What small companies need to be aware of when landing a deal with a larger, well-known international customer.
“An agreement is being negotiated between a multinational company and a much smaller supplier of parts, specialty items, raw materials, or services. The challenge for the supplier is to protect itself in a relationship where its partner has overwhelming negotiating leverage.”
Editor;’s note this is part two of a three part series on negotiating a deal. Part one :Negotiating and Surviving the Business Deal of a Lifetime
An agreement is being negotiated between a multinational company and a much smaller supplier of parts, specialty items, raw materials, or services. The challenge for the supplier is to protect itself in a relationship where its partner has overwhelming negotiating leverage.
This imbalance in bargaining power is oftentimes clear at the outset with the larger party’s presenting the supplier with a standard form contract.
Understandably, large companies, which engage many suppliers, have a genuine interest in maintaining consistent contractual terms. Practically speaking, they simply cannot deal with having to manage multiple and diverse contract administration rules, termination provisions, applicable laws and forums, etc.
Consequently, they, normally, will take the lead in contract drafting and often provide the supplier a Master Supply or Service Agreement (with individual Statements of Work to follow) in PDF format, ready for signature.
But suppliers are not without recourse to try to make contract terms that favor the larger company less onerous.
Depending on how critical it is for the customer to secure the supplier’s goods or services, the supplier may have sufficient bargaining leverage to adapt the proposed agreement to its own legal requirements.
Under Master Agreements, it is normally the case that the responsibility for the quality, validity, accuracy, and timeliness of a performance rests entirely on the supplier.
To help mitigate the risks associated with undertaking this commitment, the supplier may want to advocate for a more collaborative relationship whereby the larger customer provides equipment, personnel and data to the supplier and that such contributions would be made in a timely manner.
Ordinarily, the customer will want to have the last word on the supplier’s personnel assigned to provide services under the contract, including the right to demand substitution.
In that case, the supplier should try to include language in its agreement that tries to limit the discretion of the customer to act arbitrarily, which could disrupt the supplier’s workforce management, and to ensure that demands for personnel changes are tempered by the standard of commercial reasonableness.
Finally, in a contract with a long-life cycle, a customer may, at some point, want to change the scope of the deliverables.
Such changes could impact, among other things, upon the amount of product or scale of services being supplied, deadlines for delivery, and pricing.
Implementing such “change orders”
Implementing such “change orders” could involve a substantial amount of planning, designing, research, and sourcing management on the part of the supplier, so the agreement with the larger customer should include a detailed change order provision that would lay out how changes in deliverables are requested, and the procedures that will govern how the supplier should address such change order requests.
For example, if implementing a change order requires the supplier to expend more than a minimal effort, the contract should include a provision that can help determine if the supplier should be entitled to extra compensation and the amount of that extra compensation.
Even if a change order provision is accepted by the customer, the parties may still end up disagreeing on the scope of the changes contemplated and their impact upon the price of deliverables and the terms of their delivery.
As such, the agreement should also include, as part of any change order procedure, a review and appeals process so that disputes that may arise concerning proposed changes in the commercial terms of the relationship can be resolved without requiring one party or the other to declare a breach of the agreement.
A similar review process should be set up for any disputes having to do with invoicing.
Next: Confidentiality and Intellectual Property