I attended the ISM –New Jersey & APICS-Central Jersey Chapter joint meeting on February 5 and was able to talk Marty Carrara, the keynote presenter into allowing me to post his presentation. Carrara is commercial and transactions attorney in the pharmaceuticals industry (See more about him below). According to Marty, your contracts are core business assets, but unless you tackle the common sources of erosion, they are leaking value. On average, companies could be generating over 9% improvement to their bottom line if they tackled the commercial issues that commonly undermine contract performance. This presentation is an informative assessment of things to look out for when crafting a supplier contract.

Denise Joyner West, VP Marketing, TCGi

 

Top 10 Supplier Contract Pitfalls to Avoid

 

By Martin J. Carrara, J.D. C.P.M.
Senior Counsel, GSK

 

10. Not Including Choice of Law, Jurisdiction and DR Provisions

 

 

• Choice of law (governing law) defines which State’s laws govern the contract
• Jurisdiction defines the location of the court that will adjudicate disputes
• Dispute resolution provisions provide for how the parties will handle disputes, including management escalation/negotiation, mediation, arbitration, and in court

 

9. Not Including an Exit Plan

• Include appropriate termination provision
• Define what happens upon termination and expiration:

–Rights to IP

–Transition assistance

–Transitional services

–Work in progress

–Return of materials

–Return of confidential information

–Return of equipment

–Sell-off rights

–Other

 

8. Failure to Adequately Address IP

• The contract should address several key aspects of Intellectual Property protection:

–Define the IP involved

–Ownership rights to IP developed for us by another party

–Restrictions with respect to our IP provided to another party

–Our rights to use IP provided to us by a third party

–Appropriate protections with respect to our use of another party’s IP

–Rights/restrictions post-termination

 

7. Agree-to-Agree Provisions

• Are these provisions enforceable?
• Clearly identify the trigger for the re-negotiation
• Include objective criteria to the extent possible
• Require good-faith efforts to negotiate
• Define what happens if the parties do not reach agreement

 

6. Contract Doesn’t Reflect the Deal

• This often results from:

–Over-reliance on contract templates (without appropriate customization)

–Business clients that do not scrutinize the contract

–Lack of communication between business-owners and contract negotiators/drafters

–Contract provisions that are not practical (unable to be met)

 

5. Poorly Drafted Contract

7 C’s of Contract Drafting:

• Correct –correctly state the terms of the agreement
• Comprehensive –include all relevant terms and address all reasonably foreseeable possibilities
• Clear –avoid ambiguity and inadvertent vagueness
• Consistent –provisions should not conflict, the structure should be consistent, and words should be used consistently
• Concise –sentences should be short and easy to understand
• Client-focused –it should achieve the needs of the business and contain obligations that are practical (able to be met)
• Court-resilient –it should be able to withstand critical review by a third-party (who knows nothing about the deal)

 

4. Lack of Contract Governance

• You have heard the adage “some people make things happen, some people watch what happens, and some people wonder what happened”
• Contract governance:

–Define a governance structure and process

–Measure and monitor contract performance / include a supplier scorecard

–Implement a communications process

–Right to conduct audits and inspections

–Work cooperatively to identify and correct potential problems / have a correction process

 

3. Failure to Plan for Contingencies

• The supplier should have a business continuity plan
• You should have a business continuity plan
• The contract should define what happens when something goes wrong

 

2. Over-Focus On Risk Terms

• Risk allocation provisions (indemnification, limitations on liabilities, etc.) are important, but…
• Professors Deepak Malhotra of Harvard Business School and Fabrice Lumineau of the University of Technology in Sydney analyzed 102 contract disputes and reported their findings in a 2011 article in the Academy of Management Journal (Trust and Collaboration in the Aftermath of Conflict: The Effects of Contract Structure)

The Effects of Contract Structure

• Malhotra and Lumineau identified two main types of provisions in contracts:

–Control provisions –designed to prevent cheating and reneging through contract sanctions

–Coordination provisions

–clarify each party’s responsibilities with the goal of reducing future misunderstandings

• They found that when contracts focused more on coordination than control, parties were more likely to use a cooperative approach to resolve disputes (rather than a competitive approach)

 

1. Inadequately Defined Scope

• IACCM* research shows that lack of a clear scope is the most frequent cause of disputes, impacting around 40% of projects
• The scope is the “heart” of the contract and should clearly and comprehensively define:

–The products and services to be provided

–The obligations and rights of the parties

–All special requirements

© 2020 Martin J. Carrara, Esq.

* International Association for Contact and Commercial Management

 

 

Author Information

Marty Carrara is a commercial and transactions counsel with substantial experience negotiating and drafting complex agreements for a broad range of domestic and international business, commercial, technology and real estate transactions of substantial value, with an emphasis on procurement and supply agreements of virtually every nature. He has over 21 years of experience in the Pharmaceutical industry with Pharmacia Corp., Wyeth and Pfizer. Marty’s representative transactions include all aspects of supply and procurement, including contract manufacturing, direct materials supply, distribution, construction and capital equipment, software licensing, information and digital technology, data, outsourcing, advertising and promotion. He is a frequent author and contributor to procurement and legal supply issues, and he has been presenting legal seminars for ISM and its Affiliates for over 20 years. He is a past President of ISM – New York and a former member of the ISM Ethical Standards Committee. Marty has JD from Fordham Law and MBA and BS degrees from Wagner College. He is admitted to bar in New York and New Jersey, and is a lifetime C.P.M.