In the automotive industry, customers deal with supplier problems every day. Most such problems are resolved at the business level, but when they escalate, legal issues of contract formation and interpretation inevitably play a central role.
Mistakes made at contract formation can be harmful to a company trying to maintain consistent supply and avoid production shutdowns. A properly structured contract can help customers avoid these "purchasing pitfalls."
First and foremost, a supply contract should clearly state that the customer's terms and conditions govern the supply relationship. Failure to do so can result in a "battle of the forms," in which the terms of the supply contract are ambiguous and a court is left to decide which terms are part of the contract.
One of the key terms is quantity. The Uniform Commercial Code provides that a contract for the sale of goods will only be enforced to the quantity stated. Whether the contract states a specific quantity or sets forth quantity as a percentage of requirements, the parties' intent should be clearly expressed. Another common area of dispute is raw material costs. When such costs rise, suppliers typically seek to pass those rising costs on to customers. A contract that specifically addresses raw material costs may avoid many of these disputes.
Finally, the supply contract should clearly set forth the parties' rights regarding termination and their obligations in the event of termination. For example, what is the customer's obligation to pay for the supplier's raw material and work in process? A supply contract that specifically answers this question provides clarity when the contract is terminated.
Not every supplier dispute can be foreseen, but careful drafting of the supply agreement puts the customer in the best position to prevail when disputes arise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
