Name: Drafting Clauses to Manage Supply Chain Disruption
Uploaded: 2025-04-29T17:17:11.890Z
Duration: 1 h 15 min 23 s
Description: Drafting Clauses to Manage Supply Chain Disruption

Transcript for "Drafting Clauses to Manage Supply Chain Disruption": Hi, everyone. Welcome to our webinar on drafting clauses to manage supply chain disruption. My name is Laura Frederick. I'm the founder and CEO of How to Contract, a practical training company that helps lawyers and, contracts teams learn how to draft and negotiate contracts. So I am so thrilled to be here today. I wanna first, thank Agiloft for making this possible and partnering with How to Contract to bring this vendor boot camp vendor contracts boot camp together. This series of five webinars is gonna really focus in on providing you with fundamental training on vendor contracts. Because it's vendor contracts focused. We're really gonna be focused on the customer side of things and the kinds of things we have to do when buying, selling, and licensing products and services. And so this episode today is module one of that five part series. We are gonna be going through each of the episodes, different subjects that, will provide a well rounded, overview of the supply chain contracting, processes and. So today, our focus is on disruption. There's been a lot of disruption in supply chain world these, this year in particular. But even if for the whole time I've been a lawyer, it's always been an issue. And we wanna spend today talking about all the things that the panel and I have learned about how to manage that risk and prepare your company and your clients through contracting. And I have an incredible panel today, and I'm so excited. I'm gonna bring them on the stage. So let's start with, Krista Russell. So, Krista, you wanna come on stage? It's so great to see you. Hey. Can you see me? I think I'm on stage. Yeah. Yeah. Okay. Great. Hey, everyone. I am Krista Russell. I actually started my career working behind the scenes in supply chain legal ops for the Broadway theaters in New York, managing complex logistics before making the transition into the corporate world. Somewhere along the line, I moved, to Pittsburgh, Pennsylvania and served as senior attorney for FedEx supply chain, supporting major supply chain logistics operations, and then moved down to Florida, which is actually where I came to college, for deputy general counsel of Airbus OneWeb satellites focusing on international aerospace manufacturing. And today, I lead supply chain legal strategy as head of legal at Airbus US Space & Defense, supporting our critical national security and defense programs. I am a Seton Hall law graduate, spent many years teaching at University of Miami School of Law. I also coach a select group of lawyers and law students through my company, general counsel, U, helping them build strategic business driven careers. And, on a personal note, I am the proud bio mom of three and bonus mom of four. So supply chain disruption is not the only kind of chaos I manage regularly. That's awesome. Thanks, Krista. Let's bring on the stage Adrienne. Adrienne, great to have you here. Thanks for being here. Great to be here. You can hear me okay? Yep. Okay. Awesome. Well, thank you for including me on this incredible panel, and it's it's an honor to be part of module one and kicking it off. I am Adrienne Valencia Garcia, proud New Yorker, former litigator for almost ten years until I realized that my strength was in building relationships. So I moved into transactional commercial work, and I am currently the, senior vice president and deputy general counsel at Cengage Group, an education technology company where I'm responsible for the commercial and privacy legal teams, so never a dull moment. And we partner closely with our legal ops team and our procurement organization to, in fact, ensure that we are doing everything we can to have the proper protections in place and to be of service to our, customers and clients. And on a personal note, I am a certified personal and executive coach, focused on helping high achievers, find the fulfillment they thought they'd get from checking all the boxes. So looking forward to this conversation. Think we So it's lost forever. But, Will, do you wanna go ahead and introduce yourself in the meantime? Yeah. Sure thing. I'm sure that's where we were going anyway. So, happy to do that. Hey, everyone. My name is Will Drewery, and I'm the founder and CEO of a company called Diagon. And we sell manufacturing equipment to companies that are building new factories. Our primary market is the battery industry. So think, you know, the little cylindrical battery cells that, you probably don't know are inside of every electric vehicle or, electrics electricity storage product that may be out there on the market. Most people have no idea where the equipment, that makes those batteries comes from, but that is the primary responsibility for me and my team. And so there are some very interesting ways that we're dealing with, trade compliance these days. Prior to starting this company, I've been an equipment buyer for almost my entire career. Very early career, I worked for PricewaterhouseCoopers. I was a consultant for the US government, and spent some time working overseas in The Middle East, doing equipment purchasing for company, companies in Iraq. Very interesting project and really got me exposed to equipment sourcing, and and CapEx procurement. And that opened up a door for me to join Tesla as a a very early employee there. I was the first equipment buyer at the company, and I was responsible for sourcing all the tools that we used to manufacture the vehicles, the engines, the batteries, and all that stuff. And it was there that I, had the pleasure of meeting and working with Laura, and we were oftentimes working in really interesting situations with vendors, you know, navigating different topics. I'll get into those in detail a little bit later. But that really is kind of, the the start that I got in my career in the equipment sourcing space, and I've decided to now make that my life work, through my new company. And I'm excited excited to be here and share some of my learnings and, and my experience in this space. So thanks for having me. Let's see. Do we have Laura back yet? I am not seeing her here on stage. Oh, there she comes. Here she comes. So if we can just be patient for one minute, I'm sure that she'll be back and can lead us into the beginning of our session. Sounds good. I'm back. Sorry. It was a at what time I'm so sorry. I guess this stuff happens. It was so weird. So I'm on, my my Internet's rebooting, so I'm going through my phone. I'm hoping it won't have any more issues, but we'll keep going. And if somebody needs to, Krista and Will, just you guys can walk through the webinar and the issues. I'm sure this is all bolted into you too if I disappear again for some reason. I never have problems with my so random. So, yeah, so let's keep going. And, so the the thing I wanted to kick off was, and really focus on is business customers need predictability and flexibility from their vendors. This is so critical to our customers, and they that's where supply chain disruption throws everything off because it takes away both of those things, that put predictability and that flexibility. And so the kinds of disruptions we see and what we're gonna talk about today are new taxes and costs, particularly this year, the new tariffs that hit everybody and has everybody kind of going and going a little bit crazy. We have the unexpected events, those traditional force mature things. We have change in law and changes in in demand, can't projects canceled, sudden, all changes that we need to make. So today, our focus is gonna be on these four key areas and how vendor contracts handle these disruptions and how we as customers can improve and protect improve our our processes, better protect our company with better terms, negotiation strategies, and internal operations. What we're not gonna cover are the pricing specific things. There are a lot of tools that we have to work on vendor contracts, on the pricing side to manage disruption. And these are things that aren't related to force majeure change of law, and the like. So these are act subject of our next webinar that's coming in on, June 17. So definitely wanna tune in for that one, but these are topics we won't cover today. And you've already met our amazing panel, so I'm very excited for everybody to be here. So let's kick off. And what we're gonna do, the the format for today, is we're gonna cover these four areas, and I'm gonna start with a mini lesson for each of them. And then once, that'll be a few minutes, five minutes. And then after the mini lesson, just to make sure we're all on the same page, we'll have we'll talk to the speakers about their experiences in this subject. So increase in tariffs. That's what's on everybody's mind. But it's just one of the kinds of things that can happen that, throw off our the economics of a deal. And that's because we have, you know, all these different things in the world that can happen that can alter the pricing amount and who's taking which risk, who who is suddenly facing new or expecting. That can be freight rate heights, currency exchange, warehousing costs, material costs, or, like we're experiencing this year, an increase in tariffs. Now to clarify for everyone what tariffs are, they are import taxes. That's what they essentially are. And the way import taxes work in The US is they are assigned to an entity that is called the importer of record. That's a classification of somebody who has taken responsibility for getting the goods through customs and responsible the legal responsibility as well as the financial responsibility for any duties. So the importer of record is sometimes the seller and sometimes the buyer. Generally, it's not logistics companies. Even though the logistics companies may be physically moving the goods and supporting all these processes to get the goods through, you know, from the seller to the buyer, they aren't the importer of record. The importer of record, think of it as more of a I the party that's standing up and saying, I hereby promise we comply. I will pay the taxes. So the facilitator of the logistics company isn't the one that's gonna do that. It's gonna be the seller and the buyer. So how do we determine which of those are the importer of record? Well, the way we figure that out is the Incoterm. And if you're not familiar with Incoterms, this is a three letter acronym that is published by, the ICC. And this organization created these, and it's essentially a short, shortcut that with three letters, they have defined all of the risk of loss in shipment obligations and all the processes that happen for delivery, of goods. Especially, this is really, really helpful for cross border where the delivery of goods becomes much more complicated. So you see here a typical sentence in a contract or a purchase order, and it says seller shall deliver the goods to buyer, DDP, and then the place of delivery. This DDP is the Incoterm. And so the Incoterms work to give us a shortcut. And this I've done in this example here, two Incoterms, ex works or e x w and DDP, which stands for delivered duty paid. And you can see on the top all these icons. Those are the steps in the process of delivery. So the seller makes it. It takes the trucks to a boat or ship, I should say. The ship takes it to, in this case, to The US. They go through customs. Another truck takes it to the buyer's warehouse. We can define in our contracts where we're gonna pass the baton as you are. How we're gonna do that. So if you put x works in your contract in that provision I just used, that means the seller is passing the baton, is turning over all the risk of loss and everything to the buyer at the factory, at the loading dock of their factory. From the moment it leaves the loading dock, it's now the buyer's responsibility to arrange for that truck, arrange for the ship, get it through customs, and and, you know, all the way to the buyer warehouse. If you use DDP, it's the opposite. It means the bot the seller is the one who's responsible all the way until it reaches the buyer's warehouse. So the seller has to arrange the truck, the ship, get it through customs, and all that stuff. So we determine the importer of record when we're using Incoterms by who has the obligation for that stage because these are just two Incoterms. There's a lot of other ones, and some of them take it all the way up until customs, but not including customs. That's when it passes. Or any other combination. There's I forgot the total number. I think it's 17, if I remember correctly. But it's a lot. And so you can customize the choice of Incoterm to achieve what you're trying to achieve. But I find most people do either ex works or GDP, for the bulk of regular contracting unless you have a very sophisticated operation where you make choices, for taxes and other purposes. So what tariffs do, they're not prohibiting imports. They're not, you know, making something illegal. They're not stopping imports. All they're really doing is making it a lot more expensive. Somebody is having to incur us an additional cost that they weren't expecting when they sign this contract. So this is a little different from other that concept of a tariff is a little different from other kinds of government actions. For example, during the pandemic, we had government shuts shutdowns that were prohibiting actions and prohibiting things from happening. So that would fall in a different category from what we're talking about from the tariff. Tariff, nobody's being well, except in some industries, I guess, there are, bans on, importing some goods. I think there's some of that going on. But apart from anything like that, you wanna think of that separately from what we're talking about with tariffs. And so when where should we address tariffs in our contract? Incoterm? Absolutely. If you think of the Incoterm term and which Inco term you choose, that's the fundamental way you're addressing which party's gonna do and be responsible for the tariffs. So as you're thinking ahead for the future future tariffs, future relief from the tariffs, the Incoterm is how you're gonna do that. That's the main way. Can you do it in the change of law provision? Maybe. Some people do. We're gonna talk about that when we get to the, the change in law section, and we talk about a little bit of that. Pricing adjustment, absolutely. You can do it here where the parties can say, if there's a material change in the tariff, we can have these effects. That's the pricing adjustment is more of an economic approach to dealing with that new cost, whereas the change of law really focuses on the legislative effect and the legislative event that's causing this increase. So there are two different things. Again, we're gonna talk about pricing adjustments next week, really get into detail on that. But what about force majeure and tax? Should you talk about the tariffs there? My view, really never, but I didn't wanna put never because maybe there's a way and a reason you should. I don't believe in tariffs as should be in your force majeure provision. And we'll talk about force majeure in a little bit, and I can explain more why. I also don't think tax is the place to do it because the problem if you start putting that in tax provision, what if your internal term changes? And you're gonna create this internal conflict between your tax provision and your Incoterms. So the Incoterms says the seller has customs, so the seller's gonna pay the tariff. But then the tax provision says the buyer has to pay the tariff. Unless there's some, way that you're handling both of those, you have an internal conflict. That's why I don't really like to address that particular issue in the tax provision. So that's my mini lesson on tariffs, but I wanna get out of the great insights from our speaker, or our speakers. So let me start with you, Will. So Will, as, in you introduced yourself, hopefully, while I was off screen. I did. Good. Good. Good. I was I figured you guys would keep going. I'd love to hear from you with your supply chain background in particular, because you bring a different perspective. There's a lot of lawyers who are line are signing in and watching. But from a supply chain perspective, what should you be doing with your vendors, or what what's your advice for people on working with your vendors with this new top cost of the tariffs? That's a great question. So first of all, thanks for having me, Laura. I I love talking about these topics and, maybe not enjoy as much navigating them, but, but it's actually it can be really intellectually stimulating to really to think about how you navigate these scenarios. I would kind of categorize the response in in two ways. The first, there are conversations that you should start having immediately. The first set of conversations is with the vendor, and the second set of conversations is internally with the rest of your commercial team, and really thinking about how to navigate it. So I'll start with the conversations to have with the vendor. The first is these types of, of of laws, these days tend to travel at the speed of light. I have been in rooms with, with Chinese vendors in China where I get the same I get a tweet at the same time that they receive it, and they're asking me from across the table, hey. I just saw this tariff go into place with, you know, Canada and Mexico. Do you think that we're next? And it's, it used to be that, you know, we might get a little bit of lead time before they do. But the good part about this is that prompts the conversation to really start talking about how that might affect pricing for, you know, for the the end product that you're gonna receive. And, I I loved your breakdown of the Incoterms, you know, ex works versus DDP or DAP, which, which kind of details out the responsibility. But at the end of the day, you as the buyer are going to be responsible for paying it. You're either paying that tariff to the vendor who is taking care of it. Most most likely, they're gonna ask for that, or you're going to be paying a a US customs, agent that is going to impose that tariff on your goods. Now the good part about this is that if your vendor is paying for it, you're looking at this as a fully built in cost to whatever they're selling you. It could be parts. It could be, you know, equipment like I'm used to dealing with. But at least if it's built in to the final cost of the item, there are triggers that you can have based on the pricing fluctuation that, that you might receive at the end at the end of the day and what you're gonna be paying. And, you know, depending on how you set up your contracts, that might trigger, alternative solutions for you to be able to open up conversations with secondary sources or other strategic vendors that you might have in place that are kind of waiting in the wings in the event that something happens in a negative way with that, primary source. So that's typically my preference is that the vendor is responsible for delivering DDP. They're going to be responsible for all of those charges, and I'm seeing it as one rolled up cost at the end of the day. Yeah. So And I agree. Yeah. For sure. Sorry to cut you off there. No. That's fine. Yeah. Let me know if there's a site. I I'll I'll I'll share the second part of this quickly. So, the I talked about two sets of conversations. The other set of conversations is what's happening internally. And so that's really where I would think about, how can we diversify our supply chain so that we're, we may have alternative sources that maybe have more favorable, tariff schedule in place. And those types of conversations need to also happen, pretty immediately. If you're not already having them, then you probably should be. Yeah. I I can see that. And building up that, awareness and, agreement internally is gonna be so critical to how you deal with these sudden costs. And and let me move and thank you so much, Will, for that insight. And I wanna ask Krista about it because you have a perspective of in house counsel in the middle of this, trying to deal with all these contracts as, the tariffs are rolling out as well. What's your perspective, and and what advice do you have for people? My my first perspective is it's job security. All of this disruption with the tariffs has certainly given us a lot of work as in house counsel. So, you can't always fix past contracts. I mean, let's just be honest, but you can absolutely control the conversations you're having right now. So that's really what we're focusing on doing, for those, that are mid discussion, mid contract with vendors. The best thing that we're finding we can do is just start setting expectations around the tariff risk tariff risk explicitly, asking the vendors if they're building in tariff risk into their pricing, putting that in writing. Right? Disclosing upfront how future tariffs would be handled. Are they absorbing it? Will they be seeking adjustments? If they wanna pass through later, right, looking for guardrails, proof of impact, materiality, notice requirements. We're looking even at caps on increases. We're also looking at, like, amending contracts or purchase orders just saying that pricing is fixed and firm unless otherwise agreed in writing or based on documented new tariffs exceeding a certain percentage. Those are some things that we're doing when it's explicitly on supplier risk, but we're also looking through all of our contracts and trying to figure out for how to protect our own risk. We hadn't really designed a contract based on Incoterms that we use, that might impact us as supply chain. So we're also looking, at it from that angle. Yeah. And I think the what you're talking about in terms of thinking ahead and who's gonna bear that risk in the future and trying to anticipate and put some guardrails in different terms to address it, it makes a lot of sense. I mean, it's almost like when we had such low inflation for so long that nobody was really putting, you know, automatic price increases in their contracts for every year or two years or whatever it was, and then suddenly we faced all this inflation. And, people will fall for it. That's what we contract for. Right? Like, it's our sometimes our companies think that we're, like, being too lawyerly, right, and that we're over overriding or overthinking. But, really, we contract for things that we hope will never happen. The tariff situation is a perfect example of something that's very fluid, changing very quickly, and so building parameters around it rather than being reactive and responsive to the up and downs is really what we're finding is the best approach. Yeah. I absolutely. So let's keep going to the next session or the next section we've got, which is gonna be on force majeure. And force majeure, the nice thing is everybody knows about force majeure. If you were doing if unless you're new to contracts in the last two years or so, because we all saw it with the pandemic, and it played out in a particular way. So I just wanna give a high level quick of the force majeure. And what the way I think of force majeure is criteria and process for impossibility and practicability. These are the terms that come from contract law, where you can't do something or it's impractical to do something. And we create these contract provisions from enforce majeure to give us more control over that. So we're not relying on case law and what a court will say. We're saying between us two parties, this is how we wanna deal with these kinds of events that happen. Force majeure is three parts, and and people forget to focus in on the parts. I'm always a big believer. You have to understand the core concept to really know how to negotiate it, how to apply it. And all force majeure should really have these three things. One is it's not foreseeable, not something unexpected. Again, with the tariffs, just to use that example, I think everybody knew tariffs were coming. We didn't know how much, but that's just an economic decision. It's unlikely that a tariff would be a force majeure in my view, because we could foresee it. Trump told us he was gonna be doing this. So at least that's one argument why it wouldn't be a force majeure. So the foreseeable the second is outside the party's control. This is, of course, a subjective standard and what is outside your control, but that's the second one. You don't wanna allow someone to claim force majeure events when they could have taken steps to prevent it. And third is people have to try and mitigate. You can't just have the, event happen and then just sit back and say, oh, well, too bad. You know, we're that's, we're just canceling the contract. The law and these contract provisions require the parties to take actions. So I wanted to just quickly go through a force majeure provision to highlight two different ways they're drafted. One is to focus on the laundry list, the long list of events. And this one is force majeure means, and it gives this long list of events, and then it gives those three standards. So long list of events and other events that meet the definition. The way this is worded, we're saying everything in that list is a force majeure event. So if you say an epidemic, the or let's even say we had tariffs in this first one in the laundry list, that is saying the tariff is a force majeure event, automatically, whether it meets the three criteria or not, or at least arguably so. So this is a very broad version. Vendors prefer this approach because it really gives them a big net claim force majeure because typically vendors are the ones being who are claiming it. Customers can as well, but in most traditional buy, sell relationships, it's the vendor that's doing most of the actions. Now the second part is a narrower force majeure. And this one, if you notice, we're doing a definition first. The three elements that I talked about, we're defining force majeure with those, so everything has to meet that. And then we give this optional list, and you can include your fire, you know, explosion, war, civil unrest, all those kinds of things in the second part, but they're not guaranteed to meet all those requirements. They have to meet the elements that I laid out in the first three in order to be a force majeure. So in this case, tariff, you'd have to it's not automatically force majeure under the second definition unless it's unforeseeable. It's outside control, and it's prevented could not have been prevented with reasonable mitigation. So keep that in mind if, you know, this is for vendor contracts and customers. So we typically when I'm doing supply chain, I want the second version. I want this I want force majeure to be limited to those that actually meet the definition, not just automatically giving a, you know, virtual free pass when it's in the list. So let's talk about force majeure, and I wanna go back to to Krista on this one is should we include new tariffs and a force majeure provision? I've given my thoughts, but I'd love to hear what you have to say on that. I agree with you, Laura. In almost all cases that I can think of, no. I I don't think you should treat new tariffs as a force majeure event. As I see it, force majeure is meant for impossibility. Right? True impractical impracticability of performance, not for cost increases or reduced margins. New tariffs are making everyone's deals more expensive, but it doesn't render performance impossible. So, I I do not believe that they should be treated as a force majeure event. Yeah. And I get I got really nervous. There were a lot of people posting when the tariffs first came out talking about force majeure events, and this company is claiming force majeure for the tariff. And all I could think of is, you know, that poor company that's claiming force majeure is gonna be facing a lawsuit and, you know, a really messy legal situation down the road when the tariffs are behind us or at least the shock of them and their customers who they terminated the contract with or stopped performance are gonna have those claims and bring those against them. So it's it's not a a risk free scenario to claim force majeure. It's a breach of the contract if you don't if you stop performing and you don't have a valid force majeure. So we can contrast that, right, with, like, an import ban. If there was a ban on certain goods and performance became impossible, that may constitute a force majeure event. But the the new tariffs, I I believe, should be handled otherwise in a contract. Yeah. I agree. Okay. So next question, and this one's for Adrienne. So if we don't talk about tariffs, what you know, I've seen people who say all obligations under the contract stop when there's a force majeure. Is that the best practice? Are there, is there another approach we should be thinking about when we're doing force majeure? So that is the million dollar question. Right? I think if you're looking to maintain your relationship, the answer is a firm no. Right? And and it's looking to see what really falls in that impossibility and impractical bucket. And I think the other element sort of the umbrella is temporary, usually, is what what triggers that force majeure, clause to be used. I like to think of it as the sleepy little clause that could, and it wasn't until really the pandemic that pretty much all of us who were doing contract work at that time suddenly started looking to see what was in those provisions. So some of the obligations that absolutely from my perspective, remain in effect, do not get suddenly, like you said, Laura, a free pass would be confidentiality. Those obligations stay in place. And the one that for vendors are is most important, but from the buyer customer's perspective, maybe looking for maybe some temporary relief, would be payment obligations. That's one that on the vendor side, you're always pushing for that the payment obligation, as long as you can access the funds, you should still be able to pay. But to clarify, it should be paying for the goods and and services that have been delivered. Right? It makes sense that you shouldn't be paying for something that you haven't received the value of yet. And so being clear on that, is really important. And, another thing from a vendor perspective that typically one would see, restricted, especially if you have a situation, like a pandemic or, you know, a natural disaster where it's not safe to actually proceed with the delivery of the goods. The going if you have to be in person to deliver certain services, that would be something that falls within that bucket of temporary temporarily impossible or impractical. So the on-site support access is restricted. It's unsafe. The delivery of goods and services and also performance deadlines. I think, you know, many of us are familiar with the service level agreement provisions, the SLAs, and, you know, depending on how aggressive the customer or buyer may be, they're looking to collect on those, right, because those give financial relief, but balancing that with what is reasonable, given the situation. And then Oh, sorry. Go ahead. No. I was just gonna flip to the customer perspective, the actual acceptance of the goods, thinking of material goods. If you can't be at the warehouse, if you can't be at the office because you can't access them, it's, you know, it's been flooded, and, god forbid, it's been burned down, allowing for that, flexibility to find alternative means. Right? Yeah. Yeah. I I like that a lot. Yeah. For Will. I was just gonna, kinda piggyback on what Adrienne was mentioning there. I think that, what toward the end, you mentioned looking for alternative sources and, alternative ways to be able to continue performing on the contract. That's something that, you know, we as supply chain managers are typically looking for in capable vendors, is looking not not only ourselves making sure that we have secondary and backup sources, but also that our vendors are able to do that so that if there's a disruption in their supply chain, they have alternative machine shops and logistics firms that can help to continue performing under, these types of scenarios. So that's something that I would certainly be looking for from a vendor is to make sure that they're taking every possible route, to find ways to continue performing under the contract, and making sure that that that those those are part of that conversation. I think that that's one of the ways you can continue the obligations, that aren't just, like, you know, confidentiality, but actually making sure that they can deliver and we can continue paying. Yeah. And it goes to if you have disaster recovery, provisions in your contract, you know, you probably shouldn't be able to claim force majeure for those either. Like, that's the whole point of them is that you have alternative setup. So let me ask you, Will. I'll follow-up on that is this kind of concept of alternative sourcing and force majeure and pricing and force majeure. How are you you know, what's your strategy, and how do you approach that? You you touched on it briefly, but is there anything else you'd add there? Yeah. I think it was Krista that mentioned, you know, the the best alternative would really just be to have firm fixed pricing at the end of the day and looking to to, to see what can you possibly do to keep the cost knowable and within, within control of the contract. However, we all know that these types of scenarios can make that impossible or infeasible. So most vendors, you know, in in this type of situation are going to be looking for some sort of a price range to be able to increase prices if they, experience price increases in their, within their supply chain. Now what most of them will argue is that, hey. Listen. You know, these tariffs are being imposed by your government. You are gonna have to be the one to pay these at the end of the day. But, Laura, as you pointed out, depending on your incoterms, that just may not be true. And so what I would be looking for is provided that the vendor has the obligation, and the, the liability to be able to absorb that, looking for a a an agreeable range beyond which I then, as a supply chain manager, have an alternative, source or I can I can tap into alternative vendors as a secondary or backup? That's really something that I would, advise supply chain managers to build into their contracts, because I think it can really once it goes beyond a certain scope, then that can impact your ability to deliver to your customers and, potentially even erode the demand for your end product, which can be a a disaster for everybody that's involved. Right. Right. For sure. No. That's a great point. So with that, let's move to change in law provisions, and, we'll talk a little bit. I'll give a basic intro, and then we'll continue with the the great conversation we're having. So change in law provisions create a mechanism for the parties to adjust terms when there's a new legal circumstance. And that adjustment can take a lot of different forms. And what we see typically is these change in law provisions have two parts, and you really need to make sure you're focusing on both of these parts. The first is the trigger, and this is where most people focus their energy is what kind of change of law, new regulations, whatever it is, is going to trigger something else. And then the second part, is that something else? What's gonna happen if this change of law occurs? So when we're defining what the change in law trigger is, we really have a full continuum of what we could do. So the very, very narrow is when you say, this change in this law particular law, if it becomes illegal or impossible. So, for example, I had this circumstance where I used to trade, environmental products and commodities. And this law these things are, like, greenhouse gas, credits and things like that. And those are statutory creatures. They only exist because the legislature created them, and we had one suddenly get invalidated. And we'd already sold a bunch of it. So that was a great situation where a real specific change in law, if this law goes away, that's triggering the provision. To the extremely broad is the other end of the spectrum of any change in law. And this is really you know, there's changes in law every day. Things happen around the world, around the country. Who's law? What is it? And then there's all these variations in between. So we have to be thinking about to what degree do we wanna open this up in your change of law or change in law provision. The way I think about it from a supply chain perspective is the broader and more subjective the trigger, the more risk it is for the person needing performance. And that person who needs performance could be a customer, or it could be the vendor. So let's say you have a vendor who's invested millions in their tooling, and they have invested so much in making this product. And the change of law, which is what I see some people proposing now, like, oh, if there's a new tariff, we just get the right to cancel. It's like, oh, that's not right. You know? This that that's not fair to the vendors. That's not protecting their economics. And I know, you know, we have to be focused on the profitability of both parties and not kind of screwing over the vendor, it just because this happens. So to me, that's not a great outcome. But it also could be the buyer. If the buyer is dependent on this equipment and they there's a change in law provision that lets the seller cancel it because there's a new law. Well, that's kinda screwing up the buyer because now they have to suddenly source something that they could have that there's nothing illegal about getting it. It's just perhaps gonna cost more or whatever the impact is of the new law. So these change in laws, you really, really have to be thinking through strategically how they work. You can't just say change a law, you can cancel. What does that cancellation really mean to the parties? So they once there is a change of law, what are they gonna do? And the two things I see most of the times, this is the first, which is the parties will negotiate. And this feels soft and fuzzy. And as lawyers and and supply chain teams, we don't like soft and fuzzy. We want, what are you gonna do? Let's do this. Do this. But this is a point, at least in my view, it's perfect to be soft and fuzzy. You should not be too precise because there's no way to predict what it's gonna be. And so what most people do is they have this obligation to negotiate in good faith and to have these conversations. And then you can put in more detail if you want in your, contract. You can say if it's open ended, or you're only gonna negotiate for certain provisions, or what kind of standards do you wanna set for that negotiation? Like, good faith and fair dealing and using this concept of I see sometimes an equitable adjustment to the terms, whatever that means. But at least it's giving the parties some guidelines, some guardrails of how to approach this thing. The other thing that we see is sometimes these change a lot is this right to terminate. This is the nuclear option if you think if I think of it this way. Unless it's a a good like, you know, you're buying something off the shelf from the hardware store. Well, maybe that does make sense because you can easily get it from someplace else, and there's nobody's gonna be really harmed. If this is terminated, the buyer can go get something else. The vendor hasn't invested a lot of money. So maybe that works in some situations. But, typically, somebody's losing money when a contract is terminated, especially unexpectedly. And you're thinking ahead, if you're gonna include change in law termination, you need to be thinking about who's suffering. And if it's you, you know, you preparing. And if even if it's your vendor, how is this affecting your relationship? Most vendor relationships are broader than one transaction, and you want your vendor to have success. So they're there to sell to you tomorrow, and you can secure that supply. So thinking about change of law holistically with all these variations is so critical. So let me ask you I'm gonna ask you first, Adrienne. How should the customers think about how aggressive to be in their change in law contracts or change in law provisions in their contracts? Yes. So I think the key factor to keep in mind is there's no one size fits all, which can be uncomfortable for us as lawyers. Right? Like, what do you mean? Just it should be one and done. And then I think also from both sides because many of us have been on both sides of the aisle, if you will, but it's the best compromise, recognizes no one should profit off of a change of law, and no one should be unfairly punished either. So what I have typically seen is tying it to a change in the industry. Right? So if it's something that's going to impact, right, as a technology provider, all of your customers, it makes sense that the vendor should bear the costs of that change in law. But I think also building in protections for if it is going to materially increase, right, the cost of providing the goods and services, there should be an opportunity for a discussion. Right? So maybe it's an off ramping, so not an immediate termination, but look, this has no longer become sustainable, and and how can we work through finding a way to, still fulfill the services, but also not be bleeding, through the term of the contract, which I think also goes into deciding the length of the contract on the front end. Sometimes that ten year deal sounds amazing until it doesn't. And then you get the call, how do I get out of this contract because it's way too expensive, which then goes into also being really as a strategic adviser to your business clients, is this a good deal? Right? Because I think sometimes we get into the pressure with, you know, it's the end of the quarter. We gotta close this deal. This is a must have, And the margins get razor thin, which doesn't leave any buffer for the inevitable event that's going to happen, which may not even fall into the change in law bucket. But the the thing that that comes to mind is when GDPR was all the rage. Right? And we knew it was coming. I don't know that everyone really had a handle on what impact it would have in terms of systems and processes and people and investment and all of that. But just being able to prepare as much as you can and, again, allowing for that relationship to have the conversation and recognize, you know, it may not turn out the way you want because expecting the customer to take it on, the buyer to take it on is not reasonable. And similarly, expecting the vendor to just eat all the cost, especially in a long term deal, doesn't make sense. It's a great point. And that is that practical reality is what we all live with and what we should be living with, which is these provisions have meaning and impact on businesses and companies, and we can't just take them lightly. So, I'll ask you, Krista, this next question is how do you balance these benefits of change in law with the risk of the other side not performing? This is, to me, one of the hardest questions because it's really we don't know in advance what the change in law will be. And so we're kind of, you know, taking a bet when we put these provisions in there. And whenever you take a bet, you're balancing upside downside. So I'd love your thoughts and just kind of how you make decisions about how to approach it from a risk perspective. Yeah. I mean, honestly, I think your guardrails that you kind of outlined already are are really how, But we have to keep in mind that, like, this should fix a real legal problem, not create a commercial excuse for performance. Right? Having, you know, clause like this that is drafted too broadly is, giving the other side a, you know, get out of jail free card. So narrowing the trigger to major impacts, kind of like you you outlined, I think, is is huge. Performance has either become illegal or materially impossible. Forcing renegotiation, you talked about that, you know, clear good faith obligation. I also like to include, like, very short timelines for that so it doesn't get extended or taken advantage of. And then termination rights have to be, like, real demonstrated impact and not just a desire for a better deal. I think that's really critical, and it keeps both sides kind of in check. Right? This is intended to allow realignment and not like, an exit. Exactly. I've got, I've got some examples of that that that are happening recently. So, Laura, in the beginning of the presentation, you you, talked about the tariffs really being an economic lever, and not something that's really, you know, inhibiting the ability to, to still do business with these partners. But one of the, one of the predictable consequences of some of these tariffs are actually things like, like trade, or export controls is the way you would think about them. So, recently, China, for example, has placed export controls on rare earth minerals that are used in things like magnets or motors and batteries and other things, and, you know, under the the claim that they are national security of national security interest. But so that's something that's an actual change of law. Maybe it was a result of the, the the tariff negotiations, but now that's something that prohibits your vendor from selling you that item. And I think both parties would want for that, to be something that's covered in this type of change of law provision because them as a supplier, they still want to be able to sell and be paid for these goods, and you as a as a a buyer still wanna be able to gain access to them. So, you know, some strategies for doing things like this or things that that may be, kind of caught in the crosshairs are things like drawings. So maybe they can't provide you with that material anymore, but there might be specifications or, or details about how you can have an alternative source make it that you would want to be able to gain access to in the event that something like this happens. So that's just, like, one of the examples I've seen recently, but it's very much, since to this point that having these change of law provisions can actually be a benefit to both parties. Yeah. And I like that a lot where it's such in the spirit of us working together to face problems as opposed to the adversarial approach where it's me versus you. This is zero sum. You know, either I win or I lose. But instead, we can really structure things like that, which is a, in a sense, a win win in a terrible situation, or a lose lose. It could be. But whatever it is, it's it's the parties working together to solve the problem instead of, unilaterally. So I think that's a great example. So let's move to the last part, and I know we're getting down to the wire, and we wanna have a couple minutes for questions. We may go a little bit over, just in case, and we'll stay and answer questions or, at least, hopefully, the speakers can stay. So the the final section is gonna be set off suspension and termination. And these are contractual techniques we use for dealing with difficult situations, whether it's external or internal. And I just wanted to go through these as part of this presentation because they are so powerful in ways to give you flexibility in your contracts when things happen, whatever they are. So this is this ability to make choices about your, circumstance is what most customers want. You wanna have that flexibility to deal with the reality. And if one door closes, you wanna be flexible to go open that other door. So there's two ways that we see companies being able to exercise self help. And this is essentially at the beginning, I was talking about how force if you exercise force majeure and you didn't meet the proper qualifications to breach of the contract. Well, the thing with self help is we're building in the contract these rights to take unilateral action, and they come in two forms. One is set off, and that's allowing a party to deduct what it's owed by the other side from what it pays. This typically is gonna be a customer. The second is suspension, and a party can suspend performance in certain circumstances, and it's authorized to do that. So it's not a breach of the contract. It's your prenegotiated this right to suspend performance under certain circumstances. So let me go and walk these through just quickly. So the first one is the set off, and this is typically worded as something like this, where the buyer gets this right to deduct from its invoices that it's paying to the counterparty any amounts it's owed. A very fuzzy language often in these things. These usually favor the customer, but there can be circumstances when vendors take advantage of these as well, especially if there's amounts owed by the, customer to the vendor on or excuse me, by the vendor to the customer, it can go both ways. So the things my advice for customers, if you are drafting, these is think about what fees you wanna include. It doesn't it can be just one kind of fee. It doesn't have to be all fees. You have to some of the tricks that people use or nuances depending on your situation is, extending it to the affiliates, especially if you're buying from a corporate group. If you wanna have a broader set off right, you can extend that right to deduct against all the different counterparties. Lots of issues with this one. Not something to be doing done quickly because it creates a lot of accounting issues. Your finance team might not even want you to do this, but just something to be aware of. And then what degree of notice you're gonna give your counterparty, if you you're gonna be doing set off. Sometimes there's no notice. Sometimes it's we'll consult with you. The thing you don't want as a customer is to have to have your counterparty approve set off because that leaves your hands tied. So suspension provisions, this is a more pro vendor position when they're performing most of the obligations. They can suspend performance, for example, if you don't make payment by the due date. You know, to me, this always as a supply chain lawyer, I felt like this was holding me hostage because if I'm dependent on the vendor and they just suddenly were, like, one day late or, you know, some little thing happens if this is written even broader. If there's any breach of the agreement they can suspend, then I've seen time and time again where vendors hold this over us and basically use it almost as extortion. It's an extreme word. But it feels like that at the moment that they're extorting us to do something or give them extra money or whatever because they're basically saying we're not gonna perform this thing that your whole company is dependent on and you need desperately. So if you are a customer thinking about suspension and your vendor is insisting on it, you know, ideally, don't like suspension. I take it out because and vendors say, well, then I have to terminate you. And I personally, I'd rather have that because people are very thoughtful about termination. They don't just do it on a whim. They don't they make sure that their ducks are in order, and they've done you know, use another analogy, dot all the i's, cross all the t's. They've done their work because of the consequences of terminating without support. Suspension doesn't fit that category. So when I'm in those negotiations, I say, great. I'd much rather have you terminate because knowing they're more likely to negotiate with us if you're kind of leading up to that termination where versus suspension, there's really no need to negotiate. They just suspend, and you're kinda screwed. So it's also grace periods if you can get it. Exclude fee disputes where you have a period of time where you can dispute the fees without facing suspension, and you can exclude some things from suspension. I do this sometimes with critical infrastructure. I say, okay. You can suspend, but not you still have to keep the system running, or you still have to, you know, meet your service obligations during it. Sometimes I'll offer to pay separately from that, or, you know, something, anything so that my critical infrastructure doesn't get affected. If you're worried about your vendor suspending, I've given you some ideas, but things like objective standards, limiting it to proportional measures. So if they you owe a hundred dollars, they're not gonna cancel the hundred million dollar deal. And then building in some processes around that suspension is is really helpful for customers. For termination, and I won't get into termination. We all know termination. But I did wanna include it in this part just to make sure we're rounding it out. And I know we're gonna go a little bit over, so, hopefully, people can stay for, the remaining five minutes or so of this. But if you want flexibility for termination, make sure you have a cancellation fee if you're on the, you know, if you're the vendor. I typically want a cancellation fee if you're the other party is gonna be able to get out early, a right to prepay for ongoing service if the financial issues are there, and then credit support is always an important one. And all these, we're gonna cover in our next module. So let me ask you, and we're getting near the end. So, Will, I'll just ask you this question, which is, what strategies do you see supply chain teams use with set off suspension and termination? Great question. I normally like to see these two paired together or at least a cohesive strategy between the two. On the set off topic, I think the most contentious thing is what qualifies as a as a set off expense, and when, when is that something that's approved by the by the vendor. You mentioned that you typically don't like to have the vendor have to give approval for those, that set off. But depending on the, you know, accounting standards that you're upholding within the organization, you might need to have an invoice that matches with what you pay. So at the end of the day, you've gotta convince the vendor to change their invoice to include that set off amount so that everything matches up and you can have harmony within within your accounting books. On the other side, when it comes to suspension, one of the things that I'm often looking for is, you know, what that I think the vendors are looking for is, that you are they're they're going to want to know that, like, if they've actually performed and that is a valid invoice that they've sent you for work that's been performed, that you are going to pay that amount. And so the thing that I would always advise my team to do is to make sure that they raise the flag early for anything, any kinds of disputes because oftentimes we were able to get those exempted from that, that time period, beyond which the vendor could suspend performance. And the sooner you're able to do that and say, hey. This doesn't match with my view of of reality. You know, we've had to foot the bill for these expenses. We're rejecting this invoice because we want to, set that off this amount. That helped, at least have some administration around when they could, when they were legally allowed to suspend performance. So those are that's the way I think about those two clauses just being related to each other. Yeah. No. Those are that's and it is it is should like so many things in our contract, should be an integrated strategy and not just focused on individual provisions, but thinking of them holistically in the contract and how how they affect the relationship. Exactly. What what what type of behavior do you wanna promote or encourage from the vendors? Yeah. So before we we're gonna, again, stay over, answer the questions, if for folks as long as you wanna ask them. But, let me stop and say or stop and get the final advice from our panel. And I ask you and I'll start, Adrienne, with you of what's your takeaway that you want people to be thinking about when we're talking about supply chain disruption and our contract negotiations? So I'm off mute. Okay. Good. So I think the most important thing is to be mindful of the leverage you have and the needs that you have. Right? Because I think it's easy. You get the sort of, like, the the big person on campus coming in, and exerting their power and, it it doesn't make sense sometimes, and and you wanna think of this as a long term relationship. So, yes, protecting as much as possible, but weaving in that that reasonableness and balance based upon what the deal is, what the needs are, and the potential impacts downstream. That's a great point. How about you, Krista? What's your takeaway for the audience? I I love what Adrienne just said. I think if you can control the contract terms upfront, you can control or at least manage the disruption better later. I would add, precision and proactiveness as well. Don't rely on assumptions and bring up tariff risk change in law now, not after there's a problem. It's an it's a not an if situation anymore. It's a when. Yeah. For sure. How about you, Will? I would say communication is key. So communication upfront, as you're drafting the contract and making sure that you're placing clauses in there that are going to help, help you navigate these types of set scenarios, whether whether they're predictable or unpredictable. And at least at a very minimum, having a trigger for a conversation down the road, if these things are to happen, then we will have a conversation about them, and work on them in good faith. I think that that's that's another tool that you can use to make sure that, nobody's just having to, to eat the frog, but, that both parties can talk about it and really come to the best outcome, that will be commercially acceptable for the vendor or the customer, and also just the the right thing to do at the end of the day. Yeah. I like all that. Oh, such great advice from all of you. Before we hit questions, just a final promo for the next module. Module two is gonna be drafting pricing and financial terms to manage risk. And we're gonna be getting into all those issues I mentioned in the slide earlier of kind of more, economic ways to manage risk in our contracts and the various tools and strategies we have. So, that's fantastic. So let's get into the questions, and I'm gonna just ask the speakers. One of the questions that came a while a lot earlier was from Danielle, and she said, how can I best keep up with the ever changing tariffs? And I don't know. This is a tough one because there's exactly. Exactly. Is there a way? And I think, Krista and and Will, you're you're facing this a lot right now. What do you do to keep up? So, you know, I would I would say that government sources, tend to just have the both the most definitive and objective sources of information. So there's, like, The US, what is it called? The trade representative office. And so this is the office of the president that actually, sends out communications on these executive orders whenever they happen. So that would be the definitive source. The reality is some of these things actually are changing over social media, so, it can that can also have an an effect and be outside the normal guidelines that, that you would normally look to. And so while I don't wanna necessarily endorse just looking to social media, I would say looking for the official sources from a a government website like the, USTR. And, and then there are also paid services. One of my favorites is Import Genius. So Import Genius, I've used extensively to get guidelines on harmonized tax codes, and information on, you know, what, what the tariffs are for certain goods that I would wanna be importing from other countries. And I think that they are pretty well incentivized to make sure that they're providing this as a service to their customers. So, yeah, those are those are my answers. I'd say government websites, potentially paid services, and, of course, just always having your social media notifications on for these types of things. Yeah. That's great. One and I'm gonna ask a question that's it wasn't in the q and a, but I saw it in the chat while we were talking about, the the termination set off and suspension, and this is the concept of reasonable assurance. And, for Adrienne particularly, because this is adequate assurance, reasonable assurance. These are, concepts that we have to you know, that we have at our our in our quiver, we'll say, for dealing with these things. And, really, either of you, but, Adrienne and I see Krista had to drop off. Sorry. And, thanks for Krista for being here. But for Adrienne, how do you see reasonable assurance, adequate assurance, and working in these kinds of situations? So when I've worn my vendor lawyer hat, definitely set off, creates a lot of accounting, challenges, and so there's always a healthy debate as far as, you know, if and then when and what those guardrails are. So in terms of assurances, always having as objective a standard as possible is the most helpful. So if you're ending up with a provision, you know, commercially reasonable, something to at least quantify it that it makes it a little more difficult to have a disagreement about it. Yeah. And I'll add I did have to deal with adequate assurance a lot because I did a lot of goods and materials in the energy space for a long time, and we really it's a u uniform commercial code concept that, just for those who aren't familiar with it. It has some hoops you have to jump through, but, basically, what it says and the beauty of it is that if you have, if you take advantage of the UCC's adequate assurance provision, you don't have to wait for the vendor to breach. If you believe the vendor is going to breach, let's say, they're a factory burned down and you know they're not gonna be able to deliver the good on time. You don't have to wait, let's say, but it the delivery is sixty days from now, and you are gonna be screwed if you don't get that delivery, but you have facts that they're not going to. Under the UCC, you don't have to wait for that breach. You can ask them for adequate assurances. And if they don't give that, you can treat that as a breach. So that's a way to get around it. Again, very technical. I would dive into the details of it if you ever wanna use it, but it can be really helpful in these situations. And, also, just from the other side, if you are ever asked for adequate assurance, be very, very careful to respond, to talk to your lawyer, to get be proactive. I've seen people who ignored adequate assurance claims, and it triggered a huge amount of activity that they could have prevented if they hadn't just put their head in the sand and pretended it would go away by itself. Because adequate assurance does not go away if the other side is especially with goods relying on the UCC, it does give them a lot of rights if you fail to provide adequate assurance. So that's a really good point, and, again, another tool for all of us. So there's a question. There was also a question on let me ask the next one. Let's see. How are people managing pricing changes if, technically, the contract states sixty days prior notice before a price change can be made? Is there some way to work around that with the tariffs and the issues related to it, and the reason for needing a price change? Yeah. This is at least I'll give my take. You know, you kind of made your bed when the contract says sixty day payment terms or six sixty days pricing notice. And this is part of contracting. It's just so the parties have an agreement on how it's gonna work, and they can't change it suddenly and increase prices. Even though the tariffs sudden, your contract that you've agreed to has limitations on how much flexibility you have, and that's just part of risk allocation with contracts and why we approach contracts proactively and thinking about these things. But I'll also say you can't always think about everything that's gonna happen. This stuff happens. And as much as we plan and we I have a contract that says everything properly and, you know, we've mitigated every risk in the world. There are still things that are gonna happen that are gonna throw off the economics for the customer or the vendor, and that's just the way things work. There's only so much you can do to that. So I think, at least my thought on this question is you're kind of stuck. If it's sixty days notice, sixty days notice, you can try and negotiate. Maybe you have a good relationship. Maybe there's something they want that has value for them that you they would agree to what pricing change earlier. You know? Short they get to shorten the time frame of delivery or shorten the time frame of, deliver I don't know. Whatever it is gonna be. But you have to think proactively because it's just a negotiation. It's not a contract. Right? I'm not anything to add on that, Adrienne or Will? No. I think that's right. And and it comes back to being clear on the front end and thinking ahead as best you can. And, of course, like, what's fair? Because the buyer, the customer has made the deal based on they are planning as well. So while, yes, as a vendor, you want to, you know, get the necessary adjustments so that you're kept whole, Sometimes this may just be the deal that that didn't quite work out, and so you need to adjust it for the next one. Yeah. I I think about, like, where is your time best spent? It's it's not best spent, like, trying to figure out a way to relieve yourself of the sixty day, period. It is well spent thinking about what you're gonna do beyond that sixty day period. So starting that conversation as early as possible, you know, might actually give you some, some relief once you get to that, that sixty day cliff. I think and the other thing I was gonna add is I think companies should be doing more risk management generally when it comes to supply chain. That this shouldn't just be some sourcing folks are over there, and they're managing our risk. And, you know, we'll put them in their little bubble. They'll take care of our risk. It really should be a holistic thing across the company. And I think coming together proactively to think about risk across finance, legal, supply chain, operations, engineering, all the different groups, and thinking about what's our strategy, what's our corporate strategy about these kinds of things. And risk can be managed in so many different ways from insurance to pricing terms to credit support to so many different things that if we think about instead of looking at, oh, the tariff hit and we have sixty day pricing lock, You know? Yes. That's the risk we're facing today. But if going forward, learning from all these experiences of the pandemic, of the tariffs, sudden tariffs, thinking as a company, like, we know stuff's gonna happen. What are we doing to prepare? How are we how have we set up our internal processes and systems so that we are anticipating these things and making sure that the executives may know a risk is coming or to help sourcing may know a risk is coming. But if it hasn't been translated through the the documents to your contracts and you haven't institutionalized how you negotiate those contracts to address that risk and have consistency across your team, it's just you're gonna continue to face them no matter what you do. So I think that is probably my final takeaway for the for this webinar. And, what I hope people get from it is learning more about these tools that we have for dealing with these issues and thinking about them, holistically in terms of the relationships that we have, the bigger economics of those relationships, and using those to help us move forward. So with that, I wanna wind up. So thank you, Will and Adrienne, and thanks to Krista for being here. So grateful for your all of the knowledge you shared. This was amazing. Thank you so much, Laura, for prompting the conversation. Yeah. Thanks for being here. Wonderful. Well, thanks Thank you, everyone. I appreciate you being here, and, hopefully, we'll see you at the next module. Bye, everybody.