Negotiating to Avoid Risk

Contract negotiation is the first line of defense to manage, mitigate and allocate the risks inherent in your supply chain when suppliers have financial problems


One of the keys for some of the provisions to red flag is how they interrelate. For example, everyone considers pricing to be key contract provisions. But, few consider these terms in relation to other provisions such as payment terms which is often boiler plate. It may even be in your interest to have shorter payment terms so as to provide the supplier with cash to purchase raw materials that it needs to make what you buy. Giving yourself 30 days to pay for supply may imperil a supplier who ends up having to take out unfavorable loans to meet its production requirements.

Another red flag provision that often is boiler plate is dispute resolution. Agreeing in advance as to how your disputes will be resolved with a supplier can help ensure that your supplier can continue to supply. Does it require a supplier to continue to supply while the dispute is worked out? Is the process streamlined to allow for a quick resolution? Which dispute resolution body will it be in front of? Have you expressly allowed for emergency relief under the appropriate rules and procedures? Does the dispute resolution allow you to recover tooling, even on an expedited basis? These kinds of questions are often left unanswered, leaving your company imperiled should a supplier suffer losses or raise disputes over supply with you.

Protect yourself in the contract

No one likes to think of their relationship with a supplier having any bumps or bruises when they first start working together. Unfortunately, every company, every industry and most every supplier is not immune to the vagaries of the markets. This will surely result in some threat, major or minor, to your supply chain at one time or another. Investing an ounce of prevention in your contract negotiations to protect yourself will surely lead to saving a pound of cure later when problems do arise.

About the Author:

Jeffrey A. Soble

Jeffrey A. Soble is a partner with Foley & Lardner LLP, where his practice focuses on class action defense, post-transaction disputes, products liability, construction losses, and general contract and tort law. He is experienced in supply chain management and contract enforcement, in particular with limited or sole-source suppliers and just-in-time suppliers.

Takeaways:

  • Don’t rely only on boiler plate contracts
  • Your contract must have clarity for both parties so that they know what risks they have to protect against, indemnify and insure
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