Executive Briefings

Negotiating Supply Chain Agreements in a Time of Unexpected Disruptions

In the last year the headlines have been full of news about global supply chains and the disasters affecting them. From the Thai floods to the Japanese tsunami, to the tornadoes in Wichita and the Nylon-12 plant explosion in Germany, several fundamental truths about global supply chains have been made more apparent.

First, modern supply chains are extremely complex and likely to get more so as information technology makes further advances.  Second, those supply chains are far-flung and susceptible to disruption by everything from the weather to political instability.  Third, the specific disruption often comes from the most unexpected direction.  As a former industrial engineer, I have only admiration for the engineered capabilities of modern supply chains, fortified as they are by increasingly powerful computer technology.  Today's supply chains remind us in many ways that technology is both our future and the essential means of modern society's survival.

However, from my perspective today as a commercial and transactional lawyer, there is an unintended irony in the pairing of those complex, highly engineered supply chains with the supply agreements produced to give structure to the parties' underlying commercial relationship.  Within the legal profession today, supply chain contract work, long mischaracterized as merely form-driven, is also on the receiving end of the current disparagement of choice, namely, that it's "commoditized documentation," a double insult intended to suggest that supply chain legal work is fee-sensitive, workaday, uncreative work, not on the same plane as, say, high-profile headline-making mergers and acquisitions work.

The business reality is quite different.  Rarely does the latest business acquisition spell the difference between the acquiring company's commercial life or death.  And except for the typical long-tail indemnity obligations of a seller, the parties to an acquisition conclude their business dealings within a relatively short period of time.  But supply chains affecting businesses of all sizes can and do represent the difference between commercial life and death for both the purchaser and the seller.  Critical materials and services contracts are big-ticket items with long lifespans, legally speaking. And that's why key supply chain arrangements and their consequent savings receive Board room level attention within many if not most major companies today.  Yet crafting the legal agreements upon which the supply chain is founded is still too often treated within the legal profession as less desirable legal scribbling that nearly anyone with a law degree can do well.

Tales from the legal side tell a different story.  In one case I recall, a seasoned lawyer prepared a supply agreement for a corporate client that purchased literally billions of dollars a year in goods and services.  Unfortunately, that lawyer had unthinkingly used a seller-friendly force majeure provision (excusing seller's performance due to fire, flood, acts of God, etc.) in the contract for no apparent reason other than that he usually represented sellers.  In another case the lawyer garbled the governing law provision of a cross-border supply agreement because he was apparently unaware that the contract was not necessarily subject to the Uniform Commercial Code, but instead to the United Nations Convention on Contracts for the International Sale of Goods.  (The latter is similar to, but in many respects different from, the former.)  And as a final example of this species of legal malpractice, another critical contract's "most favored nations" pricing provision was ineptly worded: instead of giving the purchaser the benefit of the best pricing the seller offered any of its other customers during the term of the contract, the drafted language provided that assurance only as to pricing as of the date the original contract was signed.  In that last case the rookie mistake was found only long after the contract had been negotiated extensively and executed by the parties, with the purchaser blithely assuming that it would be entitled to the seller's best pricing, and the seller presumably content in the knowledge that it had no such obligation.

So how to address these problems?  Well, first, law firms and their clients need to stop relegating these supply contracts to the legal backwaters, to be reviewed by an attorney with nothing more pressing to do at the moment, who "also does contracts." That should be the case even when it's a partner or other senior-level attorney who is to do the actual work.  The mistakes described in the preceding paragraph were all made by senior lawyers, not young and inexperienced ones.  In other words, commoditization and its stigma are the learned reflexes that need to be countered and discouraged.

Second, supply agreements should ideally be regarded as flexible instruments that can and will respond to a variety of inevitable changes and challenges over time.  As the philosopher said, "No one ever steps in the same river twice."  Each such agreement needs to be drafted to address the changing needs and dynamics of the purchaser's and the seller's businesses.  Whether those changes are driven by market shifts, increasing wages, raw material scarcities, political and economic instability, or natural disasters, the commercial contract that fails to address change has failed in a fundamental respect.

In sum, in today's world, if you're not sweating your commercial supply chain agreements, there's something wrong.

Source: Greensfelder, Hemker & Gale, P.C.


Keywords: Legal, Govt. & Regulatory Issues, Supply Chain Security & Risk Mgmt, Global Supply Chain Management, Transportation & Distribution, Third-Party Logistics, Logistics, Sourcing & Procurement Solutions, Supplier Relationship Management, Technology, Supplier Contracts, Supply Chain Legal Agreements, Supply Chain Management Litigation, Supply Chain Agreement Malpractice

First, modern supply chains are extremely complex and likely to get more so as information technology makes further advances.  Second, those supply chains are far-flung and susceptible to disruption by everything from the weather to political instability.  Third, the specific disruption often comes from the most unexpected direction.  As a former industrial engineer, I have only admiration for the engineered capabilities of modern supply chains, fortified as they are by increasingly powerful computer technology.  Today's supply chains remind us in many ways that technology is both our future and the essential means of modern society's survival.

However, from my perspective today as a commercial and transactional lawyer, there is an unintended irony in the pairing of those complex, highly engineered supply chains with the supply agreements produced to give structure to the parties' underlying commercial relationship.  Within the legal profession today, supply chain contract work, long mischaracterized as merely form-driven, is also on the receiving end of the current disparagement of choice, namely, that it's "commoditized documentation," a double insult intended to suggest that supply chain legal work is fee-sensitive, workaday, uncreative work, not on the same plane as, say, high-profile headline-making mergers and acquisitions work.

The business reality is quite different.  Rarely does the latest business acquisition spell the difference between the acquiring company's commercial life or death.  And except for the typical long-tail indemnity obligations of a seller, the parties to an acquisition conclude their business dealings within a relatively short period of time.  But supply chains affecting businesses of all sizes can and do represent the difference between commercial life and death for both the purchaser and the seller.  Critical materials and services contracts are big-ticket items with long lifespans, legally speaking. And that's why key supply chain arrangements and their consequent savings receive Board room level attention within many if not most major companies today.  Yet crafting the legal agreements upon which the supply chain is founded is still too often treated within the legal profession as less desirable legal scribbling that nearly anyone with a law degree can do well.

Tales from the legal side tell a different story.  In one case I recall, a seasoned lawyer prepared a supply agreement for a corporate client that purchased literally billions of dollars a year in goods and services.  Unfortunately, that lawyer had unthinkingly used a seller-friendly force majeure provision (excusing seller's performance due to fire, flood, acts of God, etc.) in the contract for no apparent reason other than that he usually represented sellers.  In another case the lawyer garbled the governing law provision of a cross-border supply agreement because he was apparently unaware that the contract was not necessarily subject to the Uniform Commercial Code, but instead to the United Nations Convention on Contracts for the International Sale of Goods.  (The latter is similar to, but in many respects different from, the former.)  And as a final example of this species of legal malpractice, another critical contract's "most favored nations" pricing provision was ineptly worded: instead of giving the purchaser the benefit of the best pricing the seller offered any of its other customers during the term of the contract, the drafted language provided that assurance only as to pricing as of the date the original contract was signed.  In that last case the rookie mistake was found only long after the contract had been negotiated extensively and executed by the parties, with the purchaser blithely assuming that it would be entitled to the seller's best pricing, and the seller presumably content in the knowledge that it had no such obligation.

So how to address these problems?  Well, first, law firms and their clients need to stop relegating these supply contracts to the legal backwaters, to be reviewed by an attorney with nothing more pressing to do at the moment, who "also does contracts." That should be the case even when it's a partner or other senior-level attorney who is to do the actual work.  The mistakes described in the preceding paragraph were all made by senior lawyers, not young and inexperienced ones.  In other words, commoditization and its stigma are the learned reflexes that need to be countered and discouraged.

Second, supply agreements should ideally be regarded as flexible instruments that can and will respond to a variety of inevitable changes and challenges over time.  As the philosopher said, "No one ever steps in the same river twice."  Each such agreement needs to be drafted to address the changing needs and dynamics of the purchaser's and the seller's businesses.  Whether those changes are driven by market shifts, increasing wages, raw material scarcities, political and economic instability, or natural disasters, the commercial contract that fails to address change has failed in a fundamental respect.

In sum, in today's world, if you're not sweating your commercial supply chain agreements, there's something wrong.

Source: Greensfelder, Hemker & Gale, P.C.


Keywords: Legal, Govt. & Regulatory Issues, Supply Chain Security & Risk Mgmt, Global Supply Chain Management, Transportation & Distribution, Third-Party Logistics, Logistics, Sourcing & Procurement Solutions, Supplier Relationship Management, Technology, Supplier Contracts, Supply Chain Legal Agreements, Supply Chain Management Litigation, Supply Chain Agreement Malpractice