Friday, January 18, 2013

Software Support Rights

In another forum an individual described a problem:
They had licensed software from company A and had five year’s of support purchased
Company A was sold to Company B
The five years of support has lapsed.
Company B wants to have both the support purchase terms and the license agreement terms changed to their standard terms as a condition of providing support.

The question was, can they do that and is it ethical, fair or reasonable?

This is a problem that could be prevented in the original license agreement. When you negotiate price and terms for support for an initial period, the question you should ask is what is the licensor’s obligation to provide you with support after that period, at what terms and at what cost. If you can get full agreement on what the terms or pricing for support will be in the future and include that as part of the agreement, as a minimum you should require the Licensor to allow you to purchase support in the future at prices and terms no different than their other customers. This doesn’t obligate the licensor to provide support, it only says that if they are selling support to other customers, they must sell that support to you at the same terms and pricing. As licensors may have pricing or discounts based upon volume, they might want to tweak the language so what they offer you is the same as customers purchasing similar volumes.

In acquiring the company A they acquired whatever obligations existed in the License Agreement. So if you had language about future support in the license, they must honor that without changing the original license. If the License Agreement was silent as to support in the future, technically the licensor does not have an obligation to provide support. Since the only way they can change the original license terms is with your agreement, they licensor is using the buyer’s need to purchase support as leverage to change the license agreement terms.
What the supplier is doing may not be ethical, but without a firm obligation that they must provide support, they are legally within their rights barring any local laws to the contrary.

If you don't have the right to future support built into the original license agreement at the existing support terms, they can clearly change the support terms. One question to consider is are they really attempting to change the original license terms for the previous licensed products or do they want the new terms to apply only on future licenses. The difference is significant. Changing terms for the future licenses may make sense. Trying to retroactively take rights away on previous purchases isn’t ethical. When Company B acquired Company A as part of their due diligence they would have been able to review existing licenses so they fully understood what they were acquiring. If those licenses presented costs or added risks to them, they had the opportunity to take that into account in the final purchase price they paid company A to acquire them.

Another thing to consider is while you cannot prevent a merger or acquisition from occurring, as corporate officers have a fiduciary responsibility to their shareholders. What you can also do is include certain rights if an acquisition or merger were to occur. For example, in this situation you might include a requirement that if the supplier was to merged or be acquired by a specific company, they must provide your with training and all materials needed to perform self maintenance. That provides the licensee more leverage for those future negotiations.

Friday, January 11, 2013

Warranty – Should you ever agree to limit you Warranty Remedies to only Repair or Replace?

When people ask me questions abut thing like this, I want them read the agreement to understand the impact something will have. Most product warranty sections deal with a number of warranties in addition to the warranty for a defective defective product. In reading those ask yourself which, if any of those warranties may be really cured by repair or replacement? If the answer isn't all, don't agree to it.

For example all of the following may be warranties:
Requirement that the product meets your specifications
Requirement that a product have no liens or encumbrances against it.
Requirement that the product not infringe another party's Intellectual Property Rights.
A warranty that the product is safe.
A requirement that the product complies with applicable laws

Will repairing or replacing it with the same product that most likely has the same problems do anything for you? It never did anything for me. So the first part of the answer is limiting remedies to repair or replacement for all warranties should never he agreed.

The next question is would it work if the limitation only applied to the warranty against defects in material and workmanship? While that sounds more reasonable, you need to think that through. As a buyer, the last thing you want to do is buy something, have it not work properly and get jerked around forever. In that case supplier has your money and you have something that doesn't work. The only party that will benefit from that situation will be the post office or carriers that get uses and things get shipped back and forth and you can have things shuttle back and forth to the point in time when you no longer have a warranty.

I can see why a Supplier may want to limit the remedy to only repair or replace. First, they made the sale and would never have to refund the purchase price. Second, even if you could only recover direct damages, it avoids more expensive other direct damages that could be claims such is you having a more costly third party repair it or your people attempting to repair it themselves.

So my answer to limiting the remedy to the warranty against defects in material and workmanship to only repair or replace would be you shouldn’t unless you build other protections into the agreement. When I did contracting that include both warranty and out of warranty repair one of the concerns we managed was trying to get “lemons” out of the system. We would require repair stickers and dates be attached and required that any product that had been repaired twice under warranty be replaced with new if found to be defective within the warranty period. We also knew that spare parts inventory have a cost to it, and things that could take longer to replace the item (such as repairing it) would add to our inventory. If we agreed to limit the remedy, we would limit the time in which either option must be done.

Another thing to consider is the fact that where there is a defective product, there may also be the potential for property damage or personal injury to have occurred. An electrical product shorts out and causes a fire. A short causes a party to be burned or get electrocuted. So the key is in limiting remedies to repair or replacement, you don’t want to giving up any rights for claim for personal injuries or property damages caused by the defective product so you would want to carve those out of any limitation on the remedies. For example: “Except for any claims personal injury or property damage caused by defective product, Buyer’s sole and exclusive remedy for defective product shall be repair or replacement of the product.”

If I were to limit my remedy to only repair or replace, I would make that limitation conditional on performance.
One limit may be a fixed time period for performance. For example: “For any defective Product returned by Buyer, as long as Supplier repair or replaces the defective Product with a good, working Product that meets the specifications, within ____ days, such repair or replacement shall be Buyer’s sole remedy for the defective product.

Another limit could be number of repairs or replacements the Supplier can perform.
For example: Buyer’s sole remedy for defective Product shall be repair or replacement of the product, provided however that if, after a maximum or four(4) repairs or replacements combined, the product remains Defective, Buyer shall have all remedies available at law or in equity.

If a supplier wants to limit the warranty remedy to repair or replacement tell them no. If they insist tell them all the things that will be needed to do that:
1.It’s limited to only the warranty against defect in material and workmanship and not other warranties.
2.It must specifically exclude claims for personal injury or property damage that may occur because of the defective product.
3.It will be tied to clear repair or replacement performance requirements.
4.It will be conditioned on performance. The failure to perform will void the limitation.

Sunday, January 6, 2013

Purchase order versus Purchase Agreement - What's the difference?

In a linked in forum someone asked the difference between purchase agreements ans purchase orders. Many of the responses that I saw were all over the map, so I decided to do a post to explain the differences.

The first thing to understand is there are many types of purchase agreements and there are also many different uses for purchase orders. Some purchase agreements make firm commitments to purchase a specific item or quantity. You can have master agreements where over time you add additional product or service you can purchase over time. You can have agreements that establish standard terms that apply to all purchases, with the expectation that specific purchases will be made using statements of work that incorporate by reference the terms master agreement. Those statements of work become purchase agreements on their own. A basic ordering purchase agreement establishes all the Terms & Conditions that apply when future purchases are made under that agreement. That type of agreement does not commit to purchase of a firm quantity and the actual purchase is made using a purchase order. There can be purchase agreements that make firm commitment to purchase a specific quantity, where a purchase order may be used to schedule specific deliveries. There can be purchase agreements in which a buyer commits to purchase all or a percentage of its requirements from a supplier (a requirements contract) where purchase orders may be used to schedule deliveries against that commitment.

There are also a many types of purchase order and uses for purchase orders. A purchase order may be a stand -alone document that makes a specific purchase. A blanket purchase order may make a commitment to purchase a quantity over an extended period of time with the price and terms fixed, and individual “calls” against that may use a purchase order to schedule deliveries against that blanket purchase order. You can have purchase agreements that contemplate inventory stocking under a pull-replenishment type of system where the agreement establishes the pull signal as a form of purchase order that triggers the obligation to make payment.

The traditional purchase order is normally used for a purchase from a supplier where there is none of these other various forms of purchase agreements in place. Purchase Order can be used in a number of ways when there is a purchase agreement in place.

So what is the difference between the two documents?

The main difference is when there is enforceability of its terms. A purchase order is an offer that does not become a binding contract until it is accepted as issued or is accepted by performance. An acceptance with different terms creates a counter-offer that must be accepted by the Buyer. If there is no acceptance and there is a shipment what occurs is what's called the battle of the forms to determine what the terms are for that purchase.

With a Purchase Agreement, normally what you find is language that says that as long as the purchase order issued complies with the terms of the Purchase Agreement it is issued under, that order is binding and enforceable.

The difference between the two has nothing to do with the time period involved. A Blanket Purchase Order may be for long period and a purchase agreement may be for a very short period.

The difference has nothing to do with the volume involved. You could have a single purchase under an agreement and a volume of purchases under a master purchase order.

The difference has nothing to do with the firmness of the commitment. Depending upon the type of purchase agreement you use, it can either be a firm commitment to purchase or an agreement as to terms that will apply for future P.O. purchases. A Purchase Order is an offer, which may be withdrawn prior to acceptance so it is not a firm commitment, It only become firm once accepted.

Agreements can stand on their own, without use of P.O.'s. or you may use P.O.’s for some actions under the purchase agreement. P.O.'s can be used with Purchase Agreements or they can be stand alone.

Another difference is a purchase agreement should be signed before transactions or work commences. A purchase order is an offer to conduct business and does not bind the Supplier until such time as it is accepted. Acceptance may be signing an acknowledgement copy or providing an electronic acceptance that does not include additional or differing terms. It may be accept it by commencing performance. A purchase agreement requires signing by both parties, a Purchase Order requires a signing by the Buyer and only a form of acceptance by the supplier to be binding. Once a purchase order is accepted the two are no different, they are both enforceable contracts.

Another difference between the two and which document is best to use will be driven by the circumstances of the purchase. The higher the potential risk, the more frequently a purchase agreement will be used to manage those risks. When a stand alone purchase order is used they are normally used for lower risk purchases where a lesser set of terms are required. When purchase orders are used under a purchase agreement the majority of the risks may be managed by the purchase agreement. If there are risks to be managed, the purchase order would need to include additional or different terms.

When you are dealing with higher risk issues, and you are using a purchase order only you want to make sure that the Supplier signs the acknowledgement of that purchase order to establish that as a firm commitment. If you are dealing with higher risk issues and are issuing a purchase order under an agreement that doesn’t adequately
address those risks, you want to make sure that the Supplier signs the acknowledgement of that purchase order. You also need to manage the precedence between the Purchase Order terms and the Purchase Agreement terms. For example, If the P.O. terms are additional, or different from the Purchase Agreement terms you need to include a clear statement in the Purchase Order that the specific different or additional terms listed on the purchase order shall have precedence over the terms of the purchase agreement only for that purchase and have that signed by the parties.