10/9/20151 Strategies to Avoid Common Deadly Sins Found in Procurement Contracts Institute for Supply Management Madison, WI October 10, 2013 © 2013 Wagner, Falconer & Judd, Ltd.

 Quiz Bowl  The Greenheck Fan Experience  Deadly Sins of Procurement Contracts  Fact Patterns and Examples  Questions and Conclusion 10/9/20152© 2013 Wagner, Falconer & Judd, Ltd.

 You are the Director of Purchasing for a privately owned company with 3500 employees. The VP of Finance calls you into her office and says “Ralph, I’m going to a charity dinner next week with our sales rep for Verizon. I know you are working on their contract renewal and have had some trouble negotiating with them. If I get a chance to talk to our rep, what is the most important term you want to have in the contract with Verizon?” 10/9/20153© 2013 Wagner, Falconer & Judd, Ltd.

 Who we are:  Privately owned, ETO, CTO, MTO in Schofield, WI  Known worldwide as a leading manufacturer of air-movement and control equipment  Fans, ventilators, make-up air units, energy- recovery ventilators, dampers, louvers, kitchen ventilation systems, laboratory exhaust systems, indoor air handling units and coils  Shipped around the globe: WI, CA, KY, TN, MN, NC, China, India and Mexico 10/9/20154© 2013 Wagner, Falconer & Judd, Ltd.

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 Why? Too many  161 suppliers represented 98% of spend  161 suppliers represented only 2% of spend  How? Prioritize - Plan  Spend  Risk  WIIFM??  Result for company  148 suppliers (50%) represent 92.5% of spend 10/9/20157© 2013 Wagner, Falconer & Judd, Ltd.

 Handshakes and cocktail napkins  Past approach was not well suited for growing company with new products, more manufacturing locations and new customers  Informality in documentation not appropriate for changing business climate  A bolt leads to a jolt in thinking… 10/9/20158© 2013 Wagner, Falconer & Judd, Ltd.

 It’s Situational  Know Your Leverage  Strategic Use of Contracts  Using your own paper  Marking up a vendor’s form  Sometimes no contract is better 10/9/20159© 2013 Wagner, Falconer & Judd, Ltd.

 Item being purchased  Office supplies vs. weld gasses  Ramifications if something goes wrong  Serve customers  Business interruption or lost profits  Insurable  Life, health and safety issues  For public companies, impact to “Street” 10/9/201510© 2013 Wagner, Falconer & Judd, Ltd.

 Voting with your feet  Taking advantage of publicly traded companies  End of quarter spend  Prestige and Marketing Value  The common law protects me, why should I agree to XYZ  Know who can say “Yes”  Commercially unbalanced 10/9/201511© 2013 Wagner, Falconer & Judd, Ltd.

 In most situations it’s best to use your own form of agreement  Ability to clearly protect what’s important  Streamlines the process  The PDF message  Marking up a vendor’s form  Ask for a Word document  When no contract is better  UCC remedies can work to your advantage 10/9/201512© 2013 Wagner, Falconer & Judd, Ltd.

 Indemnity  Damage Caps  Insurance  Warranty  Requirements Contracts  Assignment Rights  Special concerns with Software and IT Agreements  Confidentiality 10/9/201513© 2013 Wagner, Falconer & Judd, Ltd.

 Supplier and Buyer agree to defend, indemnify and hold harmless each other, against all suits at law or in equity and from all damages, claims and demands arising out of the death or injury, to any person or damage to any property, intellectual property infringement alleged to have resulted from the sole negligent act(s) or omissions or intentional act(s) of the indemnitor. 10/9/201514© 2013 Wagner, Falconer & Judd, Ltd.

 Scope matters ▪ PI, Property Damage, IP Infringement, Breach  Will vendor do work “on site”?  Be careful of exclusions and caps in warranty section  Read indemnity in conjunction with the damage cap and try to carve out indemnification responsibilities from the cap  Make sure the vendor has insurance to cover the insurable risk assumed in the contract 10/9/201515© 2013 Wagner, Falconer & Judd, Ltd.

 Requests by supplier for waivers of indirect “consequential” damages  Carve out breaches of confidentiality or willful misconduct  Caps on direct damages  Carve out above, plus matters covered by an indemnity and those that are insurable  Arguments in your arsenal  The amount you are being paid bears no relationship to the damages I might suffer  That’s why you buy insurance, you need to have some skin in the game with me  Company policy states “No” 10/9/201516© 2013 Wagner, Falconer & Judd, Ltd.

 Avoid damage caps and disclaimers when the liability is covered by their insurance  Have the discipline to ask for “additional insured” status and obtain the certificate of insurance  Their choice to self-insure should not equate to you taking on unnecessary exposure as a customer  Consider if they will be “on site” and what issues that could cause:  Employee injuries  Theft of property or confidential information  Compliance with your safety and security policies 10/9/201517© 2013 Wagner, Falconer & Judd, Ltd.

 Clause: Customer agrees to purchase its “requirements” of aluminum from Supplier for the next three calendar years  Problem: If the supplier is not the best from a form, fit, function or pricing standpoint the customer is stuck and cannot purchase from another source  Solution:  Don’t agree to requirements contracts  Negotiate a termination for convenience 10/9/201518© 2013 Wagner, Falconer & Judd, Ltd.

 Clause: Customer may not assign the agreement in whole or in part without the express written permission of Vendor  Problem: No ability to “transfer” rights in agreement to another party (sister or parent company, successor entity)  Solution: Have right to assign to related company under your control or in the event of an M&A transaction 10/9/201519© 2013 Wagner, Falconer & Judd, Ltd.

 Use of consultants for IT projects  Ownership (works for hire)  (SSAE) No. 16, Reporting on Controls at a Service Organization  License compliance  Know how license compliance is determined (seat, site license, deployed via Internet, hosted)  Service levels  Address in a schedule/make sure timing for fixes and maintenance meets your business needs 10/9/201520© 2013 Wagner, Falconer & Judd, Ltd.

 Cost increases for future license and maintenance  Negotiate these costs upfront  Intrusive Surprise Audits  Proper written notice  Treat auditors like the FBI was coming in  Document compliance regularly  During normal business hours 10/9/201521© 2013 Wagner, Falconer & Judd, Ltd.

 “Confidential Information” means information supplied by one party to the other that is marked confidential or if orally disclosed, identified as confidential within thirty (30) days of such disclosure  Confidential Information does not include what is already published or generally available to the public; becomes generally available to the public; was rightfully in its possession prior to the time of receipt; or independently developed 10/9/201522© 2013 Wagner, Falconer & Judd, Ltd.

 Sole or exclusive vs. primary supplier tied to performance caveats  All costs vs. reasonable out of pocket expenses  Making provisions mutual  Limit disclaimers in warranty section apply to warranty claims only… not to limit negligence, strict liability, contract breach or third party claims 10/9/201523© 2013 Wagner, Falconer & Judd, Ltd.

 UCC applies to purchases of “Goods” and provides protection to purchasers  Good tactic (trading paper) when:  You do not have the leverage to get your way  Your paper process is good (purchase is subject to your PO language)  Having the ability to sue a vendor is as good as having an indemnity right  You cannot predict what will go wrong 10/9/201524© 2013 Wagner, Falconer & Judd, Ltd.

 In a world where predicting the future with precision is difficult and Nostradamus is deceased, the most important right in a contract is…  The right to terminate the agreement with no cause. 10/9/201525© 2013 Wagner, Falconer & Judd, Ltd.

 What is a deadly sin depends on the company, the product and each situation is somewhat unique.  Understanding your leverage and “playing” your audience is important.  There are normally clauses in a contract; all of which matter. 10/9/201526© 2013 Wagner, Falconer & Judd, Ltd.

Gary Van Domelen Wagner, Falconer & Judd, Ltd IDS Center 80 South 8 th Street Minneapolis, MN Phone: Facsimile: Randy Huebner Greenheck Fan Corporation 1100 Greenheck Drive Schofield, WI Phone: /9/201527© 2013 Wagner, Falconer & Judd, Ltd.