Many procurement managers and executives often inquire as to whether using a supplier scorecard is an efficient use of corporate resources or a waste of necessary manpower in today’s corporate “belt-tightening” approach to managing purchasing operations. While there is no easy answer to this question, generally, the correct answer for each individual purchasing team will likely depend upon the size of the team, the contents of the scorecard and whether the results are considered in the final decision-making process.

As many of you know, a supplier scorecard is a tool available to purchasing managers to determine the effectiveness of vendors across the supply chain. Usually, scorecards provide managers with a resource to evaluate vendors across numerous dimensions to determine if corporate goals are being achieved, while simultaneously creating a uniform process to rank the performance and capabilities of each vendor. Small to mid-size corporate purchasing teams often find the process effective, yet time-consuming, while larger teams tend to find scorecards helpful, but not considered when critical decisions are made by purchasing managers and internal stakeholders.

Supplier scorecards can be effective, regardless of the size of the corporate purchasing team, as long as the scorecard (i) meets the goals of the corporate purchasing operation, (ii) is not time-consuming or burdensome on purchasing managers and the internal stakeholders and (iii) is instrumental in the decision-making process. Purchasing teams using or contemplating using supplier scorecards should determine the purpose of the scorecard, allocate time for completion on an ongoing basis and determine how the findings will be used in selecting, retaining or terminating a supplier. With proper planning, supplier scorecards can be powerful tools that ensure that vendors are accountable and corporate purchasing spends are aligned with purchasing goals.

The governing law provision of an agreement articulates the parameters of the body of law governing any legal dispute arising under such agreement.  Therefore, the governing law provision is an important provision of an agreement, and should not be omitted.   Generally, a well constructed governing law provision addresses forum selection and choice of law.  Forum selection determines the state in which any dispute under the agreement will be litigated.  Adverse parties can utilize the choice of forum for strategic advantage during the litigation process.  In addition, by designating the choice of forum in the agreement, parties can anticipate risks, guarantee a favorable forum, and limit strategic advantage to the opposing party.  Accordingly, when drafting the agreement, it is wise to choose a state whose location and procedural laws are favorable to your position. 

Choice of law is an equally important part of a governing law provision.  This clause indicates which body of law will be interpreted by the court in the selected forum.  The choice of law clause prevents disputes over which law governs the agreement.  Without agreement by the parties on the choice of law, courts must make a complicated judicial determination for each dispute.   When making the decision as to which body of law should govern the agreement, you should choose the law of a jurisdiction that is stable, developed, and familiar.  Each of these elements, taken in concert, will likely assist your entity in a corporate dispute.

An indemnification provision can be included in an agreement to establish which party will assume liability upon the occurrence of a specified event. This provision’s importance lies in the fact that it provides additional protection to a party for the other party’s breach of its obligations under the agreement.  Events that can trigger indemnification liability include, but are not limited to, the following: breach of a representation, warranty or covenant of the agreement; negligent misconduct; and/or copyright or patent infringement.  The party agreeing to provide indemnification should consider the ramifications relating to indemnification and craft the provision in a manner that focuses on the issues as they relate to the relationship between the parties.  Ultimately, it is important to include an indemnification provision to ensure that in the event the other party breaches the agreement you have adequate recourse to recover your losses or damages.

With rising pressure to reduce supply costs occurring throughout numerous organizations, many supply chain managers are using a troublesome tactic to address their unprofitable or problematic procurement contracts – threatening to breach or not pay under such contracts. Supply chain managers using this tactic hope that their significant leverage and bargaining power over suppliers can force a renegotiation of unfavorable provisions to their benefit. However, not only is such tactic unwise from a supplier-buyer relationship vantage, but it also could trigger some unfortunate remedies. Under Sections 2-609 and 2-610 of the Uniform Commercial Code in the State of Delaware (the “U.C.C.”), a supplier is entitled to recover damages or suspend performance, among other things, if a buyer repudiates or threats to breach a contract – even if the breach is cured or the threat is retracted. As such, buyers should refrain from using this tactic, because the consequences could be detrimental to the organization and/or supply chain. If a supply chain manager desires to use this tactic, legal counsel should be consulted immediately.

In the course of drafting a master agreement, you should always consider including a provision that allows for the termination of a statement of work (“SOW”) separate from the termination of the master agreement.  Since a master agreement allows you to commence several projects under one agreement through the issuance of SOWs, the ability to terminate any SOW without actually affecting the master agreement itself is ideal.  In circumstances where a termination of SOW provision is not included in the master agreement, unless otherwise addressed by the parties in the master agreement, termination of the master agreement will also terminate any SOW issued under such agreement (potentially, jeopardizing outstanding projects under other SOWs).  Overall, a termination of SOW provision provides you with the flexibility to terminate a specific SOW without having to terminate the master agreement and undertake the monetary expense and time required to the draft and/or renegotiate a new master agreement.

Protecting your company’s name, logo and/or mark (collectively, the “Company Marks”) from unauthorized use should always be a priority when drafting an agreement.  Including a use of name/advertising provision in the agreement that limits the use of the Company Marks in any advertising or promotional literature without your company’s prior written permission can protect unauthorized use.  Such a provision puts the opposing party on notice that the use of the Company Marks without permission is a breach of your legal right and can result in a potential claim by your company.  It is important to remember that the Company Marks can be a valuable marketing tool that an opposing party to a contract could potentially use to gain additional customers for its product or service (resulting in monetary gain for the opposing party, not your company). Consequently, a use of name/publication provision should, at minimum, require the opposing party to seek written permission from the owning party (the company) prior to each instance of use of the Company Mark.

In determining whether to use a statement of work or a purchase order, you must evaluate your goal.  Typically, a party issues a purchase order for the purpose of payment, while a statement of work is used to modify the terms of the agreement.  Purchase orders may or may not incorporate the terms and conditions relating to a main agreement between buyer and sell, but usually sets forth payment terms relating to the purchase. Moreover, a purchase order provides a legal document by which all parties are bound and illustrates the buyer’s intent to purchase a set quantity of goods and is a mechanism to facilitate collection of funds.  Statements of work usually incorporate the terms and conditions of a main agreement and specify specific terms and specifications relating to the goods or services being provided by the vendor.  Accordingly, a statement of work expressly describes the work requirements necessary to fulfill the terms of the main agreement and usually serves as the standard for determining whether a vendor has met the stated performance requirements.

A limitation of liability provision is a contractual mechanism that limits exposure to liability relating to the performance of a contract.  Typical limitation of liability provisions limit a seller’s damages for breach of the agreement to: (i) the value of the contract, (ii) a sum agreed upon by the parties to the contract, (iii) the seller’s available insurance coverage or (iv) a combination of the aforementioned.  Depending on its structure, a limitation of liability provision may apply to all claims arising during the course of the performance of the contract, or to claims relating to the breach of certain covenants, representations or warranties in the contract.  The importance of the limitation of liability provision is its ability not only to limit potential damages in a claim, but to also forecast the possible damage award in the event such a claim is initiated.  As the purchasing party, if the seller manages to convince you to include such a provision in your agreement, consider excluding breaches of confidentiality, indemnification, liquidated damages and any other special provisions (i.e., trademark or logo) from the limitation.  These exclusions will ultimately allow the purchaser to seek relief for the most important provisions of the contract without limitation.

Purchasing goods and services in foreign jurisdictions can be both advantageous and disadvantageous for a potential buyer. Often, the pros of purchasing in a foreign jurisdiction include lower costs, speed of delivery of the goods and/or services and less restrictive terms and conditions. On the other hand, the cons of purchasing in a foreign jurisdiction have the potential to be more extensive. Some of these issues include, but are not limited to, determining the governing law of the contract, communication between the parties, upfront payment for the goods and/or services without mitigating the risk of receiving compliant goods, and culture/language limitations. The key to the purchasing of goods and/or services in foreign jurisdictions is to address the aforementioned issues prior to entering into the agreement, to the extent possible (particularly, structuring a payment schedule that will limit your risk exposure). Addressing these issues can potentially limit confusion with the terms of the agreement at a later date.

To borrow a famous expression, “Nothing great lasts forever”. Although business terms within a contract may remain consistent over time, generally, auto-renew provisions are not recommended for inclusion within a purchasing agreement. Auto-renew provisions extend the duration of an agreement on the same terms and conditions after the expiration of the initial contract period. Overall, the inclusion of an auto-renew provision avoids the need for the parties to renegotiate the terms of the agreement after the expiration of the initial contract period. This provision can be advantageous with respect to agreements that are low risk and do not require re-negotiation at the conclusion of the contract period. However, for those complex or high-risk transactions where pricing and other important terms are subject to change over time, an auto-renew provision is not ideal. Ultimately, before including an auto-renew provision in a purchasing agreement, you should evaluate whether the terms relating to the services, goods or products being procured are subject to change at the conclusion of the contract period. If you decide to include an auto-renew provision, you should ensure that a provision that allows you to terminate without cause is included in the purchasing agreement in case your initial assessment was incorrect.