Category Archives: contract management

Watch Out for the Force Majeure Imposters!

A recent article over on the Association of Corporate Counsel (ACC) website on “the top ten force majeure imposters” by Kate Henry Gonzalez caught my attention because it contains an expose on the ridiculous extensions to the standard force majeure clauses that have started to appear in standard contracts put forward by some suppliers. And while we should all agree that we need to be fair when truly exceptional situations do occur, this a difference between a category 5 hurricane that levels a data centre and two consecutive days of rain in a semi-desert. Seriously.

While each of the 10 situations outlined in the article should be avoided at all costs, the following five are my favourite:

  • Abnormal Weather Conditions
    Two consecutive days of rain is abnormal for Yuma, Arizona. Does that mean your shipment of widgets should be delayed a week? I don’t think so!Only extreme weather phenomenons like hurricanes, tornadoes, and tsunamis should count as force majeure.
  • Telecommunication Error
    The fax machine breaking down could be a telecommunication error. Does that mean the supplier should suspend operations for three days? Puh-leaze! Hook up a PC with a fax-modem or go buy a new one down the street at staples. 10-minute fix, tops!
  • Broken Equipment
    A knob falls of a handle, and all of a sudden the production line comes to a stand-still? Yeah. Right … Not! Put on a glove and crank the handle anyway. Fixed!
  • Inability to obtain sufficient shipment capacity
    Your supplier had fair warning that they had to ship your product to you on a certain date. If they forgot to reserve the capacity with their preferred carriers, too bad. They can pay the premium and use a different carrier.
  • Unforeseen Market Conditions
    No one can predict the market … that’s the risk that comes with doing business. If you can’t handle it, quit. But don’t cry foul when the price of oil increases 25% the next time a pipeline breaks. You knew it was bound to happen.

For more ridiculous situations that your supplier’s lawyers might be trying to slip into the force majeure clause, check out the article. You won’t be disappointed.

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It’s Good to Have an Entire State on My Side

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Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

Back on August 1 of this year, I posted an article that included these paragraphs:

 

Here’s the tactic for the day.

Run a grammar check on your contract using Microsoft Word with “check readability statistics” turned on. Look for a “reading ease” score of 40 or higher and a grade level requirement of 11th grade or less. Remember, the document probably won’t be in the supplier’s language. Once you achieve that, then print the document in an attractive format. Pay attention to typography and white space. Make it easy to read.

 

If your lawyer struggles with this, get him or her a copy of the SEC’s A Plain English Handbook . It has lots of guidelines and tips. Another good source is Plain English for Lawyers, which you can find on Amazon.

You probably read that advice here first.

It was good to get reinforcement from the State of Rhode Island. On August 19th, The NY Times published an op-ed article titled Plain English is the Best Policy. The article said that Rhode Island is going to require health insurance policies to be written at the eight grade level. Apparently that’s the average adult reading level in Rhode Island. The State will determine a contract’s education level with the same Flesh-Kincaid score that I recommended. It’s probably built in to your word processing software.

Here’s a “before and after” from the article:

Before:
In the event a third party, including your employer/agent, is or may be responsible for causing an illness or injury for which we provided any benefit or made any payment to you, we shall succeed to your right of recovery against such responsible party. This is our right of subrogation. If you do not seek damages for your illness or injury, you must permit us to initiate recovery on your behalf (including the right to bring suit in your name).

That paragraph required 13.5 years of US education and got a reading ease score of 45.

After:
Your injury or illness may have been caused by someone else. If so, we can collect from that person any claims we pay on your behalf. For example, if we pay for your hospital stay, we can collect the amount we paid for your hospital stay from the person who hurt you. We can also collect payment from that person even if he or she agreed to pay you directly or has been ordered by a court to pay you. If the person who caused your injury has already paid you, we can collect from you the amount he or she has already paid to you. This is called subrogation. In addition, if you do not try to collect money from the person who caused your injury, you agree to let us do so in your name.

This material requires 7.9 years of education and the reading ease score is 75.

My advice had to do with writing an international purchasing contract. Perhaps I set my standards too high. I thought 11 years was an appropriate level.Here’s a more pertinent example I use in my training programs

Before:
Supplier will not make any changes to the Products or to processes supporting Products which have been certified by Buyer, without Buyer’s prior written consent, such consent not to be withheld unreasonably. In the event of such changes, at Buyer’s discretion Supplier will either: (i) replace all such Products with Products approved by Buyer and reimburse Buyer for all actual and reasonable expenses incurred that are associated with such Products replacement (including expenses associated with problem diagnosis, testing, and replacement of Products in normal inventory, finished goods inventory, distributors inventories, and with customers); or (ii) credit or refund Buyer the Price of the Products. In the event of upgrades to the Products, Supplier will offer Buyer such upgrades as soon as commercially available.

 

That’s 12th-grade material. Reading ease is an abysmal 15.

I rewrote this in conjunction with a client’s attorney who was very nervous about my rewriting her work. I shortened the sentences, eliminated passive verbs, added more bullets and numbering and removed the distracting mid-sentence capitalization of common words.

After:
Unless buyer consents in writing, supplier will not:

  1. Make any changes to products, or
  2. Make any changes to supporting processes that buyer has certified.

Buyer will not withhold such consent unreasonably.

If supplier makes such a change without buyer’s consent, buyer may chose one of the following two options.

  1. Supplier will replace all such products with products that the buyer approves. Supplier will also reimburse buyer for all actual and reasonable expenses that buyer incurs in replacing the products. Expenses include expenses associated with problem diagnosis, testing and replacement. Buyer may require replacement of products that are in normal inventory, finished goods inventory, distributor inventory, and with customers. OR
  2. Supplier will credit or refund buyer the price of the products.

If supplier upgrades products, supplier will offer buyer such upgrades as soon as commercially available.

This requires 10.3 years of education and got a reading ease score of 43.7.

Enjoy working with your attorneys.

Dick Locke, Global Procurement Group and Global Supply Training.

Does Your Software Come With A Bill of Rights?

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Ray Wang of Forrester recently released Version 2 of their “Enterprise Software License Bill of Rights” and Vinnie Mirchandani did an excellent revision over on Deal Architect that not only outlines what your rights should be but identifies some key issues you need to be aware of if your vendor does not provide you with a bill of rights as part of their textbook thick contract.

In particular, watch out for:

  • 40%+ SG&A
    that money should be going to R&D to give you a better product for the 22% to 30%+ maintenance you’ll be paying
  • no support/defect stats
    your provider should be measuring them, actively working on improving them, and be willing to provide them on request
  • certified service partners
    if they don’t have any, or won’t certify any, that’s a problem
  • an inability to flex-up / flex-down at each quarter
    you don’t want to be paying for shelf-ware
  • confusing SLAs
    you want clear, concise, and to the point

And be sure to check out Vinnie’s Version. If you going to invest seven, eight, and even nine figures (over the long term), you better make sure up front that you can get what you pay for.

Blogging on International Contracting?

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Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

After I made a brief comment on international contracting, the doctor suggested that “maybe I could write an expert piece about international contract construction?“.Well, that piece would be way too long for a blog format. I take about an hour on this topic in face-to-face seminars and that’s after a session on cultural differences.

What I can do in this format is give my philosophy and a tactic or two.

Why do people write purchasing contracts? (And not everyone does.) I see two reasons. First is to get a written document that describes what each party is going to do. Second is to enable bringing in a powerful third party (a court) to get a company to do what they might not do otherwise, such as pay liquidated damages.

When you cross borders, cultures and language barriers, the first reason becomes more important than it is domestically. The second reason becomes less practical. Adjudication and enforcement can be awfully difficult and expensive.

That means first of all, it’s much more important to get a good supplier than to get a good contract. Second, it means that the contract should be written to help with communication between the parties, not hinder it. It should be clear and easy to read (no size eight gray type please.)

Here’s the tactic for the day.

Run a grammar check on your contract using Microsoft Word with “check readability statistics” turned on. Look for a “reading ease” score of 40 or higher and a grade level requirement of 11th grade or less. Remember, the document probably won’t be in the supplier’s language. Once you achieve that, then print the document in an attractive format. Pay attention to typography and white space. Make it easy to read.

If your lawyer struggles with this, get him or her a copy of the SEC’s “A Plain English Handbook”.  It has lots of guidelines and tips. Another good source is “Plain English for Lawyers,” which you can find on Amazon.

As a final note, I just happen to be doing my one and only public Global Supply Management seminar for 2009 in the Chicago area on August 11-12. Check this link for details.

Dick Locke, Global Procurement Group and Global Supply Training.

Why Are You Negotiating The Wrong Terms?

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At the beginning of every year, the IACCM does a survey of the top negotiated terms of the previous year. And for the last three years, the top negotiated terms haven’t changed much. This is not a good thing, because the top terms are not what you should be focussed on. As of today, the top negotiated terms are the following:

  1. Limitation of Liability
  2. Indemnification
  3. Price / Charge / Price Changes
  4. Intellectual Property
  5. Confidential Information / Data Protection
  6. Service Levels and Warranties
  7. Delivery / Acceptance
  8. Payment
  9. Liquidated Damages
  10. Applicable Law / Jurisdiction

This is nuts. The most important things are:

  • what products / services do you need,
  • what quality and service levels are required,
  • what quantities do you need,
  • when and how do you need the products / services delivered, and
  • how much can you / are you willing to pay?

And if you look at the top ten list, only three of these five key points make the top ten. Furthermore, if you examine the top thirty list of the negotiated terms, we see that

  • scope and goals is 14,
  • freight / shipping is 23, and
  • information access and management is 29.

This is absurd. If you can’t verbally agree up front in the first five minutes that

  • you’re liable for your actions (and your supplier is only liable for theirs),
  • your IP is your IP (and your supplier’s is your supplier’s),
  • you’ll take the utmost care to protect your supplier’s confidential information (in exchange for your supplier taking the utmost care to protect yours),
  • each party will respect the laws in each country where they do business and the jurisdiction will be that of the buyer (or destination), and
  • you’ll each respect all of the applicable import and export regulations,

trust each other on these points, and just go with standard clauses in the final agreement, then should you be negotiating in the first place? Because if you can’t get right down to what’s important, I’d argue that maybe you don’t trust each other enough to be doing business in the first place. It’s not about how many billable hours your lawyers can wrangle out of you on administrivia, it’s about getting down to business and making sure you can each profit on the transaction. I’m not saying these clauses aren’t important … I myself insure they are included in every contract I draft and / or sign … just that they’ve been written thousands of times, there are standards that capture reciprocal protections, and it’s not worth sacrificing your goals to try and wrangle out provisions that may be unfair to one party and inevitably destroy the trust that is needed for a successful relationship.