Addressing Vendor Disputes Luke Montoya Sourcing Manager

Goal of Presentation Through two simulated vendor disputes, analyze and discuss as a group a typical process for handling a vendor dispute in order to help better prepare presentation participants for future actual vendor disputes.

1st Simulated Vendor Dispute: National Printer Contract Termination Fee Dispute Scenario: In connection with switching printer vendors for your offices nationwide from Vendor A to Vendor B, you terminate the Vendor A five-year term contract that is based on paying for printers on a price-per-impression basis without claiming that any breach of contract by Vendor A led to the termination notice.

You acknowledge that a termination-for- convenience fee is owed under the contract terms, but the vendor’s account manager states that an additional early-equipment-termination fee is owed based on all of the printers not remaining in place for the full term, which would mean your company would owe Vendor A an additional $1,000,000 in early termination fees. What do you initially do?

Tips: Quickly review the contract to determine your initial thoughts on the vendor’s position Consult with your procurement leaders (if applicable), but only orally. Why only orally?

Assume that after your review of the contract and your consultation with procurement leaders, you disagree with the vendor’s position or think it is unclear whether the vendor’s position is correct. What do you do next?

Tips Contact the legal department and the insurance group. If you contact the insurance group separately, only do so orally. Legal hold may need to be issued Notice of potential insurance claim may need to be given Evaluate the contract and determine next steps in consultation with the legal department.

Let’s evaluate the contract: There is a termination section in the contract with multiple subsections: Subsection A: If Company terminates this Agreement prior to the end of the term, other than based on Vendor A’s material breach, Company shall pay Vendor A an early termination fee equal to $100,000 times the number of whole months remaining in the term after the termination date. Subsection B: If Company requests that Vendor A remove equipment from a Company site prior to the end of the term, Company shall pay Vendor A an amount equal to the original value of the equipment (as reasonably determined by Vendor A) multiplied by a fraction consisting of the number of whole calendar months remaining in the term after the equipment removal date as the numerator and 60 as the denominator.

Assuming Vendor A has not materially breached the contract, do you owe the Vendor just the early termination fee under Subsection A, or do you also owe the early equipment termination fee under Subsection B?

Speaker’s View: It depends on the intent of the contract parties Speaker’s View: It depends on the intent of the contract parties. If the issue went to court, a judge would likely look to determine intent based on the parties’ interactions and internal communications (such as e-mails, prior contract drafts, testimony about conversations, etc.) and industry customs. Assuming you agree with the above Speaker’s View, how would you proceed and why?

Speaker’s View: It depends on the legal department’s view regarding when to pursue litigation, but most likely it would make sense to (1) delay any discussions until you ensure your new printer program is in place so Vendor A cannot hurt you by removing printers or stopping maintenance services and (2) then take a strong position in negotiating with the ultimate goal of settling for a small amount. Why?

It is unclear if you would win. Litigation is expensive (even if you win). Litigation takes up the legal department’s time. Once you ensure you are no relying on Vendor A to provide services, you can take a strong negotiation position because: Vendor A likely does not want to spend the cost and time on pursuing litigation to collect the disputed amount. Delay does not hurt your Company. It does hurt Vendor A (because the disputed amount remains unpaid until the dispute is resolved).

2nd Simulated Vendor Dispute: Disaster Recovery Test Dispute Scenario: Your IT team (“IT”) conducts a disaster recovery (“DR”) test and fails to meet its recovery time objective, which IT believes was caused by the vendor’s failure to properly prepare the DR hardware and assist in the DR process. IT wants your assistance with demanding that (i) the vendor pay for (a) IT’s travel expenses to and from the DR data center ($10,000), and (b) IT’s salary for time spent on the DR simulation ($5,000), and (ii) that the vendor assist with another DR test at no cost (valued at $3,000). It would take your IT team about 3 months to switch DR vendors. What do you do?

Tips: Quickly review the contract to determine your initial thoughts on the vendor’s position Consult with your procurement leaders (if applicable), but only orally.

Assume procurement is unsure if the vendor is responsible for any damages, so you consult with the legal department. Here are the applicable contract positions: Warranty: The provision of all services and deliverables hereunder are on an AS IS basis, and Vendor disclaims all warranties, whether express, implied, or otherwise, including without limitation the warranties of merchantability and fitness.

How do you advise IT to proceed? Limitation of Liability: Vendor’s total liability in connection with this Agreement shall be limited with respect to any and all claims in the aggregate, to the average monthly fees paid under the Agreement in the 12 months immediately preceding a claim arising. [Assume this equates to roughly $5,000.] Vendor shall not be responsible for consequential damages, punitive damages, indirect damages, incidental damages or special damages. Termination: Vendor may terminate this Agreement for any or no reason at any time upon providing 10 days’ written notice of termination. How do you advise IT to proceed?

Speaker’s View: Proceed with caution Speaker’s View: Proceed with caution. Your rights under the contract with respect to the poor service are very limited. Most likely you would lose any legal claim. If you approach the Vendor aggressively, it has the right to terminate the contract within 10 days and your company would be left without any DR for about 3 months. Appeal to the Vendor’s desire to keep you as a customer and ask the Vendor to assist with another DR test at no cost. Advise IT to begin considering other DR vendors and pursue having a temporary backup DR system in place.

Summary: Typical Ideal Steps to Address a Significant Vendor Dispute Learn of significant vendor dispute Consult internally (orally) with any procurement leader that you report to, if applicable

If litigation is reasonably possible, immediately consult with the legal department (and the insurance group if a claim/counterclaim by the vendor is possible). Legal personnel will advise and potentially issue a legal hold, which would prevent documents related to the vendor dispute from being deleted/destroyed (failure to do so could lead to legal sanctions) Insurance personnel will determine if an insurance notice needs to be given (failure to do so could lead to loss of insurance coverage regarding a legal claim)

Proceed with the legal department’s oversight to negotiate a mutually acceptable resolution and potentially sign a Settlement and Release Agreement; OR The legal department may decide to handle the dispute by either sending a letter threatening legal action or by filing a legal claim in court (or in arbitration proceedings if required by contract), which could eventually lead to a settlement or court/arbitration resolution.

Evaluation and Materials Questions? Evaluation and Materials Take this time to go the conference app http://itps2016.sched.org find this class, and fill out evaluation. If you need the PowerPoint, it’s on your thumbdrive