Disclaimer: I am not an attorney and cannot give legal advice. This series is from a supply chain practitioner’s perspective on negotiating contracts and is simply offering my perspective on common contract clauses. Seek professional legal advice for your own contracts.
In our continuing series on contract clauses from a supply chain perspective, last week we talked about the pricing and quality clauses. This week we will talk about the clauses that discuss compliance with laws and the purchase order clauses – often the clauses that get the least and most focus from supply chain practitioners!
The example contract clauses and discussions of them below are separated by horizontal dividers to help you switch between them.
Compliance with Laws Clauses
5. COMPLIANCE WITH LAWS
5.1 Compliance with Laws Generally. Seller represents, warrants, certifies and covenants that Seller is in full compliance and shall fully comply with all applicable laws, rules, regulations and ordinances of government authorities, including the export control laws and regulations of the United States Departments of Commerce, State and Treasury and with all safety and environmental practices customarily followed for the type of Product and service, if any, to be provided by Seller (collectively, “Laws”) in the performance of this Agreement including, but not limited to, the following: (i) Executive Order 11246 , as amended, and all regulations and orders thereunder, if doing business in the United States; (ii) Fair Labor Standards Act of 1938, as amended; (iii) Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as the “conflict minerals provision”); (iv) all import and export laws, rules, regulations, sanctions and requirements of the United States and all countries involved in the sale of Products under this Agreement. If the Product(s) are manufactured in a country other than the country in which the Product(s) are delivered to Buyer, Seller shall meet all marking requirements related to the country of origin up to and including marking of Product(s) and/or Product(s) packaging, labels, material safety data sheets and/or identification documents as required with “Made in (country of origin)”. Upon Buyer’s request, Seller shall promptly furnish any reports, required information, and/or certifications required under such Laws.
This clause seems irrelevant in many cases, as it basically says that both parties (but especially the Supplier) will comply with the laws of the country where the parties are doing business. The value in this clause comes with establishing which country’s regulations will govern the relationship (in a relationship where the parties are in different countries), and highlights a few key relevant laws. Especially when working with non-US businesses, this can help draw attention to the regulations most applicable to the product or service, and this clause should be somewhat tailored to meet that goal. In heavily regulated industries, such as energy or banking, it might be helpful to highlight the governing or regulatory bodies for the industry. Sometimes I also see anti-corruption highlights, such as anti-bribery laws, called out in this section as well.
5.2 Laws Related to Government Subcontracts. Products supplied by Seller to Buyer pursuant to this Agreement could potentially be incorporated into Buyer’s Equipment produced by Buyer and sold to the federal and/or state governments of the United States. Accordingly, this Agreement may be considered a prime or lower tier subcontract of Buyer’s sale agreements with these federal or state governments. Therefore, if this Agreement is not otherwise exempted by rules, regulations or orders of the Secretary of Labor or the Secretary of Transportation relating to government subcontracts, Seller shall comply with all Laws related to government subcontracts, including without limitation the following clauses set forth in the indicated Code of Federal Regulations (“CFR”) as in effect on the date of this Agreement which clauses are incorporated herein by reference to this Agreement (in all such clauses, unless otherwise specified, “Agreement” shall mean “the Purchase Order(s)”, issued under this Agreement, “Contractor” shall mean Seller, “Contracting Officer” shall mean Buyer, and “Government” shall include Buyer to the extent necessary to enable Buyer to administer the applicable Purchase Orders and to perform its obligations under its prime contract or higher tier subcontract with the governments): (1) the Equal Opportunity Clause of the Department of Labor (“DOL”) Regulations for Executive Purchase Orders 11246 (41 CFR Part 60-1.4); (2) the Affirmative Action Clause of Section 60-741.4 of the DOL Regulations under Section 503 of the Rehabilitation Act of 1973 (41 CFR Part 60-741.4); (3) the Affirmative Action Clause of Section 60-250.4 of the DOL Regulations under Section 503 of the DOL Regulations under Section 402 of the Vietnam-Era Veterans Readjustment Act of 1974 (41 CFR Part 60-250.4); (4) the Minority Business Enterprise “best efforts” clause of 41 CFR Section 1-1.310-2(a) of the DOL Regulations; and (5) the participation by DBE in the DOT financial assistance programs Clause of 49 C.F.R. Part 26 pertaining to contracts with participation in the financial assistance programs. Where applicable to the Purchase Order(s), additional provisions, laws, rules and regulations related to government subcontracts may be incorporated by reference.
I have seen this clause about government subcontracts as a paragraph in the contract, but I have also seen it as an exhibit all its own. This is also related to the Federal Acquisition Regulation (FAR), which governs requirements for suppliers to the US government. While most purchases between private businesses do not require the regulations called for by the government subcontract requirements or FAR, most businesses know there is a possibility they will sell to the government at some point. The FAR can also be a bit of a “shortcut” to hold suppliers to the highest possible standard.
Story time! I once had a supplier who was set to win a $2-3m annual award in various materials who absolutely refused to sign a contract with the FAR requirements in it. After digging into it, I found that they had no equal employment opportunity requirement, meaning they could discriminate against women, minorities, and underrepresented groups in their hiring practices. As a woman who had spent much of her career at this point as the only female design engineer in a company with more than 100 design engineers, this made me extremely angry. I didn’t want to do business with a supplier who was not willing to say that, all things being equal between candidates, they would try to hire the underrepresented group. I pulled the contract from this supplier and awarded it to another supplier with a similar offering. Whenever their sales staff reached out to me from then forward, I would open by asking if they were an equal employment opportunity employer, and would hang up when they continued to say no. I am sure that company is doing business with my former employer now, but this clause did lead to a huge loss of business for that supplier.
5.3 Health and Safety Laws. Seller certifies that it will comply with the Occupational Safety and Health Act of 1970, as amended, and the standards, rules and regulations issued thereunder and warrants that all Products furnished under this Agreement will conform to and comply with said laws, rules, standards and regulations. Buyer shall have the right to recover all attorney fees and other costs necessary to enforce this clause. Seller shall report any acts (verbal, physical or visual) of harassment, intimidation or coercion related to race, color, religion or religious creed, national origin, ancestry, citizenship status (except as required by law), gender, gender identity, gender expression, sex, pregnancy, sexual orientation, genetic information, physical or mental disability, veteran or military status, marital status or any other status or classification protected by law. Seller shall support and respect internationally recognized human rights. Seller shall not use, or participate in the exploitation of workers, forced, trafficked or involuntary labor. Use of child labor or employment of any person under the age of 15 by any Seller is unacceptable. Seller shall not employ any person under the minimum legal age for employment as prescribed by the local authority. Seller is expected to ensure that wages, benefits and hours of work comply with all applicable laws and regulations.
This clause starts to get into terms that might also go into a supplier code of conduct (which is different from an employee/internal code of conduct). The intent is to expand the protections for marginalized groups, especially to areas where the law of either the Buyer’s or Seller’s country does not cover. The difficult part of this clause is it’s hard to put any “teeth” in enforcing it, so it often simply sits here. It’s rare for suppliers to mark this one up, because they also know how unenforceable it is outside of the United States. The only way to really enforce this particular clause is to simply not give business to suppliers who violate it (which can also be tricky to determine). While it is an important clause to include and I require it for my own integrity, it is also hard to feel like it’s not merely taking up space.
Purchase Order Clauses
6. PURCHASE ORDERS
6.1 Purchase Orders Generally. All purchase orders for Products (“Purchase Order(s)”) shall be subject to the terms and conditions set forth in this Agreement. Unless otherwise agreed to in writing by Buyer, Seller agrees to use Buyer’s web-based ordering system and/or Electronic Data Interchange, (hereinafter “EDI”) if applicable.
6.2 Issuance of Purchase Orders. Buyer’s Purchase Orders shall specify the quantity and type of Products listed in Exhibits A and B to be shipped, the date of receipt, the destination address, and any other specified terms and conditions. Any other information and documents provided by Buyer from time to time, including blanket purchase orders, Kanban agreements, forecasts or consignment agreements, shall not alter or modify any terms of the Purchase Orders. Such information and documents shall be used by Seller solely for information, forecasting, or planning purposes, or to open and manage accounts, as appropriate, and shall not be binding on Buyer.
6.3 Acceptance of Purchase Orders. Seller shall acknowledge its receipt of Purchase Orders through the Ordering System and/or EDI within one (1) business day of receipt and shall notify Buyer of its acceptance, rejection, which such rejection shall not be unreasonable, or adjustment of Purchase Orders within two (2) business days of receipt. In the event Seller fails to so notify Buyer within two (2) business days, the Purchase Orders will be deemed to be accepted by Seller.
These are the “nuts and bolts” clauses for how purchase orders work between Buyer and Seller, and are usually similar from contract to contract. Most of the negotiation here comes in changing time frames. Typically legal teams do not weigh in heavily on edits, deferring to the supply chain team for how they want to run the relationship. Let’s dig in a little deeper.
The first paragraph (section 6.1) establishes purchase orders as a contract document and reinforces their use of terms in this Agreement. This is important if your standard purchase order has terms and conditions attached, which many do. Establishing that these terms govern over the standard terms is important for a dispute, especially since you are going to all the effort of renegotiating the standard contract to customize the relationship.
Note: It is common if suppliers ask to edit purchase order terms and conditions to instead negotiate a full contract. Purchase order terms are typically minimal and very standardized, and not to be touched. This is a two-way street: if a buyer wants to edit standard sales order terms, the answer is to negotiate a full agreement to supersede the standard terms.
The second paragraph in this template (section 6.2) establishes exactly what is on a purchase order. While this section is not strictly needed, it can be helpful when working with non-US suppliers who have not sold much to the US market and are accustomed to different paperwork. The US and Europe tend to be more formal on purchase orders and quotes, so if the buyer wants that formality to continue it can be helpful to include it in the agreement.
Section 6.3 in our example establishes response timeframes. This is one of the most common places I see supplier edits to the contract template, and is similar in all templates I have worked with. Sometimes suppliers strike the “automatic acceptance” clause, requiring that they acknowledge a purchase order for it to be valid. Often they extend the amount of time they have to accept a purchase order, especially when time zones are dramatically different. It is up to the buyer about how much change to this paragraph is acceptable, and it may vary based on the supplier. It may be better to require a PO acknowledgment so the order does not slip through the cracks. I typically do not allow more than three (3) business days to acknowledge a PO, and sometimes put in a clause here that starts the “lead time clock” from the date the PO was sent instead of the date it was acknowledged if the acknowledgment date is several days later.
6.4 Lead Time. “Lead Time” means the time between electronic transmission (through the Ordering System and/or EDI) of Purchase Order from Buyer to the time Products reach Seller’s dock and available for shipment to the location specified by Buyer and shall not exceed the Lead Time set forth in Exhibits A and B, as applicable. Buyer uses a seven (7) day calendar for all Lead Times, excluding United States holidays and Buyer’s factory shutdowns. Any changes to Lead Time requirements as stated in Exhibits A and B must be approved in writing by Buyer. Buyer may modify or cancel a Purchase Order if Seller cannot meet the applicable Lead Time requirement.
This last purchase order clause firmly establishes lead time and how it is measured. Note it calls out the date the order was sent and not the date it was accepted or acknowledged. It also references the pricing schedule and scope of work exhibits, where lead time is contractually set for individual items. Lead time has been a nightmare in the supply chain world since 2020, and has not really settled out. It may never settle out back to the stable and short lead times we saw before 2020, so we must maximize predictability using contract clauses. This template uses calendar days to set lead times, but you can also use working days (typically 5 days a week) or measure lead time in weeks. Often when quoting materials, I will use lead time in weeks to avoid ambiguity, and then in the contract (and for all evaluations) I will include the maximum lead time quoted. For example, it is common for a supplier to quote 6-8 weeks for a particular material. I would put 8 weeks (or in this case 56 days) in the contract and evaluate the supplier for an award based on 8 weeks. Whether or not you accept orders early is a different discussion based on your definition of a perfect order and your supply chain metrics.
That wraps up this week’s deep dive into contracts, next week we will talk about the forecast and delivery clauses. If you’d like to talk to me about your company’s contract clauses, schedule a time to chat.
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