Contracting Is More than Standard Terms and Conditions
By Sheryl Toby
Strong contracting processes and communications which establishes clearly the expectations of each of the parties reduces disputes and costs and strengthens relationships. The key to strong contracting processes is to approach contracts in a holistic manner making sure all documents interconnect in a logical uniform manner. Because manufacturing processes can be complex, this is often not as easy as it sounds. For successful contracts to be created, it is important that parties recognize that contracting documents themselves are in effect a supply chain or link to the other. They must all fit together. If a chain is broken because directives do not mesh with other agreements, or, importantly, were never even properly communicated or shared, confusion, and then disputes arise.
Often, lawyers are called when a dispute arises between a supplier and its customer. The lawyers immediately focus on the terms and conditions to determine what the rights and obligations of the parties are. Therefore, lawyers spend significant amount of time focusing on terms and conditions because, frankly, that is the area they know. However, often, if there is a dispute there was a miscommunication of the expectations of each of the parties that occurred much earlier within other parts of the contracting processes. Had the parties communicated better at the front end of the process in understanding the expectations of the other, the dispute may never have arisen in the first page causing the parties to resort to the terms and conditions to determine the rights and obligations towards resolving the conflict.
Consequently, while the following is focused on the customer side of contracting, the supplier should equally be asking the customer questions to determine that it has all of the information and standards that will be required of the supplier:
1.What are all of the Supply Documents and Where are they housed? — The obvious is not always as obvious as it seems. Within the context of a dispute, I am often informed that a supplier is expected to live up to certain known industry standards or processes that are contained in manuals. However, when asked to establish when, how and where the document or standards were shared, it is often discovered that there was glitch in the system such that the document is not actually on a website, was not shared, doesn’t exist or its requirements have not been changed consistent with the terms and conditions or other documents. Thus, the first step in assessing the strength of the contracting process is to identify all of the operating manuals, technical processes and forms that the supplier is expected to follow in addition to the terms and conditions from beginning to end (collectively the “Technical Documents”). These typically include a variety of documents such as, for example, supplier quality manuals, warranty process manuals, equipment specifications and end of production requirements. Determine if, how and when the Technical Documents are communicated to the supplier. Are they on a central website? Are you sure the supplier was notified of and has access to the website (are you sure the link actually works)? What is the process used for making changes to the Technical Documents? Is that process followed and how is the supplier notified of the changes? Does the supplier, for example, have a duty to monitor the website for changes in the documents and how is that duty communicated to the supplier?
2. The RFP the Perfect Start for Identifying the Supply Documents — Usually procurement activities start with the request for proposal. Therefore, this is the key document for identifying and including a reference and access to the Technical Documents. Make sure the RFQ references all of the documents that will control the parties’ relationship including the Customer Terms and Conditions and that the supplier is given access to the Technical Documents. If there are proprietary concerns in sharing the documents before an award is made, or not all of the specifics of the requirements are known, a process for preliminary proposals can be implemented.
3. Receiving the Quotes — I often hear grumbling that a company is having a difficult time assessing offers as they are so dramatically different in the approach to the proposal. In addition, through this process, the supplier often attempts to add or varies the terms and conditions. One way to reduce the frustration of comparing apples to oranges and to avoid opening the door to supplier imposed terms is to provide a form the supplier must use in submitting the proposal. The form should again identify that the Technical Documents are incorporated and control over any terms provided by the Supplier. In addition, as stated above, in the event of a dispute down the line, it is one thing to say that a supplier is or should be familiar with industry standards and another thing to actually prove that the supplier knows or should have known established standards. The Quote can be a good place for the supplier to establish that it has been involved with the applicable industry for X years and is generally familiar with and considers itself to be a first rate supplier in the applicable industry.
5. Consider replacing the “Award letter” with a Letter of Intent — In some industries, such as in the automotive industry, a customer will issue an “award letter” which basically states the customer’s intent to issue a purchase order if all things go as planned. Unfortunately, the contracting processes often gloss over this step when this can be a key document in establishing the parties’ roles and expectations. Instead of unilaterally issuing an award letter, it is here that the parties should take the opportunity to make sure they are aligned in expectations. The suggestion is to replace the award letter with a document I fondly refer to as a “supplier framework agreement”. The supplier framework agreement is basically a letter of intent that states if XYZ happens the customer commits to issue and the supplier commits to accept a purchase order consistent with the framework. The framework itself identifies the key elements and cost obligations of the parties, and commits the parties in a signed writing to the Technical Documents and the controlling Terms and Conditions. Among other benefits, this document can go a long way towards creating internal consistency in contracting processes and helps make sure the parties are actually on the same page. It can also be used affirmatively to modify or clarify limited parts of the Terms and Conditions without having to do a formal universal rewrite. The letter of intent will refer to the purchase order or other future document as the final authoritative agreement.
6. The Technical Documents — Often the technical documents are, as they should be, drafted by technical experts such as engineers and not legal. Legal will therefore be limited in the ability to review the documents for technical content but they should be checked to determine if possible, that the processes identified or forms being used match to the Terms and Conditions and actual processes of the company. For example, if the documents refer to a certain form to be used to make a claim, does the form exist and are there instructions on how to submit the form?
7. The Purchase Order — The purchase order should also identify and incorporate the Technical Documents and Terms and Conditions.
In the end, the key to any contracting process or in analyzing processes or disputes should start with the beginning of the process. Just like a manufacturing chain, a good legal contract process depends upon making sure the legal chain connects cohesively and in reality reflects the processes actually used by the company.
Sheryl Toby is a Member/Director Supply Chain Practice Group at Dykema in the Business Services practice. She regularly advises manufacturing entities (such as automotive clients) in a wide variety of day-to-day supply chain issues that intersect operational and legal issues. This includes working closely with purchasing groups, in-house legal and management staff to address matters ranging from front end contracting best practices, “stop-ship” and other litigation threats, strategies for addressing financially troubled supplier situations that can threaten operations, to assisting in manufacturing review processes or investigations arising from employee complaints and potential whistleblower actions. Visit www.dykema.com for more information.