Part IV – Helping your lawyer help you: Negotiating a key supply agreement for your company

February 26, 2017 | BY SHANNON Q

A lawyer’s time is expensive, as anyone who has reviewed a legal bill knows. It’s why bringing legal work in-house is often viewed as a way to save costs on legal spend. But even if your in-house counsel doesn’t charge by the hour, there is an imputed cost of their time. There is also an opportunity cost of their working on your issue. There is always something else important they could be doing.   So if you’re like me – a “non-lawyer” – it’s important to prepare effectively in advance for a meeting with your lawyer. That way you will avoid multiple turns at the  issue, get the advice you need sooner and maybe even make your lawyer’s Christmas card list.  And of course, you’ll save time and money. In this fourth instalment of our series on helping your lawyer help you, we look at negotiating a key supply agreement for your company.

I interviewed Trish Steele, one of our Calgary-based lawyers who has dealt with commercial legal matters for over 25 years.  Here are her thoughts:

 What are the common scenarios on this topic when you would be approached for advice?

Our client would typically be a producer, manufacturer or service provider who may have a supply chain above it, below it or both. Our client could also be the ultimate consumer of the goods and/or service.

What would you want to know from the asker about the issue?

We would want to know whether they are the buyer or seller in the supply agreement.  If they are the buyer, are they purchasing goods, services or both? If they are buying goods they will need to decide the point at which title and risk will transfer and what the process for inspecting the goods will be.  They will also need to consider the type of warranty they will be looking for. If they are buying services, they will need to consider the appropriate standard of care that the seller should be held to and whether it is appropriate to ask for performance guarantees.If they are buying goods alone they will need to ensure that there are no incidental services (ongoing maintenance as an example) provided.  There will be exposure if an incidental service is provided without provisions dealing with standard of care, insurance and indemnities.

If the client is a seller, the question is where they are at in the supply chain.  i.e. Are they supplying directly to the seller or to another supplier?  Do they have to purchase goods or services from another supplier? The supply agreements would vary in terms of allocation of risk, representations and warranties, depending on the answers to these questions.  The same template agreement should not be used by a client in their capacity as a seller and a buyer in a supply chain.

Finally, is this is a one-off transaction or do the parties intend to do several?  In the latter case, a master service/supply agreement format using purchase orders would save time and money.

What documents would you want to have on hand to review and why?

We want to see the terms of any Requests for Proposals, warranty requirements or purchase orders that have been issued to ensure that the final supply agreement is in compliance.  We’d also discuss any delegation of authority or signing authority protocols of the client to ensure the proper internal processes are complied with. And we need to know whether the client has internal corporate policies on what they can accept in terms of limitations on liability, indemnities, waivers of consequential losses, exclusive remedies, liability for rip and tear and the like. We want to ensure the final agreement is consistent with their internal risk management protocol.

What special circumstances would you flag as being important for the client to disclose?

We want to know anything unique about the good or service.  This would inform whether there are likely to be multiple suppliers that would be satisfactory or whether a certain level of expertise is required. This, in turn, helps us determine the number and nature of the representations and warranties. Are there environmental issues that warrant unique representations, warranties and indemnities?  Is the supply of the good or service critical to the client’s business?  All of these factors would call for unique provisions in the contract.

Is there anything in particular about the current market that needs to be reflected in the agreement?   For example, if the client were a general contractor in a recessionary market they would want to ensure they had the ability to terminate any subcontracts in the event the prime contract was terminated.  

If you could give a piece of advice to companies in general, on this issue, what would it be?

I can’t limit it to a single piece of advice! 

  • Consider the state of the market and what impact that will have on your negotiating strategy.   If you are a buyer, are there multiple parties you can look to or are you required to deal with a limited number of suppliers?  If you are a seller, can you be distinguished from your competitors or is your product or service interchangeable with a number of other suppliers?   These factors will determine the strength of your bargaining position and dictate how successful you will be when it comes to negotiating price and allocating risk.
  • Be sure to understand the market for the goods or services that you are dealing with and how risk is typically allocated. This will allow you to assess how well you are managing risk in your contracts vis-à-vis your competitors.
  • If you have been dealing with a client over an extended period of time, consider whether it is time to update your terms and conditions. The business world is not static. Parties will undoubtedly be learning lessons the hard way and should be adjusting their contracts going forward to reflect lessons learned.
  • If the price you have been quoted seems too good to be true, then it probably is. Ask for references and do your due diligence!

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