Legal Aspects of Purchasing and Supply Chain Management
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Competition among potential suppliers is the key to a successful purchase. Offerors will race to propose better conditions than their competitors and to please the future customer that has not yet made up its mind. The cornerstone of the procurement process must therefore be the preservation of competition among potential suppliers in every aspect of a negotiation. Purchasers do follow this principle to a certain extent, as nobody would first choose a supplier on purely technical grounds and then start the commercial negotiation afterwards. Purchasing companies know that once the supplier understands it has been awarded the purchase, it will have no incentive to allow discounts on the price.
Suppliers therefore have traditionally been selected on both commercial and technical grounds. Doing so, however, leaves out one critical piece: contract negotiations. Once the business has been awarded on the basis of those two factors, the supplier has no incentive to be flexible in the negotiation of the contract itself;thus,this approach cannot be the correct way to proceed.
Our legally sound procurement protocol instead calls for a different approach for establishing the legal terms of the procurement contract. It seeks to foster competition among potential suppliers on all three pillars of the proposal—economic, technical, and legal.
This approach will not only lead to better contractual terms and conditions but also can reveal useful information for evaluating and understanding the economic and technical aspects of the award. Early knowledge of the contents of the contract before a winning supplier is chosen also allows the buyer to make a fully informed decision.
Indeed, contractual terms, far from being simply a formality, may alter the economic equilibrium of the deal and may even modify the technical evaluation. The length of the warranty period, for example, changes the assessment of the price being proposed.
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If, for the same price, one potential supplier offers a three-year warranty, and the second potential supplier offers only a one-year warranty, the second offeror isactuallycharging more because it is offering less in terms of service. Likewise, the scope of liability may change the technical assessment.
If one potential supplier offers to accept liability for direct and indirect damages, while the second potential supplier offers liability for direct damages only, it may be that the latter is not as sure as the former about the quality of its products. These are two very basic examples, but they serve to explain the underlying idea. In fact, there are many contractual terms that may have an immediate economic and technical impact on the deal that are often overlooked during the core negotiation process.
These include: clauses governing termination for convenience the right to unilaterally terminate the contract for any reason or no reason at all , performance indicators and penalty clauses, insurance, confidentiality, assignment the transfer of rights and obligations, or of the contract itself, from one of the parties to a third party , applicable law, and dispute resolution. In some cases, even though they are competing for business, potential suppliers may not be willing to offer better contractual terms than their competitors, or they may simply be unable to do so.
This does not mean, however, that the LSP protocol will not be useful. In fact, LSP always provides something else that is important during every procurement negotiation: awareness. Because LSP requires a potential supplier to specify not only the technical and commercial details but also the terms of the contract that it would be willing to sign, this approach at least guarantees that the procurement department is fully aware of all aspects of each proposal.
This reduces the chance that the purchaser will be surprised by the final contract terms. This kind of awareness is even more valuable than the other benefits discussed so far. Would a reasonable businessperson sign a contract without reading it? Strange as it may seem, something like this happens when a deal is struck based on only commercial and technical grounds, postponing the determination of contractual terms.
In such cases, the direction that the contract negotiation will take is unpredictable, and the exact content of the agreement is unknown at the time that the parties decide to sign it.
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Once everyone understands why the LSP approach is desirable, it is time to put it into practice. The first thing needed is a reliable, well-reasoned, repeatedly tested model of the contract for the intended purchase. Standard models or templates are by no means sufficient; each company has its own particular needs, strengths, and weaknesses, and the legal advisor has to take all of them into account, tailoring the contract to the client like a custom-made suit or—even better given the contract's protective function—a suit of armor.
The lawyers must draft the model in collaboration with the procurement department and the "internal client" department that wants to purchase theproduct or service. To be most effective, the lawyers should gointo the field to understand, to the best of their ability, the internal client's requirements asdescribed in the technical documentation, or even to cooperate in drafting that documentation. Even if they do not have technical expertise, legal professionals can be helpful in drafting technical documentation becausethese documents often regulate some aspects of the relationship between the parties, and these are "contractual contents" in their own right.
Legal Aspects of Purchasing and Supply Chain Management: Second Edition
In these cases, the guidance of a professional with experience in contract drafting can be valuable. For example, a technician may understand enough to write in the technical specification " maintenance corridors are needed and included in the scope of the purchase. The lawyer's detailed study is useful not only because it ensureshigher-quality technical documentation but also because it allows the lawyer to draft a contract that reflects the particulars of the product or service and ensures that the buyer's specific requirements will be met.
Once the model contract is ready, the buying company provides it to potential suppliers and informs them that it will serve as the basis of any future transactions between them. Suppliers may, and will, of course,propose amendments to the model. But the party making the investment has every right to maintain maximum control over the deal; in other words, the one "who pays the piper calls the tune. Proposals to amend the model should be subjected to a preliminary examination by both the procurement managers and the lawyers, so that the latter can advise the former on the potential impact of any proposed amendments.
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Amendments that are utterly unacceptable may be brought to the attention of the supplier, thereby granting the supplier the chance to change its mind. To sum up, with LSP there are two stages or cycles of communication about the contract terms between the buyer and potential suppliers:. This procedure is nothing like traditional contract negotiations. Examining the proposals of a handful of potential suppliers only twice is much less work than sending a draft back and forth between the chosen supplier and the buyer, again and again, as typically happens.
The working environment is also much different. For example, the traditional process often is very stressful because once selected, the supplier is unwilling to be flexible during the subsequent contract negotiations. Meanwhile, internal clients often do not understand why the procurement department is "wasting time" on a formality like the contract when the price has been agreed upon and the product is satisfactory from a technical standpoint.
When the LSP protocol is followed, stress is reduced because the contract terms are agreed on before the supplier is chosen and there is no long, drawn-out negotiation.
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Once all of the required information from the potential suppliers have been gathered, it is time for what can be referred to as a "degree" assessment of the offers; that is, the assessment is based on all three considerations: technical, commercial, and legal. The legal advisor should provide the negotiation team with the necessary information to understand the practical effects of the legal terms. Negotiators need to understand how each supplier's proposal is different from the company'smodel andhow each proposal is different from the others.
To make it clear, a simple report in the form of a table would be prepared for each potential supplier's offer. In the first column, there could be anindication of the amended article, and in the second column, there could be a description of each amendment. In the third column, the risks associated with each amendment would be assigned a severity level according to an agreed-upon scale for example, from 1 to 4 or from red to green. These risks would then be described in the fourth column. The last columnwould indicate how commonly the proposed amendment appears within the proposals being considered.
This last column would be filled in after comparing all of the proposals. Figure 1 provides an example of the proposed table. The first and second columns of the report help to explain how far from the optimum, which is represented by the company's model contract, each offeror is and to compare offerors on a "quantitative" basis; that is, the number and type of amendments.
The third column is the core of the assessment, whichallowsusers to appreciatehow risky each offer is, taking into consideration both the probability of and the potential harm from a risk event. Judging the offers on the basis of the third and fourth columns provides a "qualitative" comparison of them. Both the quantitative and qualitative aspects should be considered together in order to gain a complete picture. In addition to facilitating a comparison of offerors' proposals, this kind of report can provide feedback to the drafters of the model.
For example, looking at the fourth "risk" and last "recurrence" columns, if a certain risk appears in every proposal, then that risk is probably intrinsic to the operation. Here is another example involving the "recurrence" column. If a term is unanimously refused or framed differently, it is probably because of a certain feature of the suppliers' industry or trade sector.
Insisting on the original formulation of the clause to maximize protection for the buyer does not make any sense in such cases and risks hindering the company's activity. Suppliers usually have more expertise in regard to their own products and services than purchasers do. Marine A. Alexander Blackman. The Code of Capital. Katharina Pistor. The Daily Telegraph Tax Guide David Genders. East West Street. Philippe Sands. The Secret Barrister. Your review has been submitted successfully. Not registered? Forgotten password Please enter your email address below and we'll send you a link to reset your password.
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