Today, cutting-edge technology and how it is being used garners news coverage, but how companies build these products and get them to their customers is often overlooked. Companies negotiate and contract for the development and manufacture of the products as well as the sometimes complicated logistics necessary to deliver them to customers quickly in an increasingly demanding marketplace.
The COVID-19 pandemic (and the issues that arose during that time with respect to contracts, shipping, performance, and more) compelled companies to pressure-test agreements previously considered “standard,” fundamentally changing how companies use contracts. In a world where it often appears you can summon goods at will from the internet, there is a background of very important legal and operational contractual frameworks that makes this possible.
These agreements are just as important now as they ever were, and they are becoming more complex as companies enter into larger deals, ship internationally, and are under increased regulatory scrutiny.
Companies now have a renewed interest in considering the stability of their supply chains, rather than just looking for the best price. As a result, companies are relying on new supply strategies.
Companies are also reassessing inventory and warehousing needs by taking actions such as keeping larger inventory and building in fault tolerance. In the past, contracts contained broad obligations, but if the suppliers couldn’t perform, that language did not provide an immediate solution. In such an instance, the suppliers left their customers with no choice but to terminate the contract or sue for breach (in a time where everyone was strapped).
In light of these experiences, we are now seeing companies not only restructuring supply chains to build in/account for fault tolerance, but also adding other contractual remedies and solutions.
Manufacturing Agreements
One of the most important considerations in connection with manufacturing agreements is the necessity for exclusivity or minimum commitments. Without exclusivity or minimum commitments, a business may risk unwanted competition and security of supply.
Warehousing Agreements
Businesses should evaluate their potential third-party logistics (3PL) warehouse partners based on the range of order fulfillment services offered, the service levels (pull pack and ship/how fast and how much), and their ability to protect the goods.
Transportation Logistics Agreements
Transportation logistics is increasingly being outsourced (e.g., 4PL model). While use of broad outsourced service provider relationships can be efficient, these agreements should be carefully negotiated because the service provider generally has leverage when in control of or managing all aspects of a company’s transportation and logistics.
Regulatory Considerations
Because of the cross-border nature of many agreements, they may be subject to regulations in multiple jurisdictions. Businesses should be aware of the implications of such regulations, the potential impact of sanctions, and the potential for increased scrutiny from varying agencies.
Limitation on Damages
Contracting parties should carefully consider and document how to determine liability for lost, stolen, or damaged shipments. If not specifically contracted around or otherwise agreed upon, certain limitations on a carrier’s liability may apply by force of law (e.g., the Carriage of Goods by Sea Act, which applies to the carriage of goods by sea to or from foreign ports and US ports (and may be incorporated into contracts for the carriage of goods between US ports)).
Key Takeaways
It is crucial for businesses to consult legal and financial experts when negotiating these types of agreements to ensure the terms are favorable and aligned with their business objectives, while minimizing risks and potential disputes.
- Supply chain agreements were pressure-tested when the market changed
- View provisions in light of current events and market demands
- Underlying contracts are key
- Use contracts to mirror operational and business agreements and provide fault tolerance and viable remedies
- Don’t forget about regulations, sanctions, and applicable laws
- Be aware of regulatory issues and potential applicability of sanctions
- Limitation of liability and damages may be governed by statute unless otherwise agreed upon