Negotiating contracts in the supply chain are certainly challenging. As a lawyer, there is a temptation to want to change every term that is not to your liking. And, for that reason, a lot of lawyers will receive a contract to review from their client and immediately red-line every provision. Now, if your client is on the top of the supply chain, such an approach might work. But, for many of our clients, who are in the middle or even towards the bottom of the supply chain, such changes are often not effective or well received. Because of this reality, some manufacturers /distributors will simply sign the supply chain contracts without seeking legal advice because it is a “take it or leave it” situation.
The ultimate question then is whether there are ways that a manufacturer/distributor can attempt to minimize or eliminate risks even if the company has no leverage and the typical risk shifting clauses cannot be used (e.g., indemnification). The answer is Yes.
For example, assume that you are selling a component part that is then being incorporated into a larger product or apparatus. The contract states that you are responsible for any alleged problem with the component even if the installation by the OEM into the larger product was faulty. I often encourage clients to ask as part of negotiations that it be allowed to offer training guidance about how installation should be done. Something as simple as a few on-site sessions a year can help minimize risk.
I also often tell manufacturers/distributors to be mindful of the contract term. While Long-Term Agreements (LTAs) are often sought after and surely are better from a business perspective than a purchase order by purchase order arrangement, shorter terms are often preferable in a “no leverage” situation. Simply stated, it allows a manufacturer/distributor to assess what types of liabilities are being created in the marketplace. This information allows for potential tweaks in the contract the next time it is renewed. It is often easier to negotiate changes when there is concrete evidence to support them. This is in contrast to the situation I described above where legal counsel changes every term in a contract without assessing business realities.
Are there ways that you have addressed “no leverage” situations? If so, email me at firstname.lastname@example.org and I will share them in my next post.