to carry inventory at a costs and have other inventory costs such as the risk of loss or obsolescence. If their period was too short versus your need, you may not want to source with them and use that threat of taking that business away as a means to drive an acceptable period.
2.0 Payments and Acceptance
Terms for payment are
Unless otherwise provided by local law without the possibility of contractual waiver or limitation, Supplier will submit invoices, corrected invoices, or other such claims for reimbursement, to Buyer within (1) year from the date of
The reduction is the payment period is a cash flow loss for the Buyer.
The change from 60 days to 45 days and the inclusion of the “deemed acceptance language here was intended to do several things. Since delivery is occurring at the Supplier’s dock, the 5 days would be measured from that point and in five days you may not have even received it to inspect or reject it. This would effectively eliminate your right of acceptance and the ability to return defective products for a refund. All defective products would then have to be managed under the Warranty provision the clock of which may already be running if the Warranty period started when the product was delivered so with this change no only are they eliminating your right to reject the product and get a refund, they are also cutting into your effective warranty period.
The deletion of the language that provided for the refund plus inspection, test, and transportation costs are increasing your cost of quality in dealing with this Supplier and when you read this in conjunction with the warranty redemption language they could simply refund the cost of the purchase with you assuming all the other costs associated with the defective product they sent you.
They struck the on-going language as the simply want the warranties to be for a limited period. The problem with that is for some of these warranties a claim could be made we’ll after the end of the warranty against defect in workmanship and materials and if you let them shorten the period on those warranties you wind up losing the protection.
To the best of Supplier’s knowledge, Products do not infringe any intellectual property right of a third party;
The insertion of the “knowledge” qualifier has a major impact on this warranty. In effect it is saying that if we didn’t know about it, we’re not responsible for it. I call this Ostrich management where rather than deal with it they want to bury their head in the sand.
For this type of deletion you would really need to go back and ask the Supplier why they deleted it. If they deleted it because what they are selling doesn’t include any code, you could reverse it and have them warranty that their Product or Service does not include any third party code. If they do and simply do not want to warrant it, they are trying to pass all the risks associated with third party code onto the Buyer.
Products are free from defects in material and workmanship for
The change here from 39 to 12 months is increasing the Buyer’s warranty cost if the products were to fail during that period. Having 12 months tied to the date of shipment further reduces the effective warranty you are receiving, as you will lose all the time in transit, etc, until you or your customer starts to use it. Suppliers will normally propose short warranties for one of two reasons. One is they are concerned about the future risk and want to avoid the cost, or two, they want to sell things like on-going service, maintenance and can’t do that until the warranty ends.
Products will substantially conform to the Specifications for the warranty period.;
The additional of “substantially” is an attempt to water down or soften the commitment. It doesn’t have to conform in all respects, it only has to substantially conform and there can be a huge difference in opinion between the Buyer and Supplier what is substantial or not. Don’t agree to it.
This deletion was intended to place all risk for design defects on the Buyer. It goes hand in hand with their desire to add substantial conformance as a way to avoid liability if there are problems with their product
Products are safe for use when used in according to the operating parameters set forth in the Specification
So far this is the only change that may be acceptable as long as you agree with the operating parameters in the Specification. If you don’t you would need to change them to accept this.
Disclaimer on Warranties
EXCEPT FOR THE EXPRESS WARRANTY SET FORTH HEREIN, SUPPLIER MAKES NO OTHER WARRANTIES OR GUARANTESS REGARDING THE PRODUCTS, WHETHER EXPRESS, ORAL, IMPLIED, STATUTORY, ARISING BY OPERATION OF LAW OR AS A RESULT OF USAGE OF TRADE, COURSE OF DEALING, OR COURSE OF PERFORAMNCE. SELLER HEREBY DISCLAIMS ALL IMPLIED WARRANTIES OR WARRANTIES OTHERWISE ARISING BY OERATION OF LAW, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. NOTWITHSTANDING THE FOREGOING, IF ANY PRODUCTS COVERED BY THIS AGREEMENT IS DESIGNATED PROTOTYPES, SAMPLES, OR FOR EXPERIMENTAL USE, NO WARRANTY WHATSOVER SHAL BE APPLICALBE THERETO AND BUYER ACCEPTS SUCH PRODUCTS “AS IS” AND WITH NO WARRANTY WHATSOEVER.
The majority to this disclaimer is to eliminate any potential claim for the implied warranties of merchantability or fitness for a particular purpose. If you were buying an item to resell it you may need the warranty of merchantability. If the Supplier went of and created the product or service specifically for you where they were clearly advised in advance of the specific purpose that you would be using it for, you would probably want the warranty of fitness for that purpose, otherwise they could be selling you something that met the specification but simply did not work in your application. In many cases these types of disclaimers are common and acceptable. Where they went too far on there is they also included a disclaimer on non-infringement. The effect of this would be that if there was and infringement claim made against you, you may have an indemnity against the claim, but you wouldn’t have the warranty and it’s the breach of the warranty that would allow you to terminate the agreement for cause and claim damages that would most likely be the cost of cover.
The creation of the As-Is position for prototypes and samples eliminates all warranties on those types of products. The risk you have will be dependent upon the use of those products. If it’s merely for internal test and development use it might be an acceptable risk. If the intent is to include those in products that you sell to a customer, you would have no protection under warranty against potential problems that the products could cause
The lead-time for Buyer to issue a PO prior to delivery will be specified in a SOW. Products specified in a PO for delivery with such lead-time will be delivered on time. Supplier will use commercially reasonable efforts when Buyer requests delivery with a shorter lead-time. If Supplier cannot comply with a delivery commitment, Supplier will promptly notify Buyer of a revised delivery date and Buyer may:
1. cancel without charge Products not yet delivered; or
2. Require Supplier to deliver Products using priority freight delivery at Supplier’s expense for the incremental freight charges
In insertion of the qualifying language “commercially” has reduced their standard of commitment from doing what is reasonable, to only doing what is “commercially reasonable”
Meaning what would normally be done in the industry they operate in. It may provide you with little if anything if that’s what the standard is for the industry.
The deletion of the other remedies would mean that if the Supplier failed to deliver on time you would only have two options. You can cancel the order. Or, when the Supplier finally gets around to shipping the product, if ever, you can require that they pay for premium shipping. It would not allow you to claim a material breach of the agreement, terminate the agreement and sue for any damages sustained as you agreed that those would be your remedies for their failure to deliver on time.
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The striking out of the General Indemnification means that if the Buyer were sued by a third party for personal injury or property damage caused by the Supplier or Supplier’s personnel, the Buyer would need to defend against the claim and counter sue the Supplier to make them a party to the suit. It would add to the Buyer’s cost, as they would have to pay for the legal defense. Without the hold harmless portion of the indemnity the Buyer could also be found to have contributed to the injuries and be held responsible for that portion of the damages, all on injuries that were caused by the negligence of the Supplier or Supplier Personnel. This is another reason why the definition of Personnel was important.
Just in case you were wondering, the reason why the Buyer may be sued in the first place is under the law, they would look upon a supplier as a form of agent of the Buyer and principal are responsible for the acts of their agents.
Intellectual Property Indemnification
Supplier will defend,
1. obtain for Buyer the right to continue to use and sell the Products consistent with this Agreement;
2. modify the Products so they are non-infringing and in compliance with this Agreement;
3. replace the Products, with non-infringing ones that comply with this Agreement; or
Buyer will give Supplier prompt notice of third party claims against Buyer, and cooperate in the investigation, settlement and defense of such claims at Supplier's expense. Buyer shall give Supplier sole control over the defense and settlement of any such claim that is subject to the indemnity under this Section..
The issue of who controls the defense that appears here and in the last sentence are liability issues. If you give the Supplier sole control over the defense, what happens if they don’t defend the claim or mount a weak defense? Suppliers will always be concerned with giving the right to the Buyer as that could set a precedent in other claims with other companies.
This is the type of Issue that you should always refer to an IP lawyer, as there is probably a middle ground that can be established such as allowing the Buyer to participate in the defense, or having the sole control be conditional on their mounting the defense in a timely manner.
The change from practicable to reasonable changes the entire impact of the remedies. Practicable mean capable of being done so with that the option is they have to do the first that is capable of being done. Making it the first that is reasonable could be the first that is most expedient for the Supplier but has significant impacts to the Buyer
The change from Buyer’s option to Supplier’s option would allow the Supplier to elect that option as a part of their decision on what is reasonable, leaving the Buyer with a major problem and only being able to return the products for the price paid which wouldn’t come close to all the costs and losses the Buyer would sustain.
The requirement that the Buyer give prompt notice of the claim in this context could make the entire indemnification be contingent. If the Buyer failed to provide prompt notice the Supplier could argue that they breach the agreement and the Supplier would not be obligated to provide the indemnity. If you encountered something like this you should get with your legal or contracts support and something could be drafted to protect against that such as: “Failure on the part of the Buyer to provide prompt notice of the claim to Supplier shall not excuse Supplier of its obligation hereunder, unless such failure materially prejudices Supplier’s ability to defend against such claim.”
Exceptions to Indemnification
Supplier will have no obligation to indemnify Buyer or Buyer Personnel for claims that Supplier’s Products or Services infringe the intellectual property rights of a third party to the extent such claims arise as a result of:
1. Buyer’s combination of Products with other products or services
2. Supplier’s implementation of a Buyer originated design and such infringement or claim would have been avoided in the absence of such implementation; or
3. Buyer’s modification of the Products
In this section that involves situations where the Supplier is not obligated to indemnify the Buyer against third party intellectual property infringement claims, the Supplier’s deletion of the sections is intended to broaden the situations where they are excused from having to provide the indemnity.
For example if a Supplier designed a product to plug into and be compatible with another product, that use should be foreseeable. By deleting the language they are trying to avoid liability. Why should you be able to use it in the manner that the design contemplated?
A number of Products may simply not have any value of be used on their own without being combined with, inserted or installed on another product, Why would you want to relieve the Supplier of responsibility when they know those types of modifications need to be made
Limitation of Liability between Supplier and Buyer
In no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages.
Buyer will not be liable to Supplier (i) under a PO for an amount greater than the amount due and unpaid under such PO,
The first deletion is huge as it limits their entire liability under the contract to only direct damages. This negates the value of the indemnifications, as third part claims are not direct damages. This would also eliminate the value of the epidemic defect clause that is to collect incidental or consequential damages associated with the epidemic defect. It would leave the Buyer with the ability to only recover direct damages that under the epidemic defect situation would be the cost of re-procurement, but later on they excluded that so buyer would have no damages they could claim. On things like willful infringement of Intellectual Property they courts could award special damages of up to 3 times the damages the claimant sustained, and this prevent the Buyer from recovering those special damages.
The deletion of language here eliminates the Buyer’s cap on liability under the agreement making it unlimited
Supplier will maintain at its expense:
1. commercial general or public liability insurance including products liability and completed operations with a minimum limit per occurrence or accident of 3,000,000 USD (or local currency equivalent);
2. workers' compensation and employer’s liability insurance as required by local law,
3. automobile liability insurance as required by local statute but not less than 1,000,000 USD (or local currency equivalent) if a vehicle will be used in the performance of this Agreement.
The indemnity makes the risk the Supplier’s risk. The insurance provides the financial protection for the indemnity.
The value of the indemnity is significantly reduced or eliminated if, after the claim with their employee is settled, for the Supplier’s insurance company to come back after the Buyer to recover what they paid under the rights of subrogation. You want the rights of subrogation waived so the Supplier’s insurance company won’t wind up suing the Buyer.
Termination of this Agreement.
The term of this Agreement shall be for
The change in the term of the agreement really needs to be reviewed from a perspective of both the potential impact and leverage that will exist at the time. If you will need the Supplier longer and the cost or difficulty of changing Suppliers is substantial, never agree to a short period because you could wind up with the need and little leverage that the Supplier would use to their advantage in the negotiation of terms and pricing for that additional period.
Termination of a SOW or PO
1. with Cause effective immediately or as otherwise specified in such notice if such cause remains uncured for thirty (30) days following written notice of the applicable Cause from the other party; or
2. without Cause effective
b) Upon termination, in accordance with Buyer’s written direction Supplier will
1. cease work;
2. prepare and submit to Buyer an itemization of all completed and partially completed Products;
3. deliver to Buyer Products satisfactorily completed up to the date of termination at the agreed upon Prices in the relevant SOW and/or WA; and
4. deliver upon request any work in process.
Making it mutual changes the entire impact of the clause. First if you need the supplier to perform, you shouldn’t give them the right to terminate the agreement without cause, as there is no commitment on their part to make the Buyer whole as there is with the Buyer’s termination.
Second if you want to terminate you want it now, not in 30 days as all that 30 day period will do is add to your cost of termination and probably have the Supplier providing you with products that you don’t need.
The deletion here eliminates the Buyer’s potential cap on liability for termination for convenience making it unlimited
The change from immediately to promptly would allow the Supplier to continue to work and incur costs that the Buyer doesn’t need or want
The most ridiculous aspect of the changes is the Supplier could terminate the agreement. Make the Buyer pay all the costs associated with that and not be liable to the Buyer for anything. This is not something I would ever agree to.
Neither party will be in default or liable for any delay or failure to comply with this Agreement due to any act beyond the control of the affected party,
The deletion of the exclusion for labor disputes would then make any labor dispute that is “beyond their control” an excusable delay. Most of the time the labor dispute may be beyond their control but the acts leading up to that labor dispute may be fully in their control which is why you traditionally want to exclude labor disputes as a force majeure.
The provisions set forth in the following Sections and Subsections of thisAgreement will survive after termination or expiration of this Agreement and will remain in effect until fulfilled: “Taxes”, "Ongoing Warranties", "Epidemic Defects", "Warranty Redemption", "Intellectual Property",
Once an agreement is terminated or expires the only continuing rights you would have under the agreement are those that you mutually agreed would survive the termination of expiration. Buy striking out a specific term, the Supplier’s responsibilities under that term would cease on the effective date of the termination or expiration.
Claims for personal injury, property damage or intellectual property infringement may be made well out in the future. By striking them from the Survival provision they are eliminating those protection out at a point where you may really need them.
After reading through all of this you’ll probably ask how real something like this is. About 90% of my examples that I used here came from one Supplier response to a proposed contract.
- Who is responsible for certain costs in the relationship
- What's included in the Price, who bears the cost for Delivery, Warranty, etc
- The administrative processes for how the relationship will operate
- Ordering, rescheduling, cancellation, warranty returns, payments, etc.
- Responsibility for various risks that may occur and the standard of responsibility for protecting against that risk..
To negotiate contracts you need to understand risks because many contract terms are included to help manage against risks and their potential resulting cost.
There are a substantial number of potential risks in Procurement. The primary vehicles to manage the risk are:
- Supplier selection
- Supplier and product or service qualification
- Ongoing supplier management
- The management and/or transfer of costs and risks by contract
Typical Risks Managed
- Financial. Is the supplier financially qualified to perform the work and stand behind all the contractual obligations?
- Production. Is the supplier capable of producing the product or providing the services in the volume required and in a consistent high quality manner?
- Supply Chain. Does the supplier have a supply chain that is efficient and compatible with your requirements?
- Quality. Does the supplier have quality management systems and programs to ensure consistent high quality product?
- Specification. Does the Product or Service meet the specification?
- Application. Does the Product or Service work in the specific application?
- Competitive. Is the Product or Part price competitive today and for the future?
- Life Cycle Support. Will the Product, Service FRU's, part and repairs be available and be price competitive to support the entire life cycle of the Product or Service?
Types of Risks that may be managed in the Contracts by contract terms.
- Third Party Claims
- Supplier Claims
- Risks In the Contracting Parties
- Risks In Defining And Getting What You Want
- Risks With Changes To The Product, The Relationship, or Your Demand
- Risks in Pricing and Payment
- Risks in Long Term Support
- Risks in Continuity Of Supply
- Risks that are traditionally covered in standard Warranty provisions
- Risk With Warranty Redemption
- Risks with Delivery And Flexibility
- Risks in accountability
- Risks in Contract Enforcement
- Risks with the Import
- Contract Writing Risks Creating Enforceability Problems
- Risks with Supplier Performance
To give you a better understanding of each of these risk the following provides examples of each
Third Party Claims
- Product Liability - Personal Injury, Property Damage
- Auto Liability (under potential claim of agency) for Personal Injury, Property Damage
- Premises Liability (Guests and business invitees), for Personal injury
- Third party Financial claims to the Product such as Security Interests in the product, or Liens
- Claims of infringement of intellectual property contained in product such as Copyright, Patent, Mask Works, Trademark, Misappropriation of a Trade Secret claims, and the cost to correct the problem
- Claims from Other Suppliers for things like Unfair trade practices, Defamation, Libel, Slander
- Claims relating to Supplier Employees - Personal Injury (as Guests or Business Invitees) As workers: Workers Compensation, Employers liability, Claims for Employment rights, Government claims for Withholding Taxes
- Claims by governmental agencies for complying with laws, regulations, ordinances and licensing or permit requirements
Potential Supplier Claims
- Breach of Contract
- Breach of Confidentiality obligations
- Damages to supplier's property on Buyer's site
- Loss of anticipated profits
- Claims for delays, extra costs
- Claims For Misappropriation of trade secrets
- "Agency" Risk
- Buyer's Responsibility For Specific Requirements Or Instructions
- Claims for cancellation or termination
Risks In the Contracting Parties:
- Definition Of The Supplier And Contracting Parties
- Financial Resources To Support Contract Obligations
- Purchases From Resellers
- Risks Created By Purchases By or From Affiliates
Risks In Getting What You Want / Need are managed by
- Product Description And Requirements,
- Definition of "Product", Definition of "Services"
- Rights of acceptance or rejection of non-conforming materials
- Responsibility For Costs Associated With Non-conforming Product
- Right To Accept Or Reject Product Lots
- Acceptance, And Acceptance Criteria
- Acceptable Quality Levels And Responsibility For Failure To Meet Those Levels
- Quality Management requirements
- Supplier's Use Of Subcontractors - Responsibility, Approval And Changes
- Control over changes
Risks With Changes To: Product, Relationship, or Demand
- Right Of Buyer To Make Changes To Product Specifications
- Effective Date Of Changes
- Supplier Changes Authorized By The Agreement
- Termination Rights
- Cancellation Rights
- Ability To Reschedule Orders Based On Changes In Demand,
- Responsibility To Mitigate Costs,
- Amendments To The Agreement,
- Managing change and amendments
Risks in Pricing and Payment
- Price Firmness, and Competitiveness
- Price Changes
- Long Term Pricing Competitiveness
- Payment terms
- Taxes and Duties
Risks with long term support
- Availability of Spare Parts, Consumables, Repairs, Technical Support to support products during their useful life
- Competitive pricing for and Spare Parts, Consumable, Repairs,
- Technical Support needs.
- Continuity of Supply Risks
Product Availability During Term Of Agreement
- Supplier Product Withdrawal - End-of-life
- Contract Term - Length of the Agreement
- Obligation To Accept Conforming Purchase Orders
- Access To Future Products And/or Services
- Responsibilities In The Event Of A Force Majeure
Risks covered by Warranties
- Legal Right To Enter Into The Agreement (Authority Of Signing Party)
- Performance Complies With Laws, Regulations And/or Ordinances
- Compliance With Applicable Export And Import Laws
- Avoidance Of Claims, Liens, Actions That Interfere With Buyer's Use Or Sale
- Products Are Free From Defects In Design, Material, and Workmanship
- Products Conform To The Warranties, Specifications And Requirements
- Products Are Safe
- Products Don't Contain Ozone Depleting Substances
- Products Are New And Do Not Contain Used Or Reconditioned Parts
- Products Don't Infringe Any Intellectual Property Right Of A Third Party
- Risks with Warranty Redemption
What constitutes a defect?
- What are the Supplier's Responsibilities for defective material
- What is the Warranty Redemption Period And What Starts The Warranty Period
- What costs are covered by the product warranty
- What is excluded from the warranty
- Obligations for Post Warranty Support
Risks with Epidemic Defects
- Epidemic defects is a situation where, because of the severity of the defect, the Buyer wants to recover more than just warranty replacement and wants to cover its real costs such as the field cost associated with the defect.
- Risks to manage are:
- Ensuring that the limitation of liability does not prevent such recoveries (e.g. epidemic defects is carved out of the Limitation)
- The basis for epidemic defects is clearly defined with applicable trigger points
- The basis is appropriate for the risk and volume of business.
- Any limitations or caps are clearly defined (e.g. per incident, per product, per year, etc.)
- Costs to be recovered are established
Risks with Delivery and Flexibility
- Predictable Lead-time
- Delivery Term / Location,
- Forecasts And Responsibility/Liability For Forecasts,
- What constitutes on-time delivery
- How are Early Shipments managed
- Remedies if shipments are late or are never made
- What happens with Allocation Of Supply,
- Supplier's Responsibilities for Packing And Packaging,
- Responsibility for Shipping
- Who selects the Carrier
- Who bears the risk of loss or damage to the product while in transit
Risks in accountability
- How do you keep from problems where you don't have a single point of responsibility multiple parties are involved and each could be blaming the problem on the other?
- For example, Supplier claims the reason that the product doesn't work correctly is because it was:
- damaged in shipping that they weren't responsible for,
- or damaged or not properly installed by the party who installed it
- Risks with Insurance Coverage:
Many third party risks are covered by insurance requirements, so there are insurance risks that must be managed such as coverage for
- Comprehensive General Liability Insurance (for personal injury and property damaged caused by the Supplier
- Workers' Compensation Or Employer's Liability Insurance (for injury that may occur to their employees)
- Subrogation Rights Against Buyer (to make sure the Buyer isn’t sued as partly causing the problem
- Automobile Liability Insurance (to cover personal injury or property damaged associate with autos)
- Financial Requirements For Insurers (to ensure that the risks are financially covered by the insurance)
Risks in Contract Enforcement:
The typical clauses in an contract that focus on enforcement issues are:
- Choice of Law and Forum (to ensure that it is favorable)
- Waiver of Jury Trial (so decisions are made on the facts and not sentiment)
- Limitation of Actions (to prevent aging claims)
- Requirements for Notices (so proper notices and actions may be taken)
- Conflict Between Documents (to establish precedence in interpretation)
- Survival (to determine the enforceability of certain terms after the contract has expired or been terminated.
- Waiver Of Rights (to establish what constitutes a waiver of rights)
- Enforceability of Electronic Commerce (to ensure that electronic transactions are enforceable,
- Severability Of Terms (to make sure that the contract remains in effect if one term is no longer enforceable)
For example, to protect against the risk of third party claims for personal injury caused by the Supplier or the Supplier's personnel, a contract will include a general indemnification by the Supplier to defend, indemnify and hold the Buyer harmless against those claims. To further protect against the Supplier not having sufficient assets to meet those commitments, a contract would include the requirements for
insurances for the types of perils that would represent those types of injuries (Automobile Liability and Comprehensive Liability). To ensure that the limitation of liability does limit what may be recovered,
the Indemnification would be carved out of the limitation of liability.