Four steps for manufacturers to avoid legal pitfalls of re-sourcing supply
Disruptions in the supply chain are leading manufacturers to seek alternate sources, often involving termination of a contract, which can lead to a number of legal pitfalls. James DeLine recently recently outlined how manufacturers can avoid these pitfalls to ensure a smooth transition for DBusiness.
With market volatility and supply chain constraints at record levels, manufacturers find themselves in unfamiliar territory with their supply base. As a consequence, manufacturers may need to protect production and reduce costs by finding an alternate source of supply during serial production. Changing suppliers mid-program often involves the termination of the supply contract, which can be fraught with legal pitfalls leading to costly litigation and delay. Knowing how to avoid these legal pitfalls can help smooth a manufacturer’s transition to a new supplier and minimize legal risk. The following four steps will help assure an orderly transition of supply.
First, understand your supply contract. The single most important roadmap for changing suppliers is the contract itself. The contract governs your rights and obligations with the supplier and may set forth a procedure for re-sourcing. In some cases, the contract may consist of a series of documents, such as quotations, purchase orders, and standard terms and conditions, that together constitute the supply contract. In other cases, there may be a discrete supply agreement negotiated between the buyer and seller and signed by both parties. The contract may provide a specific expiration date, after which no further obligations exist for either party. Often, the contract grants the buyer a right to terminate the contract with or without cause when changing suppliers before the expiration of the contract. Absent a specific provision allowing for early termination, other contractual terms, such as force majeure, may also give rise to termination rights. Understanding your contractual rights – and obligations – can go a long way toward developing a successful strategy to change suppliers.
Read the complete article on DBusiness.
About the author:
James E. DeLine is chair of Kerr Russell’s automotive industry practice group. He has extensive experience in all phases of state and federal litigation as well as domestic and international arbitration. He regularly represents clients in several areas of law, including contract and UCC matters, automotive supply chain disputes, injunctions, product liability, antitrust, business torts, shareholder rights, creditor’s rights, and appeals.
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