10/9/20151 strategies to avoid common deadly sins found in procurement contracts institute for...

04/19/23 1

Strategies to Avoid Common Deadly Sins Found in Procurement Contracts

Institute for Supply ManagementMadison, WIOctober 10, 2013

© 2013 Wagner, Falconer & Judd, Ltd.

Quiz Bowl The Greenheck Fan Experience Deadly Sins of Procurement Contracts Fact Patterns and Examples Questions and Conclusion

04/19/23 2© 2013 Wagner, Falconer & Judd, Ltd.

You are the Director of Purchasing for a privately owned company with 3500 employees. The VP of Finance calls you into her office and says “Ralph, I’m going to a charity dinner next week with our sales rep for Verizon. I know you are working on their contract renewal and have had some trouble negotiating with them. If I get a chance to talk to our rep, what is the most important term you want to have in the contract with Verizon?”


Who we are: Privately owned, ETO, CTO, MTO in Schofield,

WI Known worldwide as a leading manufacturer of

air-movement and control equipment Fans, ventilators, make-up air units, energy-

recovery ventilators, dampers, louvers, kitchen ventilation systems, laboratory exhaust systems, indoor air handling units and coils

Shipped around the globe: WI, CA, KY, TN, MN, NC, China, India and Mexico


Why? Too many 161 suppliers represented 98% of spend 161 suppliers represented only 2% of spend

How? Prioritize - Plan Spend Risk WIIFM??

Result for company 148 suppliers (50%) represent 92.5% of

spend04/19/23 7© 2013 Wagner, Falconer & Judd, Ltd.

Handshakes and cocktail napkinsPast approach was not well suited for

growing company with new products, more manufacturing locations and new customers

Informality in documentation not appropriate for changing business climate

A bolt leads to a jolt in thinking…04/19/23 8© 2013 Wagner, Falconer & Judd, Ltd.

It’s SituationalKnow Your LeverageStrategic Use of Contracts

Using your own paper Marking up a vendor’s form Sometimes no contract is better


Item being purchased Office supplies vs. weld gasses

Ramifications if something goes wrong Serve customers Business interruption or lost profits Insurable Life, health and safety issues For public companies, impact to “Street”


Voting with your feetTaking advantage of publicly traded

companies End of quarter spend

Prestige and Marketing ValueThe common law protects me, why

should I agree to XYZKnow who can say “Yes”Commercially unbalanced


In most situations it’s best to use your own form of agreement Ability to clearly protect what’s important Streamlines the process The PDF message

Marking up a vendor’s form Ask for a Word document

When no contract is better UCC remedies can work to your advantage


IndemnityDamage Caps InsuranceWarrantyRequirements ContractsAssignment RightsSpecial concerns with Software and

IT AgreementsConfidentiality


Supplier and Buyer agree to defend, indemnify and hold harmless each other, against all suits at law or in equity and from all damages, claims and demands arising out of the death or injury, to any person or damage to any property, intellectual property infringement alleged to have resulted from the sole negligent act(s) or omissions or intentional act(s) of the indemnitor.


Scope matters▪ PI, Property Damage, IP Infringement, Breach

Will vendor do work “on site”? Be careful of exclusions and caps in

warranty section Read indemnity in conjunction with the

damage cap and try to carve out indemnification responsibilities from the cap

Make sure the vendor has insurance to cover the insurable risk assumed in the contract


Requests by supplier for waivers of indirect “consequential” damages Carve out breaches of confidentiality or willful

misconduct Caps on direct damages

Carve out above, plus matters covered by an indemnity and those that are insurable

Arguments in your arsenal The amount you are being paid bears no relationship

to the damages I might suffer That’s why you buy insurance, you need to have

some skin in the game with me Company policy states “No”


Avoid damage caps and disclaimers when the liability is covered by their insurance

Have the discipline to ask for “additional insured” status and obtain the certificate of insurance

Their choice to self-insure should not equate to you taking on unnecessary exposure as a customer

Consider if they will be “on site” and what issues that could cause: Employee injuries Theft of property or confidential information Compliance with your safety and security policies


Clause: Customer agrees to purchase its “requirements” of aluminum from Supplier for the next three calendar years

Problem: If the supplier is not the best from a form, fit, function or pricing standpoint the customer is stuck and cannot purchase from another source

Solution: Don’t agree to requirements contracts Negotiate a termination for convenience


Clause: Customer may not assign the agreement in whole or in part without the express written permission of Vendor

Problem: No ability to “transfer” rights in agreement to another party (sister or parent company, successor entity)

Solution: Have right to assign to related company under your control or in the event of an M&A transaction


Use of consultants for IT projects Ownership (works for hire)

(SSAE) No. 16, Reporting on Controls at a Service Organization

License compliance Know how license compliance is determined

(seat, site license, deployed via Internet, hosted) Service levels

Address in a schedule/make sure timing for fixes and maintenance meets your business needs


Cost increases for future license and maintenance Negotiate these costs upfront

Intrusive Surprise Audits Proper written notice Treat auditors like the FBI was coming in Document compliance regularly During normal business hours


“Confidential Information” means information supplied by one party to the other that is marked confidential or if orally disclosed, identified as confidential within thirty (30) days of such disclosure

Confidential Information does not include what is already published or generally available to the public; becomes generally available to the public; was rightfully in its possession prior to the time of receipt; or independently developed


Sole or exclusive vs. primary supplier tied to performance caveats

All costs vs. reasonable out of pocket expenses

Making provisions mutualLimit disclaimers in warranty section

apply to warranty claims only… not to limit negligence, strict liability, contract breach or third party claims


UCC applies to purchases of “Goods” and provides protection to purchasers

Good tactic (trading paper) when: You do not have the leverage to get your

way Your paper process is good (purchase is

subject to your PO language) Having the ability to sue a vendor is as

good as having an indemnity right You cannot predict what will go wrong


In a world where predicting the future with precision is difficult and Nostradamus is deceased, the most important right in a contract is…

The right to terminate the agreement with no cause.


What is a deadly sin depends on the company, the product and each situation is somewhat unique.

Understanding your leverage and “playing” your audience is important.

There are normally 25-30 clauses in a contract; all of which matter.


Gary Van Domelen

[email protected]

Wagner, Falconer & Judd, Ltd.

1700 IDS Center80 South 8th StreetMinneapolis, MN 55402-

2113Phone: 608.790.4695Facsimile: 612.392.3999www.wfjlawfirm.com

Randy Huebner

[email protected]

Greenheck Fan Corporation1100 Greenheck DriveSchofield, WI 54476Phone: 715.355.3151


10/9/20151 strategies to avoid common deadly sins found in procurement contracts institute for...

Documents

falconer judd

contract renewal

makeup air units

owned company

company148 suppliers

spend161 suppliers

many161 suppliers

indoor air handling