“Supply chain issues” is the post-Covid version of saying “the check is the mail.” It is a perfect analogy. When a person blames the post office, that person is blindly blaming everyone from the clerk at the post office to the person who delivers your mail plus an untold number of people who have never come within 1,000 miles of your letter.
Blaming the supply chain is similar. Are you blaming the supplier or raw materials? The shipper of raw materials or the finished goods? Were you unable to transform raw materials into finished goods because someone else’s supply chain fails to furnish what you needed?
The supply chain really should have a different title: non-operational, uncontrollable problems. While no company has control over a pandemic, volcano, or other force majeure scenarios, it can implement smart business solutions such as using a diversity of suppliers and data reports/analytical technology to oversee suppliers and shippers.
A smart attorney can help mitigate your damages and business risks while also increasing your potential remedies to recover from losses. The following are three examples separate the good (basic) attorneys from the great attorneys on pricing issues:
Price Increase or Decrease. It is the first thing and the last thing discussed. Plus, it is mostly a business term. That being said, you should ask your client whether it is considering the Consumer Price Index (CPI), Producer Price Index (PPI), or a different price escalation model. Using CPI as an example, major categories are food, energy, and all other items—if any subgroup is better for your client, then bring it up.
Your client will be amazed by your thoughtfulness and the thousands, if not millions, of dollars you could save your client.
Most Favored Nation. I rarely see agreements containing an MFN clause. I find this weird. “Most Favored Nation” clauses require the seller to give you the best pricing it gives anyone else. This sounds too good to be true—so why not ask for it. Companies that do a lot of business together should strongly consider these clauses for their mutual benefit because it might create mutually beneficial savings.
Companies who place this clause in their contract could learn valuable information when a customer balks at this clause. Your client could use this information however it chooses including going to a new vendor with better pricing (absent a non-disclosure or similar agreement).
And if you receive blow back from your client for suggesting a MFN clause that was not well-received, then (a) blame your attorney; (b) say you knew better, and (c) crack a lawyer joke.
Impossibility. As a general proposition, impossibility of performance occurs when performance is made objectively impossible by an unforeseeable circumstance. The law also considers whether contracts can be deemed “impracticable” to perform or have their purpose “frustrated” to excuse performance. All three words: impossibility, impracticability, and frustration all are determined by what was reasonably foreseeable then the contract was executed.
Therefore, it is imperative for buyers to have the strongest price guaranty language possible to maintain the benefit of the bargain. Since deflation is not a real risk, I like a simple and direct statement:
All prices are firm and not subject to increase for any reason.
Sellers want wiggle room. They are interested in listing parades of horribles that would justify a price increase such as (a) increases in the prices or costs of raw materials, components, (b) labor disruption, (c) natural disasters, and Force Majeure or Force Majeure-lite provisions.
The art of convincing both sides that specific terms for specific pricing for a select number of goods is where an attorney can really make a positive difference. For if the cost of certain raw materials is the greatest concern, then the parties need to agree to a carve-out and specific pricing and let the other issues remain resolved. An added bonus is that the more specific language is, the easier it is to confidently predict the outcome of potential dispute resolution and, therefore, avoid litigation or arbitration.
Although there are many other pricing considerations that were not discussed such as “profitability protection”, these three items are great places to start showing your clients how seriously you take their businesses.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, real estate, and other issues. He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
