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 miscellaneous clauses covering the supplier manual, contract assignments and relationships, waiver, severability, disputes, and a few other clauses. This week we wrap up the “main” part of the contract with governing law, force majeure, and the “Entire Agreement” clause that determines which documents are part of the contract and which govern in a dispute.
The example contract clauses and discussions of them below are separated by horizontal dividers to help you switch between them.
Governing Law and Language Clauses
29. GOVERNING LAW
This Agreement, and disputes arising hereunder, shall be governed by and construed in accordance with the laws of the State of Iowa, without regard to Iowa principles of conflicts of law. Any and all actions arising from or relating to this Agreement shall be submitted to the state or federal courts of the State of Iowa and the Parties hereby consent to the exclusive jurisdiction of such courts.
30. LANGUAGE
This Agreement is written in English. Any translation into another language shall have no impact on the interpretation of this Agreement. The English language shall be used in all documents and correspondence related to this Agreement.
These two clauses establish the “home” of the contract, both for its jurisdiction and its language. The first clause is very common and I have found it in some form in every contract I’ve seen. Typically the default jurisdiction is the state where the buyer is headquartered, or where their legal team resides. This is because the legal team is most familiar with the laws in their home area, and knowledge is power in any form of negotiation. Ultimately even a lawsuit is a form of negotiation, although one with an arbitrator and a whole lot of rules. I have seen suppliers redline this clause to move the jurisdiction to their own home territory, or in the U.S. a compromise of Delaware is common. This is because Delaware’s laws are particularly friendly to corporations, to the point where many companies are technically incorporated in the state.
I have seen international businesses (especially those in Asia) redline this clause to move the jurisdiction to their own local country and territory. While this is understandable, I always fight it. As the buyer, I am the customer and hopefully I have enough leverage with the supplier to keep the jurisdiction in my home country. That being said, sometimes a compromise is reached for the jurisdiction in an English-speaking country/territory, such as Hong Kong or Singapore. I always involve my legal team in these decisions, as there are a lot of rules about their practice and the different country laws that I cannot anticipate.
I have only once encountered a contract where English was an issue or barrier. I negotiated one contract that ended up in both English and Mandarin, with each clause printed in Mandarin, followed by its translation in English. We got through it, but litigation around that contract would be a minefield if it was ever necessary. The potential for mistranslation or even nuances in the translation were simply huge. I don’t recommend negotiating a contract in a language where you are not fluent (I am not fluent in Mandarin) unless you absolutely have to. If you have to, consider hiring a translation service if the contract is that important. This language clause is intended to prevent someone from running the contract through a translation software and assuming it was always written in the translated language. While software is definitely not that adept yet, there is potential for it to be within the next few years.
Force Majeure Clause
31. FORCE MAJEURE
Neither Party shall be liable for any delay or failure in performance, or for any damages suffered by the other Party by reason of such delay or failure in performance, if caused by or arising directly or indirectly from any act, event or circumstance beyond such Party’s reasonable control without such Party’s fault or negligence, including, but not limited to, acts of God; vandalism; sabotage; accidents; fires; tornadoes, earthquakes, volcano, strikes or other labor disputes; mechanical breakdown; labor, power or transportation; acts of suppliers; interruption of utility services; acts of terrorism; or acts of any unit or agency of government (collectively, “Force Majeure Events”). Seller’s economic hardship or changes in market conditions are not considered Force Majeure Events. Any delays so occasioned shall result in a corresponding extension of either Party’s dates of performance that are, in any event, understood to be approximate. Seller shall use all diligent efforts to end the failure or delay of its performance, ensure that the effects of any Force Majeure Event are minimized and resume performance under the applicable Purchase Order. If a Force Majeure Event prevents Seller from carrying out its obligations under the Purchase Order for a continuous period of more than thirty (30) calendar days, Buyer may terminate the applicable Purchase Order immediately by giving written notice to Seller.
Ah, the force majeure clause. Before COVID, we cared mostly about weather such as seasonal hurricanes when negotiating this clause. A force majeure clause is basically the “but it wasn’t my fault!” clause for suppliers. It says something happened to cause them to be late or unable to fulfill the contract, and that the supplier had no other way to remedy the situation. It is notable that if the supplier can simply pay more and complete the task, that can negate the claim of force majeure. If the additional cost is “commercially impractical” (a very disputed term), then the force majeure stands.
The COVID pandemic and the resulting supply chain meltdown caused an interesting set of lawsuits. The lawsuits hinged around whether the supply chain delays triggered by COVID-19 were actually a force majeure or not. The American Bar Association has an extensive article about the impact of COVID on force majeure clauses here, and their conclusion is very “it depends.” How this clause is written also impacts whether a supplier can claim force majeure for pandemics or even major economic disruptions. While a pandemic has been generally ruled as an Act of God (a phrase choice I always found amusing), it is extremely rare for poor economic conditions (such as a global recession) to be ruled a force majeure.
Force majeure all gets down to nuances and how this clause is written, and really no one ends up happy in a force majeure dispute. Ultimately a company simply wants their goods or services on time, and the supplier wants to supply those goods or services according to their contract.
Wrap-up Clauses
32. CUMULATIVE REMEDIES
The rights and remedies under this Agreement are cumulative and are in addition to and not in substitution for any other rights and remedies available at law or in equity or otherwise.
33. ENTIRE AGREEMENT
33.1 Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes all previous understandings and agreements, whether verbal or written, express or implied, relating to the subject matter herein. No amendment, waiver or modification hereto shall be valid unless made in writing and signed by the Parties. All transactions between the Parties shall be governed exclusively by this Agreement and Buyer’s Purchase Orders; as such Purchase Orders are issued from time to time. If there is a conflict between the terms of Buyer’s Purchase Order and this Agreement, this Agreement controls and supersedes the terms contained in the Purchase Orders. The Parties further agree that the terms contained in any of Seller’s quotes, acknowledgment forms or any other forms or invoices supplied by Seller will be given no effect.
33.2 Inconsistencies. To the extent of any inconsistencies between the main body of this Agreement, the Exhibits and Purchase Orders, the order of precedence shall be as follows:
i) This Agreement
ii) Exhibit A: Production Products / Prices / Productivity
iii) Exhibit B: Service Products
iv) Exhibit C: Buyer Owned Property
v) Purchase Order(s) provided by Buyer
These last two clauses are here to wrap up the main part of the contract before the signatures. The cumulative remedies clause isn’t found in all contracts as a separate clause, but usually exists somewhere. It simply says this contract does not replace a country’s laws or any other source of rights available to the parties. This can get especially tricky with international parties as another country’s law might be in direct opposition to a U.S. law on the same subject. It is helpful to remember that the goal is to not use a contract, it is simply here for settling a dispute. A solid supplier relationship with a good understanding of mutual goals is worth far more than any contract.
The last clause in the main part of the contract is the Entire Agreement clause, intended to prevent what is called a battle of the forms. This is a legal term that simply means a court or arbitrator has trouble determining which document should govern in the case of a conflict. A simple example is if the contract says the payment terms are 45 days, but the purchase order says the payment term is 30 days. This clause is intended to clearly define that the agreement governs, so the payment term would be 45 days. Note that supplier contracts or invoices are not on this list, for a couple of reasons. First, the contract negotiation process should put any terms the supplier needs into this agreement. Second, it is a buyer-centric contract form and so will not include documents that favor the supplier. It is rare for a supplier to redline this clause, although I have seen them add the supplier invoice to the bottom of the list on rare occasions. That wraps up this week’s deep dive into contracts. Next week we’ll talk about the exhibits, which change more for each contract than the main clauses. If you’d like to talk to me about your company’s contract clauses, let’s chat.
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