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 WEDNESDAY, APRIL 13, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Huu Nguyen, Partner, Squire Patton Boggs, New York Sarah K. Rathke, Partner, Squire Patton Boggs, Cleveland The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. 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Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: • Click on the ^ symbol next to “Conference Materials” in the middle of the left- hand column on your screen. • Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon. Long-Term Requirements Contracts with Suppliers Drafting, Negotiation and Enforcement Challenges Sarah Rathke Esq. & Huu Nguyen, Esq. About the Speakers . Huu Nguyen, Partner Squire Patton Boggs, New York, [email protected] . 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, [email protected] . 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. squirepattonboggs.com 6 Resources . http://www.globalsupplychainlawblog.com/ . Sarah’s Book: . Legal Blacksmith: How to Avoid and Defend Supply Chain Disputes squirepattonboggs.com 7 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 squirepattonboggs.com 8 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 squirepattonboggs.com 9 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 squirepattonboggs.com 10 Overview . Risk and commitment sit on a spectrum . From Buyer’s Perspective No commitment to Promise to purchase all supply/purchase certain products supplied by seller amounts (PO by PO basis) AND seller has flexibility in AND seller has flexibility in pricing and delivery pricing and delivery Risk No commitment to Promise to supply all supply/purchase certain products needed by buyer amounts (PO by PO basis) AND buyer has flexibility in AND no flexibility in pricing pricing and delivery or delivery Commitment squirepattonboggs.com 11 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 squirepattonboggs.com 12 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 squirepattonboggs.com 13 Overview . How can businesses best mitigate risk when drafting and negotiating long- term requirements contracts? . That’s what this talk is about! squirepattonboggs.com 14 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. squirepattonboggs.com 15 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 of 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 output or requirements will approximate a reasonably foreseeable figure. … squirepattonboggs.com 16 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). squirepattonboggs.com 17 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"). squirepattonboggs.com 18 UCC 2 vs CISG . For the international sale of goods, the Convention on the International Sale of 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 squirepattonboggs.com 19 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. squirepattonboggs.com