Tuesday, August 13, 2013

As may be amended from time to time.

In a linkedIN group someone asked the meaning of what “from time to time” means. The most frequent use of the term is with a requirement that a party, their product or service complies with applicable laws. When you say “Supplier shall comply with all applicable laws as may be amended from time to time”, what you are doing is require the supplier to make changes each time an applicable law changes.

Complying with applicable laws as they are changed presents a huge potential risk. You can have labor laws, minimum wages or health care laws enacted. You can have environmental laws enacted. Imagine being a supplier to a company that sells products in well over 100 countries, each of which may have multiple political subdivisions that can each pass laws. A change or new environmental law can also force changes to materials and processes used to manufacture a product.

Should a supplier be forced to comply with all changes that may occur in these various locations? Is it even economically feasible? If a small country enacted an environmental law or other laws the cost to implement the changes may not be worth it for the volume of sales in that market. It may also not be worth it to manufacture a unique item for only that market, nor would a supplier want to burden their cost structure for markets that simply don’t require it.

Even if you require a supplier to make all changes that are necessary to comply with a new or changed law, there are several situations where they won’t be required to make changes. The first is if the change in the law would make performance of the contract illegal. In that case the contract would be voidable. The other situation would be where they would be excused from performance because the change in the law causes impossibility of performance, impracticability of performance, or in some locations results in an economic hardship.

One of the comments made in that discussion was “if the Supplier thinks he wants that deal, it is part of the risk they have to take which should be addressed in their quoted price”. If the contract is silent about compensation or other adjustments that may be required to comply with the law, the full responsibility and cost for compliance would need to be borne by the Supplier. Many times a change in the law may simply not be a cost issue, it can also impact the time for performance.

As I always say how you view of issues will always depend upon where you sit. As a buyer, transferring all the risk to meet any changes to the law is clean, but it can also be expensive. For a supplier to assume all risks associated with changes to laws the contractor will include a contingency in their price to cover that risk. The buyer will either win or lose when you force a supplier to carry contingencies. If a new law is passed the buyer may win or lose depending upon the amount of the contingency that was included in the price versus the supplier’s cost to implement the change. If the supplier’s cost is greater than what was included in the contingency, you win. If the cost is less than what was included in the contingency, you lose as you paid the supplier more in contingencies than they had to pay. If the law isn’t changed or a new law isn’t passed you lose as you paid the contingency and the supplier didn’t need to use it, so it becomes additional profit for the supplier.

My view is you should always consider the potential risks in the situation to determine which party should manage the risk. Some risks may be best for the supplier to manage if they can best manage and control the risk. Changes in government laws aren’t always something they can manage, especially on a long-term contract. Some risks may need to be assumed by the buyer. If you assume the risk the first thing you do is eliminate the contingency in your pricing. If the risk never materializes you save all of what you would have paid if there were a contingency. If the risk materializes later you will save. The only time you potentially lose is change occurs and the cost is greater you have to pay in the adjusted price is more than the total amount you would have paid with the contingency. In the interim you also had the use of your money.

If you know something is going to change but are not sure how much, there are a number of approaches you can take. You could agree to adjust the price. You could also set parameters to reduce the amount of the contingency where adjustment are made only if the cost falls outside of the range. If the cost falls below that range you agreed you get a price reduction. If the cost falls above that parameter, you adjust the price. That type of band approach is frequently used when dealing with the risk of fluctuations in currency exchange rates.

I would never agree with language about anything that is "as amended from time to time" unless I also had the right to an equitable adjustments to the cost, time for performance, etc. necessary to meet the changed requirement. A buyer cannot change a specification without compensating a supplier for the added cost of the change. Why should a government mandated change be any different? Even then I might not agree unless I knew that I would be able to recover all investments that were needed to comply. Making a change in a per-unit price or contract amount doesn’t work unless there is a corresponding volume across which one time investments can be amortized.

Many times a supplier that is not contractually required to make changes will make the changes anyway simply because it’s the right decision for their business. For example when the European Economic Union passed RoHS (Restriction of the Use of Certain Hazardous Substance), (which is an environmental law that banned the use of certain materials in products because of concerns over ground water contamination in the disposal of product after the end of their useful life), suppliers knew that if they didn’t meet those requirement, their products would not be used in their customers products that were being sold in that huge market.

If you do push for a supplier to be fully responsible to comply with all applicable laws, don’t be surprised when they seek to limit the scope of that to a limited number of countries that represent the highest volume of your sales, as that will also equate to the highest consumption of their products.