Contracts with Suppliers Assigning Contractual Risks, Navigating - - PowerPoint PPT Presentation

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Presenting a live 90-minute webinar with interactive Q&A

Negotiating Long-Term Requirements Contracts with Suppliers

Assigning Contractual Risks, Navigating Differing Court Interpretations of UCC Section 2-306

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, APRIL 13, 2016

Huu Nguyen, Partner, Squire Patton Boggs, New York Sarah K. Rathke, Partner, Squire Patton Boggs, Cleveland

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Long-Term Requirements Contracts with Suppliers

Drafting, Negotiation and Enforcement Challenges Sarah Rathke Esq. & Huu Nguyen, Esq.

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About the Speakers

• Huu Nguyen, Partner

Squire Patton Boggs, New York, huu.nguyen@squirepb.com

• Huu is a deal lawyer, focusing his practice on commercial and corporate

transactions in the technology and media space. He counsels and assists clients with complex commercial arrangements, strategic relationships, financial regulatory matters, privacy and security matters, licensing, outsourcing, cyber law, intellectual property rights and rights of publicity and personality. He also helps his clients with accelerator and foundry formations and associated fund formations, mergers and acquisitions, corporate governance, corporate formation and other corporate matters.

• Sarah K. Rathke, Partner

Squire Patton Boggs, Cleveland, sarah.rathke@squirepb.com

• Sarah is a trial lawyer whose practice focuses on supply chain disputes. She

also advises clients on supply chain compliance issues, corporate social responsibility issues in the supply chain, and working with NGOs on supply chain

• issues. Sarah is co-author of the 2016 treatise, Legal Blacksmith: How to Avoid

and Defend Supply Chain Disputes, and is a frequent speaker on supply chain topics.

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Resources

• http://www.globalsupplychainlawblog.com/
• Sarah’s Book:
• Legal Blacksmith: How to Avoid and

Defend Supply Chain Disputes

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Overview

• This talk will address issues from the Buyer’s perspective and its

requirements, and not from the Supplier’s perspective

• Address common scenarios/challenges
• Allocation of risk is ultimately based on leverage
• Take into account number of suppliers, integration points, exclusivity or not

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Overview

• Outline of Talk:
• Overview
• UCC §2-306
• Minimum quantities
• Expected and estimated purchase levels
• Price escalations
• Reduction and excused performance
• Scheduled delays
• Changes to lead time
• Amendments and variations
• Avoiding and/or addressing contractual and enforcement pitfalls

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Overview

• We will focus on supply, delivery time, and pricing controls
• We won’t focus on these things, but they all play a role in long term supply

agreements in general:

• Cooperation, dispute resolution, audit, project management
• Indemnification, limitations of liability, warranties, insurance
• Flow downs to sub-suppliers, contractors
• Partnership vs. Contractors

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Overview

• Risk and commitment sit on a spectrum
• From Buyer’s Perspective

No commitment to supply/purchase certain amounts (PO by PO basis) AND seller has flexibility in pricing and delivery Promise to purchase all products supplied by seller AND seller has flexibility in pricing and delivery No commitment to supply/purchase certain amounts (PO by PO basis) AND no flexibility in pricing

• r delivery

Promise to supply all products needed by buyer AND buyer has flexibility in pricing and delivery Commitment Risk

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Overview

• What are the benefits with long-term requirements contracts?
• Certainty, certainty, certainty
• Locked in supply and price
• Locked in Buyer/Seller
• Long-term relationship permits more flexibility in negotiating bespoke terms

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Overview

• What are the legal risks with long-term requirements contracts?
• More risk of breaches by either party because buyer can’t produce goods or

seller no longer has static needs – or when the economics of the deal change

• More risk of upstream breaches by sub-suppliers

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Overview

• How can businesses best mitigate risk when drafting and negotiating long-

term requirements contracts?

• That’s what this talk is about!

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UCC § 2-306

• § 2-306. Output, Requirements and Exclusive Dealings.
• (1) A term which measures the quantity by the output of the seller or the

requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

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UCC § 2-306

• Commentary:
• 1. Subsection (1) of this section, in regard to output and requirements, applies

to this specific problem the general approach of this Act which requires the reading of commercial background and intent into the language of any agreement and demands good faith in the performance of that

• agreement. It applies to such contracts of nonproducing establishments

such as dealers or distributors as well as to manufacturing concerns.

• 2. Under this Article, a contract for output or requirements is not too

indefinite since it is held to mean the actual good faith output or requirements of the particular party. Nor does such a contract lack mutuality

• f obligation since, under this section, the party who will determine quantity

is required to operate his plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his

• utput or requirements will approximate a reasonably foreseeable figure. …

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UCC § 2-306

• Buyers in requirements contracts must use good faith in defining what

their requirements are. Attempts to stockpile products beyond a buyer’s actual requirements – whether in anticipation of a contract ending or a price increase – constitute bad faith. Enzo Biochem, Inc. v. Affymetrix, Inc., 2013 U.S. Dist. LEXIS 18599 (S.D.N.Y. Dec. 6, 2013).

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UCC § 2-306

• Law is not settled on whether a requirements contract would be found

enforceable if it were a non-exclusive arrangement.

• Majority view is that valid requirements contract requires that the buyer and

seller agree implicitly or explicitly to an exclusive commercial relationship.

• But, a minority view does not require exclusivity: General Motors Corp. v.

Paramount Metal Products Co., 90 F. Supp. 2d 861, 873-74 (E.D. Mich. 2000) (distinguishing section 2-306(1) from 2-306(2) and asserting that all requirements contracts may not be exclusive in nature); Hoover's Hatchery,

• Inc. v. Utgaard, 447 N.W.2d 684, 688 (Iowa App. 1989) (“Nothing in the

statutory language of section [2-306], or in the official comments to that section, suggests that exclusivity is a prerequisite to the establishment of a requirements contract").

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UCC 2 vs CISG

• For the international sale of goods, the Convention on the International Sale
• f Goods (CISG) may apply unless disclaimed
• Our discussion will focus on UCC 2 and US contract law and not CISG
• UCC 2 covers the sales of goods
• All 50 states have enacted some version of UCC 2
• Our talk will focus mainly on UCC § 2-306, but other sections also apply and

we will discuss those briefly

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Minimum quantities

• A minimum quantity requirement puts a floor on what Buyer is willing to order

and Supplier is willing to supply

• Typical for sophisticated parties – maximum quantities are too
• Minimum quantities can be expressed as actual quantities, percentage of

Supplier’s production, etc.

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Minimum quantities

• Example Requirements Clause with Minimum Quantities:

Purchase and Sale. Subject to and in accordance with the terms and conditions of this Agreement, during the Term, Buyer shall purchase from Supplier, and Supplier shall manufacture and sell to Buyer, 100 percent of Buyer’s requirements for the Goods (the “Requirements”). At a minimum, the Requirements shall require supplier to manufacture and Buyer to purchase 50 Goods per month.

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Expected and estimated purchase levels

• Forecasting in business is common; common to communicate forecasts to

suppliers

• Forecasts are communicated in a variety of ways
• Can create binding contractual obligations; specify clearly whether forecasts

are intended to be binding

• Suppliers may expend costs based on forecasts and estimates

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Expected and estimated purchase levels

• 6th Circuit: Court held buyer’s forecast was binding because goods were

specially manufactured for the buyers, and because the buyer knew that the product price was calculated based on anticipated order quantity. Detroit Radiant Products Company v. BSH Home Appliances Corporation, 473 F.3d 623, 61 U.C.C. Rep. Serv. 2d (Callaghan) 701 (6th Cir. 2007).

• In Georgia, court limited buyer’s damages to the amount of purchases buyer

forecasted to the supplier, reasoning that because the buyer knew that the supplier relied on the forecasts, the buyer’s forecasts were binding, and additional damages were not legally supported. Scovill Fasteners, Inc. v. Northern Metals, Inc., 303 Ga. App. 246, 692 S.E.2d 840, 71 U.C.C. Rep. Serv. 2d (Callaghan) 263 (Ga. App. 2010).

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Expected and estimated purchase levels

• The parties may also create limits on the quantities to be sold in a

requirements contract by stating an estimate. If they do, they will not be

• bligated to supply an unreasonably disproportionate quantity above

that estimate per UCC § 2-306(1), although the buyer still may reduce its purchases to zero, constrained only by good faith, even with a stated

• estimate. Canusa Corp. v. A & R Lobosco, Inc., 986 F. Supp. 723, 728-29

(E.D.N.Y. 1997).

• It is unwise to define the phrase "unreasonably disproportionate" in UCC §

2-306(1) in terms of rigid quantities. Instead, when construing the phrase, the following factors should be considered: (1) the amount by which the requirements exceeded the contract estimate; (2) whether the seller had any reasonable basis on which to forecast or anticipate the requested increase; (3) the amount, if any, by which the market price of the goods exceeded the contract price; (4) whether such an increase in market price was itself fortuitous; and (5) the reason for the increase in requirements. Orange & Rockland Utilities, Inc. v. Amerada Hess Corp., 59 A.D.2d 110, 397 N.Y.S.2d 814, 1977 N.Y. App. Div. LEXIS 12466 (N.Y. App. Div. 2d Dep't 1977).

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Expected and estimated purchase levels

• Example definitions
• Quantity. Supplier will provide Buyer with 100 percent of Buyer’s requirements for

the Goods, whereas: (a) such quantity includes Buyer’s production, replacement, and Inventory Bank requirements of the Goods; (b) throughout the Term, Supplier shall maintain the capacity and availability to supply Buyer’s peak daily, weekly, and annual requirements of Goods (as communicated by Buyer to Supplier in Purchase Orders or Releases); (c) throughout the Term, Supplier shall, at its sole expense and risk, maintain an Inventory Bank; (d) from time-to-time, Buyer may, but shall not be required to, provide Supplier with Forecasts. Forecasts are for informational purposes only and do not create any binding obligations on behalf of either Party;

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Price escalation

• Buyer would want right to lower prices
• Supplier would want right to raise prices
• But price escalation upwards is issue for Buyer
• Buyer usually asks for a price lock

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Price escalation

• § 2-305. Open Price Term.
• (1) The parties if they so intend can conclude a contract for sale even though the

price is not settled. In such a case the price is a reasonable price at the time for delivery if

• (a) nothing is said as to price; or
• (b) the price is left to be agreed by the parties and they fail to agree; or
• (c) the price is to be fixed in terms of some agreed market or other standard as

set or recorded by a third person or agency and it is not so set or recorded.

• (2) A price to be fixed by the seller or by the buyer means a price for him to fix in

good faith.

• (3) When a price left to be fixed otherwise than by agreement of the parties fails

to be fixed through fault of one party the other may at his option treat the contract as cancelled or himself fix a reasonable price.

• (4) Where, however, the parties intend not to be bound unless the price be fixed
• r agreed and it is not fixed or agreed there is no contract. In such a case the

buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.

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Price escalation

• In breach-of-contract action by buyer for defendant seller's failure to ship full

quantity of rayon rejects ordered by buyer, court held (1) that parties' failure to fix price of rejects was covered by UCC § 2-305(1) and Official Comment 1, under which price was "reasonable price" that was equivalent to market price; (2) that since buyer had ordered up to 3,000 tons of rejects based on its customer's estimated requirements for forthcoming year, such amount--under requirements quantity-term, "gap-filler" provisions of UCC § 2-306(1)--established basis for measuring buyer's damages for lost profits; and (3) that shipments to other buyers, which included prices, could be used under UCC § 2-305(1) to establish reasonable market price of goods that should have been shipped to buyer. Pulprint, Inc. v. Louisiana-Pacific Corp., 124 Misc. 2d 728, 477 N.Y.S.2d 540, 1984 N.Y.

• Misc. LEXIS 3322 (N.Y. Sup. Ct. 1984).

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Price escalation

• Example of Pricing Control Provisions:
• Price. The prices for the Goods shall be the prices set forth on Schedule 1

attached hereto (“Prices”). All Prices include, and Seller is solely responsible for, all costs and expenses relating to packing, crating, boxing, transporting, loading and unloading, customs, Taxes, tariffs and duties, insurance and any

• ther similar financial contributions or obligations relating to the production,

manufacture, sale and delivery of the Goods. All Prices are firm and are not subject to increase for any reason, including changes in market conditions, increases in raw material, component, labor or overhead costs or because of labor disruptions[, changes in program timing or length,] or fluctuations in production volumes.

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Price escalation

• Most Favored Customer (MFC) protection
• E.g., match to best price the Seller offers to other buyers
• Sellers often qualify as best price for similar buyers
• How to prove best price for similar buyers?

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Price escalation

• Example of MFC:

Most Favored Customer. Seller represents and warrants that [each of] the Prices set forth on Schedule 1 is at least as low as the price charged by Seller to other buyers for the same Goods or similar goods. If, at any time during the Term, Seller charges any other Buyer a lower price for the same Goods or similar goods, Seller shall apply that price to all same or similar Goods under this Agreement. If Seller fails to apply the lower price, Buyer may, at its option, in addition to all of its other rights under this Agreement or at Law, terminate this Agreement without liability. The Parties shall reflect any adjustment to pricing under this Section in an amendment to Schedule 1; provided, however, that, notwithstanding anything to the contrary contained in this Agreement, the execution and delivery of any such amendment by each of the Parties will not be a condition to the effectiveness of such price adjustment.

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Price escalation

• If Seller has right to escalate price, Buyer should put a collar or limit in
• Only for when conditions occurs, such as increase in costs not otherwise accounted

for by the parties, or change in requirements from customers

• Collar around increase
• Tie to Force Majeure and right for Customer to terminate

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Schedule delays

• Do parties have interlocking obligations?
• Does Buyer need to submit orders by certain dates with certain details?
• Does Buyer need to provide details for manufacture of goods?
• What options does Buyer have if Supplier delays?

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Schedule delays

• § 2-311. Options and Cooperation Respecting Performance.
• (1) An agreement for sale which is otherwise sufficiently definite (subsection

(3) of Section 2-204) to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness.

• (3)Where such specification would materially affect the other party's

performance but is not seasonably made or where one party's cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party in addition to all other remedies

• (a) is excused for any resulting delay in his own performance; and
• (b) may also either proceed to perform in any reasonable manner or after

the time for a material part of his own performance treat the failure to specify or to cooperate as a breach by failure to deliver or accept the goods.

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Schedule delays

• From UCC Comments on § 2-311:
• Subsection (3) applies when the exercise of an option or cooperation by one

party is necessary to or materially affects the other party's performance, but it is not seasonably forthcoming; the subsection relieves the other party from the necessity for performance or excuses his delay in performance as the case may be. The contract-keeping party may at his option under this subsection proceed to perform in any commercially reasonable manner rather than wait.

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Schedule delays

• § 2-612. “Installment Contract”; Breach

(1) An “installment contract” is one which requires or authorizes the delivery

• f goods in separate lots to be repeatedly accepted, even though the

contract contains a clause “each delivery is a separate contract” or its equivalent. (2) The buyer may reject any installment which is non-conforming if the non- conformity substantially impairs the volume of that installment and cannot be cured …; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment. (3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

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Schedule delays

• Examples of Delivery Clause with Time of the Essence:
• Shipment and Delivery Requirements. Time, quantity and delivery to the

Delivery Location are of the essence under this Agreement. Seller shall procure materials for, fabricate, assemble, pack, mark and ship Goods strictly in the quantities, by the methods, to the Delivery Locations and by the Delivery Dates, specified in this Agreement or in an applicable Purchase Order or Release. Delivery times will be measured to the time that Goods are actually received at the Delivery Location.

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Schedule delays

• Example of Delay Protections Clause:

Duty to Advise. Supplier shall promptly provide written Notice to Buyer of any

• f the following events or occurrences, or any facts or circumstances

reasonably likely to give rise to any of the following events or occurrences: (a) any failure by Supplier to perform any of its obligations under this Agreement; (b) any delay in delivery of Goods; (c) any defects or quality problems relating to Goods; (d) any change in Control of Supplier; (e) any deficiency in Buyer specifications, samples, prototypes, or test results relating to this Agreement; or (f) any failure by Supplier, or its subcontractors or common carriers, to comply with Law.

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Changes to lead time

• A lead time is the latency between the initiation and execution of a process.

Lead time between the placement of an order and delivery

• If time is of the essence (as stated in agreement or otherwise) and there is

no slack in the lead time for Seller, costumer can claim breach

• Failure in lead time can cause cascading failure at critical integration points

in the supply chain

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Changes to lead time

• Seller obligation to account for interruption
• Seller obligation to give notice of potential delay
• Limit excuse for Sellers under a Force Majeure clause

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Changes to lead time

• § 2-309. Absence of Specific Time Provisions; Notice of Termination.
• (1) The time for shipment or delivery or any other action under a contract if

not provided in this Article or agreed upon shall be a reasonable time.

• (2) Where the contract provides for successive performances but is

indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.

• (3) Termination of a contract by one party except on the happening of an

agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

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Changes to lead time

• Example of Delay Protections Clauses:

Protection Against Supply Interruptions. Seller shall, at Seller’s sole cost and expense, take such actions as are necessary or appropriate to ensure the uninterrupted supply of Goods to Buyer for not less than [NUMBER] days during any foreseeable or anticipated event or circumstance that could interrupt

• r delay Seller’s performance under this Agreement, including any labor

disruption, whether or not resulting from the expiration of Seller’s labor contracts (and whether or not such occurrence constitutes a Force Majeure Event hereunder). Seller shall notify Buyer at least [NUMBER] days before the termination or expiration of any collective bargaining or other labor agreement that relates to Seller’s Personnel involved in the production or delivery of the Goods.

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Amendments and variations

• Mandatory Change (e.g., by notice)
• Change due to change in law, emergencies, recalls
• Changes due to change in design; firming up inadequate specs; downstream

recalls,

• Optional Changes (e.g., by amendments)
• Process to negotiate in good faith changes or variations to Master Supply

Agreement

• Exception to exclusivity if Seller can't supply or Buyer can’t buy
• Buyer termination right if agreement cannot be met
• Cost issues:
• Who should bear costs of changes?
• Party that asks for the changes or party that causes the need for the change?

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Amendments and variations

• Example of Change Control Procedures:

Certain Changes. Seller shall promptly make any changes Buyer directs in writing with respect to the Goods, which may include changes in the design, drawings, specifications, processing, inspection, testing, quality control, methods of packing and shipping or the date or place of delivery. Any changes pursuant to this Section will not affect the Price or time for delivery of Goods unless (i) within [NUMBER] days after Buyer’s notice to Seller of the change, Buyer receives from Seller written Notice of a claim for adjustment with all sufficient information and documentation regarding Seller’s costs and production timing resulting from such changes to allow Buyer to perform an audit and verify such claim, and (ii) after auditing and verifying such claim, the results of such audit indicate that, in order to implement such Buyer-requested changes, Seller’s actual out-of-pocket costs increased by a material amount or that implementing such changes reasonably and appropriately caused a delay in the Delivery Date of any affected Goods. Seller may increase the Prices hereunder in a per-unit amount solely to the extent necessary to compensate Seller for such commercially reasonable cost increases (but not to allow for any additional margin). If Buyer’s audit and verification results indicate that Seller’s costs have or should have actually decreased, the Prices hereunder shall be deemed decreased on a per-unit basis to reflect the amount of any such cost savings. Nothing in this Section, including any disagreement with Buyer as to any adjustment in price or time for performance, will excuse Seller from proceeding with this Agreement as changed.

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Reduction and excused performance

• If no minimum quantity specified, Buyer can just simply stop submitting

purchase orders or Seller can simply stop accepting purchase orders

• Even if minimum quantity specified, Force Majeure Events may give rise to

reduction

• Agreement should account for what happens if there is a reduction or

termination

• Buyer will want certainty when there is a reduction in demand for Goods

(either through Seller’s request or Buyer’s request)

• Buyer will want a smooth transition when reducing, suspending or

terminating a relationship

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Reduction and Excused Performance

• Good faith, rather than estimate stated in contract, applied in determining

whether seller breached contract by reducing output; output agreement is not transformed into fixed quantity contract by insertion of estimate. Canusa

• Corp. v A & R Lobosco, 986 F. Supp. 723, 1997 U.S. Dist. LEXIS 19402

(E.D.N.Y. 1997).

• Buyer was not in breach of a requirements contract, assuming one existed,

because it ceased ordering from a seller in good faith when the buyer's own customer ended its ordering; a good-faith termination by the buyer in a requirements contract will excuse further performance. Goaltex Corp. v Association for the Blind & Visually Impaired, 979 N.Y.S.2d 481, 2014 NY Slip Op 24007, 2014 N.Y. Misc. LEXIS 22 (N.Y. Sup. Ct. 2014).

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Reduction and excused performance

• § 2-615. Excuse by Failure of Presupposed Conditions.
• Except so far as a seller may have assumed a greater obligation and subject

to the preceding section on substituted performance:

• (a) Delay in delivery or non-delivery in whole or in part by a seller who

complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

• (b) Where the causes mentioned in paragraph (a) affect only a part of the

seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

• (c) The seller must notify the buyer seasonably that there will be delay or

non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

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Reduction and excused performance

• § 2-616. Procedure on Notice Claiming Excuse.
• (1) Where the buyer receives notification of a material or indefinite delay or

an allocation justified under the preceding section he may by written notification to the seller as to any delivery concerned, and where the prospective deficiency substantially impairs the value of the whole contract under the provisions of this Article relating to breach of installment contracts (Section 2-612), then also as to the whole,

• (a) terminate and thereby discharge any unexecuted portion of the contract;
• r
• (b) modify the contract by agreeing to take his available quota in substitution.
• (2) If after receipt of such notification from the seller the buyer fails so to

modify the contract within a reasonable time not exceeding thirty days the contract lapses with respect to any deliveries affected.

• (3) The provisions of this section may not be negated by agreement except in

so far as the seller has assumed a greater obligation under the preceding section

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Reduction and Excused Performance

• In action by buyer for breach by seller of contract for sale of 11,000 pairs of

combat boots, where (1) buyer had contract to resell boots to Government of Ghana (2) seller agreed to manufacture boots in Korea and deliver them to Ghana, and (3) en route from Korea to Ghana via United States, boots were destroyed in train derailment in Nebraska …

• Court held Seller was not excused from performance under UCC § 2-615(a),

in that (a) it failed to prove that contingency (train derailment) that made performance commercially impracticable was not foreseeable at time contract was made, and (b) parties' contract did not contain specific, exculpatory language excusing nonperformance in event of train derailment. Bende & Sons, Inc. v. Crown Recreation, Inc., Kiffe Products Div. (1982, ED NY) 548 F Supp 1018, 34 UCCRS 1587, affd without op (1983, CA2 NY) 722 F2d 727 (apparently applying UCC as rule of federal common law).

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Reduction and excused performance

• Example of Force Majeure Clause:

Force Majeure. Any delay or failure of either Party to perform its obligations under this Agreement will be excused to the extent that the delay or failure was caused directly by an event beyond such Party’s control, without such Party’s fault or negligence and that by its nature could not have been foreseen by such Party or, if it could have been foreseen, was unavoidable (which events may include natural disasters, embargoes, explosions, riots, wars or acts of terrorism) (each, a “Force Majeure Event”). Seller’s financial inability to perform, changes in cost or availability of materials, components or services, market conditions or Seller actions or contract disputes will not excuse performance by Seller under this Section. …

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Reduction and excused performance

• Example of Force Majeure Clause Continued:

… During any Force Majeure Event, Buyer may, at its option (a) purchase goods similar to the Goods from other sources without liability to Seller (and all such goods will be deemed to be Goods purchased under this Agreement for purposes of satisfying any quantity requirements applicable to Buyer hereunder), and require Seller to reimburse Buyer for any additional costs to Buyer of obtaining the substitute goods compared to the Prices for such Goods under this Agreement, (b) require Seller to deliver to Buyer all finished Goods, work in process or parts and materials produced or acquired for work under this Agreement, or (c) require Seller to provide Goods from other sources in quantities and at a time requested by Buyer and at the Prices for the Goods

• hereunder. …. If the delay lasts more than such [NUMBER]-day period, or if

Seller does not provide such adequate assurances, Buyer may immediately terminate this Agreement without any liability to Seller.

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Reduction and excused performance

• Example of Force Majeure Clause Continued:

… Seller shall give Buyer prompt written notice of any event or circumstance that is reasonably likely to result in a Force Majeure Event, and the anticipated duration of such Force Majeure Event. …The rights granted to Seller with respect to excused delays under this Section are intended to limit Seller’s rights under theories of force majeure, commercial impracticability, impracticability or impossibility of performance, or failure of presupposed conditions or otherwise, including any rights arising under Section 2-615

• r 2-616 of the UCC.

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Reduction and excused performance

• Example of Termination:

Buyer’s Right to Terminate for Cause. Buyer may terminate this Agreement, by providing written Notice to Seller: ... if Seller takes any action, or fails to take any action, required under this Agreement or any other agreement between Buyer and Seller, or as reasonably requested by Buyer, the result of which is any imminent interruption

• r delay, or the threat of an imminent interruption or delay, in any production at

any of Buyer’s or its customer’s manufacturing facilities;

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Avoiding and/or addressing contractual and enforcement pitfalls

• Communicate expectations
• Internal flow-through of information across departments/functions
• Avoid inadvertent contract waivers

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Avoiding and/or addressing contractual and enforcement pitfalls

• § 2-209. Modification, Rescission and Waiver.

(1) An agreement modifying a contract within this Article needs no consideration to be binding. (2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party. (3) The requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified is within its provisions. (4)Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver. (5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

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Avoiding and/or addressing contractual and enforcement pitfalls

• Example No Oral Modification or Waiver Clause:

This Agreement may not be modified, waived, or rescinded other than by a writing executed by both parties. No verbal communication, representation, conduct, course of performance, course of dealing, usage of trade, or purported waiver or estoppel shall modify or alter the terms of this Agreement.