PURCHASING PITFALLS

A discussion on how to avoid supplier conflicts and legal problems.

By Rich Apkarian and Frank Hamidi

Discussion Topics

1. The Battle of the Forms

2. The Quantity Conundrum

3. The Rise in Raw Material Costs

4. Supplier Termination

Topic # 1 - The Battle of the Forms

What is the Battle of the Forms?

• RFP/RFQ• Quotes• Purchase order• Order acknowledgement form• Production begins• Conflict arises• Two questions:

• Do we have a contract?• What are the terms?

Contracts 101

Contract = Offer and Acceptance

What is the offer?• Quote• Purchase Order

What is the acceptance?• Purchase Order• Order Acknowledgement Form• Performance

The Governing Law

• Uniform Commercial Code - governs the supply of goods

• UCC 2-207

• Adopted in every state, except Lousiana

• “The greatest statutory mess of all time.” Professor Grant Gilmore, Yale Law School

Do We Have A Contract?

Rule #1: If the basic offer is accepted, you have a contract (offer and acceptance), even if the acceptance has additional or different terms, unless the acceptance is expressly limited to its terms (then, it’s a counteroffer).

What About Additional Terms?

Rule #2: Additional terms set forth in an acceptance become part of the contract unless:

• Offer is expressly limited to its terms.

• The offeror objects within reasonable time. • Additional terms materially alter the offer.

What If Both Parties Expressly Require That Their Terms Apply?

Rule #3 - The law enforces contracts that are supported by the parties’ conduct even if their forms conflict.

What are the terms of the contract?• Material terms agreed upon.• Conflicting terms knock each other out.• UCC fills in the gaps.

How Do I Win the Battle of the Forms?

• Make sure your purchase order is the offer.

• Example PO language: “This is an offer. The terms and conditions, which are attached hereto (or available at www.buyer.com), are the sole and exclusive terms on which Buyer will purchase products from Seller. Any additional or different terms proposed by Seller are expressly rejected by Buyer.”

On The Winning Path….

• If your supplier’s order acknowledgment form contains additional or different terms, send a written rejection.

• Example rejection letter language: “Buyer rejects Seller’s non-conforming purchase order acknowledgment. All additional or different terms are unacceptable and shall not be binding on Buyer.”

Winning is All About The Details

• Get your purchase order signed by the Supplier.

• Be careful with business award letters.

• If you use multiple documents (quote, purchase order, contract, terms and conditions), reference them and stay consistent.

Topic #2 - The Quantity Conundrum

Quantity is King

• Contracts can be enforceable even if they are missing certain terms.

• Terms (even price) may be determined by UCC and parties’ conduct.

• UCC states that contract will only be enforceable to quantity stated.

• Specific quantity vs. requirements

Potential Pitfalls

• Up to ….requirements.

• Ambiguous terms such as “blanket” or “as released” are risky.

• Minimums and maximums are risky.

Structure of the Contract

• Good faith governs

• Commit to purchase your requirements

• State estimated quantity

• UCC specifically contemplates changes in requirements and provides that an agreed upon estimate is the “center around which the parties intend the variation to occur.”

Flexibility

• Conflict between business flexibility and legal enforcement.

• Contract which commits buyer to nothing may offer flexibility but may not be enforceable.

• Using requirements plus estimated quantities commits buyer and offers flexibility if requirements vary due to lower volumes or other factors.

• Contract likely to be enforced as long as buyer acts in good faith and variations in requirements are legitimate.

Topic #3 - Increased Costs

The Situation

• Buyer and Seller have fixed price contract.

• Seller’s costs increase - Often driven by volatility in raw material prices (steel, oil, resin).

• Seller cannot sell to buyer profitably and asks for price increase.

Increased Costs, Cont’d.

• Buyer refuses because it cannot get relief from its customer.

• Seller stops shipping.

• Buyer’s production (and that of its customer) is threatened.

An Ounce of Prevention

• Address raw material costs at contract formation

• Price warranty.

• Do you (or your customer) have a steel program?

• Structure contract so it is not vulnerable in other areas.

A Pound of Cure

• Negotiate new agreement• Pass through• “Split the difference”

• Call the lawyers• Pay under protest• Pay into escrow• Seek injunctive relief

Topic #4 - Supplier Termination

Important Business Considerations

• Backup plan

• Build a bank of parts

• Tooling

• Validation process

• Notify customers

Reasons For Termination

• What does the contract say?

• Termination for cause.

• Termination for convenience.

How Do I Properly Terminate?

• Issue written notices and follow contract terms.

• Pay reasonable compensation, including outstanding invoices, tooling, work in progress and raw material based on reasonable lead times.

• Call the lawyers.

The End

Questions/Comments?

Rich Apkarian• (248) 433-7215• Rapkarian@dickinsonwright.com

Frank Hamidi• (313) 223-3104• Fhamidi@dickinsonwright.com