Hartford Business Journal

10 Hartford Business Journal • May 25, 2015 www.HartfordBusiness.com EXPERTS CORNER Contract legal battles brew between OEMs, suppliers By Andrew C. Glassman A new battle is emerging between origi- nal equipment manufacturers (OEMs) and their suppliers, one in which sup- pliers must pay close attention to the con- tracts they sign. Here's an exam- ple of the issue: A company has just been awarded its biggest contract ever to supply clips to Air National, whose executive vice president of pro- curement said that she and her team were impressed with the company's focus on quality. A confirmation email follows with Air National's first purchase order for 10,000 clips. This order consists of two pages. The first is an order form that specifies part numbers, pricing, volume requested and dates of delivery. The second contains Air National's terms and conditions regarding delivery site, warranty and quality stan- dards, change of specification process, product liability obligations to be imposed on the supplier and a clear expression that Air National has the right to seek recourse from the supplier for defective clips or clips that are not within specifications. The supplier immediately fires back to Air National an invoice, which contains separate terms and conditions, confirming acceptance of the order. The terms include a limitation of damages to the price paid under the contract for the parts, a limita- tion of remedy to repair or replace defective clips, a limited warranty that merely pro- vides that the clips will be manufactured to the specs within tolerance and that pro- cess or product configuration changes are subject to price negotiation. The supplier, which has confidence that the relationship with its new customer will be long and pro- ductive, never focused, or even thought about, the differences in the two sets of terms and conditions and the problems those differences could create. This scenario is repeated daily in pro- duction facilities across the country includ- ing in Connecticut. What also is occurring more frequently is OEMs, under extreme pressure from their end-user customers, asserting claims against their downstream suppliers based on quality and pricing issues. The terms and conditions that are applicable here have an enormous effect on the outcome of these legal claims. This is why it's important for suppliers to understand how the law deals with these differing sets of terms and conditions. The law describes this scenario as a "bat- tle of the forms," because the parties have crafted conflicting writings. This scenario can produce a wholly unintended contract. While a judge, jury or arbitrator may con- clude that there was no contract because the parties' minds never met on all essen- tial terms, modern commercial law allows a fact finder to determine if a contract was formed even when there are contradictory terms and conditions. Implicit in this con- clusion is that there was sufficient agree- ment to create a valid, binding contract. The biggest problem occurs when the customer's terms and conditions say the supplier can be liable for an award of dam- ages but the supplier's terms and condi- tions say the opposite. Commercial law tends to favor the customer, and the result for the supplier — liability for consequen- tial damages — can be devastating. Imagine, for a moment, that one of the parts a supplier has shipped is defective, and, as a result, the customer's assembly line is shut down until the defective part is discovered and removed. The customer's employees are called in but are idled due to the shutdown, and other parts suppliers or fabricators are halted in their work. For an error with a 15-cent part, the supplier could be facing millions of dollars of lia- bility. Consequential damage claims just like this are regularly asserted by the big volume production companies because their customers specifically impose these charges on them. Based on the supplier's failure to recog- nize, consider, and overcome the battle of forms problem at the contract formation stage, the company may be unwittingly assuming this type of liability with poten- tially disastrous results. The lesson is this: Pay attention at the con- tract stage to the battle of forms and where the terms and conditions of each party con- flicts, negotiate the best protections possible. Suppliers may not get any protections, but at least they will know what the exposures are and can plan for them accordingly — or walk away from the deal. And, of course, suppliers may achieve sufficient protection to avoid the most disastrous of consequences, and that can be enough to conclude that the rewards are worth the risk. n Andrew C. Glassman is chair of the Busi- ness and Finance practice at Hartford law firm Pullman & Comley. Contact him at aglassman@pullcom.com. Andrew C. Glassman suppliers, our business growth consultants help them see and remove waste in their pro- duction process, thus increasing their capacity to produce more. Our team of quality service providers assists with auditing standards to achieve non-inferiority. We also work with them to develop strong supply chains that con- sider a skilled workforce and new tech- nologies, such as 3D printing now being used for tooling. We don't assume that we know every pain point a supplier may be experiencing with their client or their sub- tier supplier. In order to keep abreast of their issues, we constantly obtain market intelligence and consider this informa- tion in our design for solutions. Currently, we have a "Voice of the Customer" survey being performed independently with this exact sector, including the original equip- ment manufacturers and manufacturers in three levels of supply tiers. n Q&A: Bonnie Del Conte WORKFORCE STARS BREAKFAST is the place to be … Many thanks to our sponsors: Champion Sponsor: Media Sponsor: Hartford Business Journal Gold Sponsor: Pratt & Whitney Silver Sponsors: Halloran and Sage, United Health Group Bronze Sponsors: Bill Putt; UIL Holdings; SINA — Southside Institutions Neighborhood Alliance; Whittlesey and Hadley, The Sullivan Investment Group of Wells Fargo Advisors, Hartford Public Library, Capital Community Foundation, Northeast Hartford Community Solutions Sponsorship opportunities still available. 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