Focus on the Fine Print
Michael O'Shaughnessy and Jennifer Clements
July/August 2011, eSide Supply Management Vol. 4, No. 4
What the Boilerplate in Your Supply Agreements Really Means
It's easy (and tempting) to gloss over the contractual boilerplate — that is, the language typically found at the end of a commercial contract — when dealing with a commercial supply agreement. It's natural to focus on price and delivery terms, and boilerplate is just "standard terms and conditions," right? Not really.
The terms in the contract's boilerplate could be incredibly important, especially if there is a dispute between the parties during the performance of the contract. There is no "standard" set of terms and conditions, no matter what your supplier might tell you about how standard the terms in its own form agreement are. In short, boilerplate can be a trap for the unwary.
3 Practical Tips
Here are a trio of key strategies to keep in mind when dealing with commercial contracts and boilerplate.
- The advantage always goes to the drafting party, so if you have the opportunity to prepare the first draft of a contract, take the initiative.
- Remember: You can't always get the terms you want. Prepare a checklist of your company's absolute terms requirements, including essential boilerplate provisions.
- Prepare a list of preferred clauses or phrases for reference while in the midst of contract negotiations. Those terms are the specific language that your company would ideally like to have in the contract. You might not be able to include all these terms, but you at least have a starting point against which you can compare what's been proposed by the other side.
Parties sometimes will add "most-favored nation" language to a contract in the boilerplate at the end of the document, often in a section called "representations and warranties." The most-favored nation language typically has the supplier representing and warranting that the prices quoted for the goods are the lowest prices at which the goods or similar goods in similar quantities are legally sold by the supplier to other customers. If you are the purchaser, this sort of language doesn't necessarily protect you, as it provides the supplier with several possible "outs," as follows.
The language only speaks in the present tense as of the time the contract is executed and doesn't speak to the future. As a purchaser, you want such language to say that those prices "will be, during the term of the agreement, the lowest prices." Otherwise, you might think you have a forward-looking promise of lowest prices when, in fact, you don't.
As stated, the language only applies to similar goods and similar quantities. At a minimum, you want broader price protection that, for example, gives you the benefit of reasonably similar conditions — including goods and quantities — instead of allowing the supplier to claim that the most-favored nation language doesn't cover your specific goods and your specific quantities.
The paraphrased language doesn't grant you any audit rights to allow you to check on whether the supplier is living up to the warranty. What you don't want is to find yourself in a position where you believe the supplier isn't living up to the warranty, but you have no way of determining or proving that. Audit rights give you that right to ask questions, review the books and obtain evidence of the supplier's living up to the warranty (or not).
A force majeure provision protects the parties in the event that either party's performance is impaired by events like acts of God. As the recent unfortunate events in Japan indicate, you never know when or where a force majeure event will occur.
Under a typical force majeure clause in a contract, the supplier is not liable for damages related to the sale of goods in the event it cannot perform due to a specific force majeure event. There are several items a purchaser should consider including within a force majeure provision.
Define what events will (or will not) be considered to be a force majeure event. Whether you or the supplier has provided the form of the contract, consider which acts or events are beyond the reasonable control of the supplier. In addition to the typical force majeure events — acts of God, fires and war — consider whether or not labor strikes or changes in the law (both of which tend to favor the supplier) should be included in the definition of a force majeure event. Those which are reasonably beyond the control of the supplier are good candidates for force majeure events.
Consider adding termination rights. Exercise these rights in the event that the effects of the force majeure event extend beyond a certain number of days.
If the supplier has not shipped any ordered goods to you, or has made only a partial shipment of your order, have the supplier allocate to you any goods remaining in its inventory (up to the contract amount) as opposed to its other customers. Or at least have the supplier agree to make a fair allocation among all its customers, including you. This permits you to reduce as much as possible the adverse effect of the force majeure event on your business.
Contract boilerplate might also contain provisions that limit the liability of the parties in the event of a breach. Obviously, if the supplier breaches the agreement and you suffer damages, such clauses become very important. A typical limitation of liability provision might state that the supplier is not liable to the purchaser in a contract or a tort action ("tort" actions address deliberate or negligent acts that cause harm) for lost profits, or for indirect, consequential or punitive damages arising out of the agreement. This clause is a very broad limitation on your ability to recover for those damages.
Typically, the supplier and the purchaser negotiate some sort of reasonable middle ground for this limitation (in part because most suppliers won't agree to liability for an entire plant shutdown resulting from late delivery of one order by a supplier). Such liability allocation is often supplemented by business interruption insurance.
These examples reinforce the importance of paying attention to the boilerplate in a commercial contract and resisting the urge to skim over the contractual boilerplate in favor of focusing on price and delivery terms. That knowledge could be very useful if in the event of a dispute between you and your supplier over the life of the contract.
|Jennifer Clements and Michael O'Shaughnessy are partners with the law firm of Quarles & Brady LLP in Chicago. Their practices include commercial contract work. For more information, send an e-mail to email@example.com.|
For more articles and resources on contract writing, visit the ISM articles database.
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