Tag Archives: supplier

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Change Orders & How They Impact Your Contract

When you are negotiating and drafting a contract with a supplier, it is imperative to include a well thought-out provision regarding how changes will be handled. The types of things you should address in the changes provision depends upon the product or service you are buying. Below are a few examples of the different issues you should consider addressing:
• When a change is necessary, the contract should require the supplier to provide a detailed estimate of the cost of the change.
• The contract should require that the supplier receive written approval from a designated department/ representative before proceeding with any change.
• The contract should provide that if the parties cannot agree on the cost of the change, the buyer can require the supplier to perform the work based upon a time and materials basis. Additionally, if a time and materials basis is implemented, the contract should set forth the rates that will be paid for the different categories of labor or processes.
• Language should be included that provides the basis for direct cost for any materials required as part of the change. It should also address what can be included as a direct expense and what must be provided for in their overhead rate.
• The changes provisions should detail the permitted percentages for contributions to the supplier’s overhead and profit, if allowed.
• The changes provision should outline the documentation that is necessary to substantiate the costs charged, including copies of invoices and timesheets, and the right to audit the documentation that is not required to be submitted.
• The contract should set forth the right to inspect the work in process to confirm any time, labor or material charges.
• The changes formula should address how deductions in the scope of work will be managed.

A buyer’s leverage in negotiating changes will vary throughout the business relationship. If you have conducted business with the supplier for a lengthy period of time, the supplier is more likely to treat you fairly in order to continue to receive your business. In contrast, if this is your first transaction, the supplier may require more oversight. The safest approach is to protect your interests regardless of the business relationship.

If you need assistance, providing for change orders in your contracts or you have questions regarding your company’s contractual needs, contact Leslie S. Marell for help. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.

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How to Use Your Attorney More Effectively

Contrary to the reputation lawyers have, we really do want to help you in a manner that is effective and efficient. Unfortunately, many people get frustrated with the time it takes to get the answer they need. What they fail to realize is that if their attorney had been informed earlier and kept in the loop as things developed, he or she could have acted much quicker. Consider the following scenario that you may be able to relate to:

As a lawyer or purchasing person, your internal customer (pick one: calls you/   drops into your office/   sends you an email) telling you he/she needs a Purchase Order or Contract issued within the next XX minutes/ hours/ days. After questioning, you find out he/ she has been talking (hopefully, negotiating) with the supplier for months. Unfortunately, this is the first you’ve ever heard about the deal. Of course, they don’t tell you any specifics….just the basics they think you need to know to issue the PO/ Contract. They tell you not to spend a lot of time on it and just do the “standard” PO/ Contract. (IMPORTANT NOTE: All names have been deleted to protect the guilty!)

Without having the specifics of the interaction between your internal customer and the supplier, it inhibits your ability to do your job effectively. If you had been involved sooner in the process, couldn’t you have issued a more meaningful purchase order or contract? This is similar to the interaction many clients have with their attorney.

What can an internal customer do to get better advice and quicker responses from your legal department? Give us the information and the time we need early on in the process. This doesn’t mean you have to have a lengthy meeting with me, but sending a quick email or making a short telephone call to give me notice of the deal being negotiated can prove to be quite helpful.

The internal customer should stay involved in the process. If the supplier is asking for changes to a clause, it is important that you understand the issues behind the requested change before sending it to your attorney. This allows you to discuss the negotiation or the rewrite of the provision with your attorney so that the issue is addressed and it avoids the unnecessary back and forth.

Lastly, you should think about whether or not your lawyer really needs to approve certain changes. If the change is a business issue that is within your domain to decide, handle it yourself. However, if your supplier wants to change the indemnity, insurance, governing law, warranty, confidentiality, non-disclosure or the intellectual property clauses, you should confer with your attorney.

To ensure that your contract provides you with the most protection from liability available, contact Leslie S. Marell to schedule an appointment. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.

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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.