Tag Archives: product

Business, Contracts

What You Can Learn from Apple & GT Advanced Technologies

Have you heard the story of how the supplier relationship between Apple and GT Advanced Technologies (GTAT) went south? GTAT was the company selected by Apple to supply sapphire for use in the iPhone 6 screens and there are some significant lessons to be learned from them.

Prior to Apple’s relationship with GTAT, the iPhone screens were made out of glass, which had many benefits with regard to the use of touch-screen technology. However, the primary disadvantage was that the glass tended to scratch and break easily. GTAT was going to provide sapphire as a replacement for the glass, which is one of the strongest materials available, it is transparent, and it can be industrially made.

If you own an iPhone, you know that your screen is still made of glass. So, what happened? According to GTAT’s bankruptcy filings, Apple used its muscle and forced GTAT to enter into a one-sided contract that heavily benefitted Apple while placing all of the business risks on GTAT.

While this may be true, there are additional lessons that can be learned from GTAT’s mistakes and the problems that arise when negotiating development and production agreements at the same time. In the supply chain context, the development contract is an agreement to develop a new product, which may also include updating/ revising an existing product by using new technology. There are a wide variety of problems that can arise in development contracts that cannot be foreseen at the outset. For example, the product may not work, it may cost more than predicted, or a competitor may release a similar product before yours.

As you might have guessed, linking a production-level supply chain contract to the success of a development project (like Apple and GTAT did), can be dangerous. Not only did the supply agreement between Apple and GTAT assume that the new product would be developed within a certain price structure and be a specified deadline, but they also bet more than $500M in production-level orders on it.

While there were several other issues that seemed to seal the ill-fated destiny of the agreement between Apple and GTAT, it is important to note that for a development contract to succeed, the risks and rewards must be carefully scrutinized. Before production terms and conditions are finalized, the parties should understand the technical parameters of the product, including what it costs to make it, the time it takes to make it, and what the market is expected to be.

If a party insists on negotiating the production terms before the development is finished, it is wise to reserve the right to renegotiate certain key terms such as price, deadlines, warranties and indemnification terms.

To learn more about non-disclosure agreements or how we can assist you with other business-related matters, contact Leslie S. Marell today.

Contracts

THE CONTENTIOUS WARRANTY CLAUSE

Ask any experienced contracting professional to name one of the most contentious clauses in a negotiation and the answer usually includes the warranty provision.

(The other contentious clauses are Limitation of Liabilities and Indemnity, followed closely by who owns the IP).

Many business people assume these clauses are strictly “legal” issues. If you’ve ever attended my seminars, you know my opinion:  Even the most highly “legal” clause – such as the indemnity clause – boils down to who’s going to pay the money. In my seminars, I break down the issues and language and educate people how to make sense of and negotiate these clauses.

 

WHAT’S THE PROBLEM?

I think business people frequently view the warranty clause as a “legal” issue primarily because:

  1. i) the clause is typically written in long, difficult to read, run-on sentences, and
  2. ii) suppliers ask for warranty disclaimers similar to the following:

THE FOREGOING WARRANTY IS THE SOLE AND EXCLUSIVE WARRANTY MADE BY SUPPLIER.  SUPPLIER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

Business people tell me that while they’re not entirely sure what the above clause means, they know it doesn’t sound good for them. As a result, what do many people do?  They turn the entire clause/ contract over to the legal department.

What if I were to tell you that most Buyers’ lawyers will actually agree to the Seller’s inclusion of this disclaimer language?

Most lawyers will tell you that as long as you insert into your contract:

  1. i) all the Supplier’s promises about the Product/ Service and
  1. ii) all Supplier actions/ responsibilities to correct a defective Product/ Service,

then you can agree to the above disclaimer.

This Supplier disclaimer language is negating highly legal UCC warranties that may prove helpful to the Buyer if you go to court, but will be of limited value otherwise.

 

RESOLVING THE ISSUES

I have concluded that what lawyers refer to as “Warranty” are the issues that business people refer to as “Quality”.

In plain English, warranties are promises made by the Supplier about its products/ services.

More specifically, warranties deal with the following issues:

  • How specific/ detailed/ unambiguous are your specifications/ requirements/ statement of work?
  • What will the supplier do if the product/ service doesn’t meet these requirements?
  • How quickly will the corrections be made?
  • What if the supplier doesn’t make those corrections within the defined time period?
  • What if the defective product is in the field?
  • What if buyer has to recall the product?
  • Who will pay for labor charges, parts replacement, tear down?
  • What if buyer performs the warranty repair?
  • How much and when will supplier reimburse buyer?

Approaches to the limitations of liabilities issue:

  • Limitations of Liabilities is an integral issue to warranties:
    • It’s not unreasonable to agree that the Supplier will be responsible for some costs, but not for others or for all costs not to exceed a specified dollar amount.
  • One effective approach to negotiating Limitaitons of Liabilities with respect to the Warranty is to permit the supplier to limit its liabilities for certain damages (such as loss of business, profits that you’re unlikely to pursue) in exchange for the Supplier’s agreement to  make certain fixes/ do certain things.

IMPORTANT NOTES:

Your warranty will only be as good as your specs/ requirements/ SOW

  • It’s not unreasonable for the Supplier to limit its liabilities. In this litigious society, the prudent business person does so. (In fact, take a look at your company’s terms of sale.  There’s probably a limitation of monetary responsibility in there as well).
  • The goal in the warranty provision is to identify your requirements; outline the steps if the product/service doesn’t meet these requirements; and create a guideline for what happens in the “real world, worst case” scenario (In other words, what are the Buyer’s rights if the Supplier doesn’t do what they promised to do?)

I go into much more detail about warranty and many other clauses in my Legal Aspects of Purchasing and Contracts: Reading, Writing & Negotiating” seminars.

Please contact me if you have any questions.