The early days of the pandemic brought about the ultimate legal declaration from many supply chain players: force majeure.
This "act of God" term holds harmless a supplier who cannot fulfill their contracts due to traditional supply disruptions like fires, floods, storms and other events considered beyond the reasonable control of the party.
Most force majeure clauses are written thinly, covering the standard disruption. Few identified pandemics as a condition.
The interpretation of COVID-19 as an act of God is the crux of many legal battles involving purchase order terms and conditions.
Purchase orders, sales orders and ironclad terms
At one time, the legal dispute was called "battle of the forms." How did the buyer’s purchase order line up with the supplier’s sales order, and which terms needed to be reconciled or renegotiated?
I worked for several companies with large legal departments that assumed their terms and conditions were ironclad. The back of the standard purchase order had company-generated boilerplate in microscopic font. There were additional terms on the front of the PO, and some were even in red, which made them super terms, overriding standard terms. Even the signature line identified the law of agency over the buyer’s name.
It was all quite tidy and legal. I don’t ever recall a supplier objecting.
On the supplier side, clerical staff stapled the sales order to the purchase order and filed them away, never to be seen again. The document might have been checked to reconcile a price discrepancy or delivery date, but not much further. Once, when the clerk found another job, the sales orders went directly into the recycling bin, demonstrating their importance to the company.
Our legal obligation to contracts
In our current times, buyers are scrambling to keep supply lines open, factories humming and customers at least partially satisfied. Buyers and suppliers alike are working to creatively solve supply problems, often putting legal terms and conditions aside for now.
But we cannot ignore terms and conditions, no matter the business environment.
Article 2 of the Uniform Commercial Code is the overriding legal doctrine covering the normal interactions between a buyer and seller, one that we all work under. Purchasing professionals operating under the UCC are granted powers of agency and fiduciary responsibility.
There very well may be legal entanglements in which we may not be the primary litigants but tangential ones, such as a case where our customer sues one of our suppliers for anything from a missed delivery to a product safety issue.
4 ways to protect ourselves
Review current terms and conditions
Read and understand your company’s purchase order terms and conditions. If necessary, seek company or outside legal advice to gain a complete understanding.
Look past force majeure into such areas of jurisdiction, warranty, inspection, indemnification and title of goods. Your signature on a purchase order or contract, and even your verbal agreement, carries with it responsibilities under the law. It’s best to understand what those responsibilities are.
Be sure your suppliers have a copy
Traditionally, every PO had terms and conditions on the back. These days, with automated systems and workflow, actual paper documents are few and far between.
Be sure that each supplier has your company’s current terms and conditions and acknowledges their receipt. An annual mailing of a hard copy or an electronic distribution is important. Be sure to include a confidentially agreement — an often-overlooked document.
Reconcile terms and conditions from critical suppliers
Consider the review a way to reduce supply chain risk. There may be odious terms present that need to be negotiated. Identify key second tier suppliers, as well, for conflicting or missing contract terms.
Reconcile force majeure and other contract terms to meet business reality
There is often benign neglect, when it comes to terms and conditions. One can be sure that pandemics will be added to force majeure clauses going forward. What other factors need to be added to contracts to make them relevant? Review them yearly.
When the dust from COVID-19 supply chain disruptions settles down, the winners will be the buyers and suppliers that embraced workarounds with resourcefulness and creativity to ensure continuity of supply.
I like to think that just about any issue can be worked out between reasonable people acting in good faith. But not all.
This story was first published in our weekly newsletter, Supply Chain Dive: Procurement. Sign up here.