MIM 524 Global Sourcing Class five

1. MIM 524 Global Sourcing Class five

2. Contracts, Contract Terms and International TermsThis is intended to be a holistic overview of contracts and the legal aspects of global business.

3. Agenda • Agency Law • Contract Formation • Legal Issues in Purchasing • UCC vs. CISG • Contract Term Considerations • Current Events/Review Next Class

4. Agency Law • Agency • Definition: One who is legally empowered to act for another • An agent has the legal authority to bind his or her principal to a contract. • Principal • Definition: Can be an individual person or a legal entity such as a corporation. • “Agency” is a fiduciary relationship – which means the Agent must put the Principals interest ahead of their own.

5. Agency Authority • Apparent Authority • Anyone that a 3rd party could “reasonably” assume has the authority to bind a company • Real Authority • Individuals such as Corporate Officers that a company has authorized to act on their behalf. • Other specifically delegates organizations (procurement, real estate, etc.) or individuals that have accountability by the nature of their roles.

6. What is a Contract? • A promise or a set of promises, that the law will enforce, or at least recognize in some way. • If you have a contract, you may be entitled to legal remedies if that contract is not fulfilled. • You need ALL 3 Basic elements to have a contract • Offer • Acceptance • Consideration

7. Contract/Procurement Law • Essential Contracting Principles • Contract Formation • Written vs. oral contract • Electronic contracts • Terms and Conditions • Battle of the forms • What terms apply? • Contracts for Services • Applicable law(s) • Legal differences

8. Contract Formation • Written vs. oral contract • State laws generally require “writing” IF: • Sale of goods over $500.(changing to $5,000); • Promise to pay debt of another; • Sale of land or interest therein; • Contracts not performed within one year; • UCC also requires “signature” for contract formation (UCC 2-201)

9. Elements of an “offer” • An offer is more than an inquiry, it must show the intent to be bound. • Remember the RFI/RFP/RPQ differences? • “This is a request for quote and not an offer to purchase.” • A promise or commitment • Using words or conduct that indicates intent to contract • Which is communicated to a 3rd party • Creates a power of acceptance

10. Elements of Acceptance • Words or conduct that indicate intent to be legally bound • Communicated to the other party • Offers may define the form of acceptance which gives it control • If it doesn’t specify, then UCC Uniform Commercial Code will fill in. More on UCC later. • Special kind of acceptance: Unilateral Contract • Is formed when an offer invites acceptance by performance • Acceptance by performance is a legally valid acceptance

11. A contract can be any of the below… • An exchange in writing such as a purchase order and the associated acknowledgement • Oral promise • Combination of oral promises and writings • Formal signed agreement in writing • Promise by one party and performance by another • NDA – Non disclosure agreements • LOI/MOU – Letter of Intent/Memorandum of Understanding

12. Legal Issues – Contracts • Oral Modifications of contracts • Written agreement says one thing but the parties do something else and don’t amend the agreement in writing? • Called Course of Dealings • Modification terms are not enough to protect against Course of Dealings • Oral Contracts • Oral promise is just as enforceable as written promises • If you have offer, acceptance and consideration, you have a contract – no requirement for “in writing” • Contract will be incomplete and/or ambiguous

13. What is the Uniform Commercial Code? (UCC) • Standard contract terms that provide a contract structure for contracts for acquisition of goods. • Key provisions for Definitions and Remedies • Protection tends to favor the Buyer • Covers all aspects of goods contracting • Offer, Acceptance, Consideration • Right of Inspection & Rejection • Buyer and Seller Remedies • Contracting management • Warranties • May also serve as a “gap filler” for incomplete contracts. • Not to be utilized for Service Contracts. • Valid in 49 of the 50 United States • All except Louisiana

14. Whose Terms Prevail? • Buyer’s P.O. Contains: • “Acceptance of order. This order is buyer’s offer to seller. Seller’s acceptance is expressly limited to the terms of the order and buyer hereby objects to any additional or different terms in seller’s acceptance. Seller accepts this order as written by executing and returning to buyer the acceptance or acknowledgement copy of the order, or by beginning performance.” • Seller’s Acknowledgement Contains: • “Seller’s acceptance of this order is expressly made conditional on buyer’s assent to the additional (or different) terms incorporated herein by seller.”

15. UCC – Uniform Commercial Code • Battle of the forms (2-207) • Conflicting terms are thrown out • Difference, non-conflicting terms • Materially altering terms – added if does not materially alter • Firm Offers (2-205) • If method of acceptance is not called out in the offer then UCC applies (2-206) • An order requesting prompt shipment may be accepted either by a promise to ship, OR by prompt shipment of goods. • Silence can not constitute acceptance

16. Contract Issues • Mistakes • Bilateral • Unilateral • Excuses • Waiver • Prevention • Impossibility • Force-Majeure • Parties can be excuses from liability for unforeseen events outside of their control (IE: Natural Disaster, etc.)

17. Acceptance of Goods • Right of Inspection (2-513) • Acceptance of Goods (2-606) • Notification to seller that goods are confirming, or writing to accept in spite of non-conformity • Buyer fails to inspect in reasonable time • Revocation of Acceptance (2-608) • Supplier fails to cure defects • Discovery of latent defects • Must occur within reasonable time after discovery

18. Rejection of Goods • Improper Delivery (2-601) • Reject the whole • Accept the whole • Accept part, reject rest • Rejection (2-602, 3, 4) • Reject and notify supplier in reasonable time • Hold rejected goods with reasonable care for seller’s disposition • CAN NOT just rework and back charge without seller’s concurrence • Follow reasonable seller’s instructions for disposition • After reasonable time, may sell and recover expensed, returning balance to seller

19. Buyer’s Remedies for Breach of Contract • Contract Assignment (2-210) • Incidental and Consequential Damages (2-715) • CONSEQUENTIAL DAMAGES - Those damages or those losses which arise not from the immediate act of the party, but in consequence of such act • INCIDENTAL DAMAGES – Those damages for commercially reasonable expenses incurred as a result of the other party's breach, such as costs of inspecting and returning goods that do not conform to contract specifications. • Cost to “cover” (2-712) • Cost for Buyer to find alternate method to fill needs • Liquidated Damages (2-718) • LIQUIDATED DAMAGES - When the parties to a contract agree to the payment of a certain sum as a fixed and agreed upon satisfaction for not doing certain things particularly mentioned in the agreement, the sum is called liquidated damages • Deduction of Damages From Price (2-717) • Notify supplier of intention to do so • Must be deduction from same contract

20. Suppliers Remedies for Breach of Contract • If Buyer • Wrongfully rejects • Wrongfully revokes acceptance • Fails to Pay • Repudiates Agreement • In General (2-703) • Withhold Delivery • Stop Delivery • Resell and Recover Damages • Recover Damages for Non-Acceptance • Cancel • Incidental Damages (2-710) • Reasonable charges/expenses • Transportation • Care and Custody • Return costs

21. Warranties – 2 types…. • Express Warranties (2-313) • Written or spoken • Implied Warranties • Title (2-312) • Merchantability (2-314) • Fitness for Particular Purpose (2-315)

22. Warranties – Exclusions and Modifications • Exclusions or Modifications (2-316) • Conspicuous Writing • As Is, Where Is, With All Faults • If inspection Should Disclose Defects OR if Inspection Is Declined, NO IMPLIED WARRANTY • Warranties can be modified by Course of Dealings • Remedies can be limited by contract

23. UCC is for domestic contracting, what about Global contracting… • UN Convention on Contracts for International Sale of Goods (CISG) • Similar Objectives to UCC • Similar to UCC in Function • 5 Significant Differences • Acceptance of Offer: Mirror image or no contract • Contract Price: No Contract without firm price • Revocation of Offer: May be revoked at any time prior to acceptance • Formation of Contract: At time of Receipt of Acceptance • Oral Contracts: Valid and Enforceable • CISG may be Preferable to another country’s laws

24. What are They? • UCC: Uniform Commercial Code – United States • CISG: United Nations Convention on Contracts for the International Sale of Goods - International

25. UCC Transactions in goods, where U.S. law applies. CISG Commercial transactions in goods between parties in signatory nations, and can displace the UCC in an international context. Generally:

26. UCC Automatic application if “sale of goods” when U.S. law applies (any state) except Louisiana. CISG Sale of goods between parties in “contracting states.” If only one party is in a contracting jurisdiction, CISG will not apply, unless both contracting parties agree. When Do They Apply?

27. Contracting States • Argentina, Australia, Austria, Belarus, Belgium, Bosnia, Herzegovina, Bulgaria, Burundi, Canada, Chile, China, Kirghizstan, Croatia, Cuba, The Czech Republic, Denmark, Ecuador, Egypt, Switzerland, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guinea, Iraq, Italy, Yugoslavia, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, Norway, New Zealand, Holland, Peru, Poland, Romania, Russia, Singapore, Slovakia, Slovenia, Spain, Syria, Sweden, USA, Ukraine, Uganda, Uruguay, Uzbekistan, Venezuela, Zambia

28. Is the CISG “Law”? • Only if you agree to it! Parties can opt out of these provisions through contractual language. • Clearly specify an alternate choice of law to avoid CISG. • Both parties must agree to the choice of law.

29. SimilaritiesUCC and CISG

30. Goods • Sale of goods ONLY! • DOES NOT apply to service contracts; however, may apply to contract for mixed goods and services.

31. Warranties • Both provide similar coverage, including: • Warranty of merchantability (goods are fit for their ordinary purpose(s)); and • Warranty of fitness for a particular purpose (goods match any purpose made known to the Seller, where Buyer relied on Seller’s skill and judgment in choosing goods.).

32. International Contract Terms • Payment • Currency Selection • On Account • Letter of Credit • Revocable/Irrevocable • Confirmed • Standby • Buyer Sets Conditions • Supplier Guaranteed Payment Upon Meeting Conditions • INCO Terms • Negotiate prior to signing contract

33. Commonly Used INCO Terms • Ex Work – Departure from factory all carriage paid by the buyer • FCA – Free Carrier • FAS – Free alongside ship • FOB – Free on Board • CIF – Cost insurance and freight • DDU/DDP – Delivered duty unpaid/Delivered duty paid

34. Supplier Contract Types • Blanket Orders • Way to attack the small purchase order • Low volume, low value goods • Supplier Managed Inventory Agreements • Breadman Agreements – focus on continuity of supply • Frequency of use • Relatively low value • Systems Contract • Custom catalog • PO’s • Annual Contracts • Multi-year Contracts • Evergreen Contracts

35. Detrimental Reliance • A unilateral contract which arises from a promise (made verbally or by conduct) which induces a supplier to rely on our promise, to their detriment. • Need All elements to exist: • Promise, commitment or inducement • Reasonable expect the supplier to rely upon (or act upon) • Supplier does rely in a definite and substantial way • Reliance was reasonable • Supplier suffered measurable damage or injustice which can be avoided by enforcing the promise • Need to avoid accidentally entering into binding contracts

36. Tips to avoid Detrimental Reliance • Do not promise to order based on forecasts • Be careful dealing with small, new and start up type companies that may be financially unstable • Keep suppliers informed of latest demand trends. • Reduce the surprises and help mitigate the potential impact • Avoid micromanaging the supplier • Hold them accountable to the result – let them figure out how to achieve those results.

37. Conclusions • Legal Considerations • Intent is to STAY OUT OF TROUBLE • Clear, Concise Communication • Frequent Communication • Careful Record Keeping • Understand Rights and Obligations Under the Law • Contract Considerations • International Considerations

38. Contract Terms – Things to Consider When Negotiating

39. Things to Consider – Contract Terms • Effective Date: • When does the contract officially start? • Expiration Date • When does the contract officially end? • Who is the Buyer? • Affiliates, Joint Ventures, Partners, other assignees? • Who is the Seller? • Be clear to avoid confusion on who is really doing the work…. • Definitions – Need to be very clear • Avoid Slang, Acronyms, Anyone should understand

40. Things to Consider – Contract Terms • Attachments – supplemental information to the contract terms might include: • Product Description • State of Work (SOW) • Schedule • Pricing • Quality Requirements • Certificate of Originality • Software Licenses • Other? • Always be sure these attachments are the appropriate revised/update and do not contain conflicting information

41. Things to Consider – Contract Terms • Term of Agreement – Length of Contract • Decide best length for specific contracts • Time and effort to renegotiate is high • Difficult negotiation with critical supplier • Consider a longer term contract • Highly dynamic environment/changing quickly • Consider a shorter term contract • Evergreen is a contract that does not expire • Make sure your terms allow for Delivery AFTER a contract Expires……

42. Things to Consider – Contract Terms • Pricing • Be clear on what is and is not included in the price • Taxes, surcharges, Freight, etc. • Determine how price is set • Fixed Price • Adjustable Price based on some indicator • Payment Terms/Acceptable Invoice • 2%10/Net 45, Net 60, etc. • Clock starts ticking upon receipt of accurate Invoice • Payment is not acceptance (Able to inspect, etc.)

43. Things to Consider – Contract Terms • Term for Convenience • Do not make this Mutual – not really a contract • Limit supplier claims to Custom product only • No liability for standard products • Retain right to audit claims • Contingencies – Force Majeure • Require immediate notification of issues • Retain right to terminate without penalty • Inspection/Acceptance/Warranty • Reserve the right to inspect product • Determine appropriate length of warranty and what is included in it • What is suppliers obligation if product is rejected?

44. Things to Consider – Contract Terms • Delivery/Release/Scheduling • Retain flexibility to reschedule, cancel, push out, pull in or increase size of order • Do not commit to a locked forecast UNLESS there is benefit for Buyer • Require reasonable notice if deliveries are delayed/impacted • Buyer is only liable for “released” product • Typically a release comes from a Purchase Order issued under the terms of a contract. • Supplier should be responsible for returned freight on non conforming product • Product Specification/Errata • Be clear on the product you are buying/specs • Seller should have “track and trace” capabilities • Appropriate Change Control and Errata Notification

45. Things to Consider – Contract Terms • Packaging and Shipment • Special packaging should be called out in SOW • Protection/Markings • Specific Logistics Mode and Environment • Moisture Control • Limited Vibration • Clean Room Protocol • INCO Terms • Who is responsible for cost of freight from Point A to Point B • When does Title and Risk Transfer • Who is responsible for Customs and Duties • Custom Clearance • Need to conform to laws • Ability to obtain documents from Seller

46. Things to Consider – Contract Terms • Confidentiality • How will the supplier protect your Intellectual Property? • Who has authorization to see the documents? • How is 3rd party value add managed? • IP Indemnification • The #1 most negotiated contract term • Necessary to protect Buyer from Supplier or others infringement on patents or IP • Limit liability for the Buyer • Puts due diligence on supplier to ensure there are no issues • Insurance • Specifically important for suppliers who do work on the Buyers site (service providers) • Determine how much coverage the Buyer should have

47. Things to Consider – Contract Terms • Modifications/Mergers/Remedies • This is the one and only final document • Changes require written approval from both Buyer & Seller • Each Breach is Separate and Actionable • Retention and Audit • What is a reasonable time for Buyer to retain documentation? • Reserve the right to audit anything related to this contract and necessary supporting areas • Assignment • Determine if, when and who the Buyer might assign this contract to • It is usually not a good idea to allow assignment

48. Things to Consider – Contract Terms • Specific Performance • Right to compel supplier to deliver (schedule and volume) and pricing as negotiated • Notices • Who to contact for all official communications • This is more important in large corporations vs the smaller company • Large companies typically designate their legal department verses the Buyer (Buyer’s rotate positions) • Survival Clauses • Which clauses will last beyond the expiration of the contract • Typical Clauses that would come into play here: • Confidentiality • IP Indemnification • Warranty

49. Tips & Tricks on a Good Contract • Read the contract – top to bottom • Make sure there are no conflicting or ambigious terms • Write the contract so anyone can understand – don’t over use the legalese…. • Ensure all attachments and supporting documents are correct/up to date • Review the agreement with internal stakeholders • What is expected of the Seller? • What is expected of the Buyer? • What happens if either do not perform? • Point of Escalation/Communication

50. Current Events