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Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Mar 26, 2015

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Page 1: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.
Page 2: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

Purchasing, Manufacturing and Distribution AgreementsCase StudiesQuestionsBehaviorPlain English RecitalsCritical TermsCase Studies

Page 3: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

Questions: The “What If’s?”What if we have a problem?What if we can’t identify the vector?What if the vendors go out of business?What if they don’t have enough insurance?What if we don’t have a contract?

(Could be better off than with a bad contract.)What if we do have a contract?

Will it protect us?

Page 4: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

Case Study No. 1Chi Chi’s

Hepatitis A on green onions kills 3; 660 ill; thousands more get gamma globulin shots.

Chi Chi’s already in BK, but up-for-sale.Hep A outbreak is final death-blow. Chain sold

for assets, not as “going concern.”Customers / Victims sue Chi Chi’s.Chi Chi’s sues vendors.

Page 5: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 1

Chi Chi’s (cont.)Green Onion trail:

Mexican Grower sells toAmerican Distributor, who sells toCastellini Produce, who sells to Sysco (Sigma Distribution).

Litigation with first three in chain on-going.Arbitration with Sysco recently completed.

Page 6: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 1

Chi Chi’s (cont.)Chi Chi’s and Sysco had a contract.

Clauses included Indemnification and limitations on liability and remedies.

Sysco argued that an “express” provision limited remedies.

Chi Chi’s argued that remedies weren’t limited to the contract, that UCC remedies also existed.

Page 7: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 1

Chi Chi’s (cont.)Why does it matter?

Sysco argued that they had to be “grossly negligent” to be liable.

If UCC remedies, then this was a Breach of the Implied Warranty of Merchantability, and the only question was, “what was the state of the product when Sysco delivered them to Chi Chi’s?”

Page 8: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 1

Chi Chi’s (conclusion):Arbitrator held that despite the existence of

the contract and indemnification provisions, Chi Chi’s was not limited to just the contract.

Awarded $7.5 million to Chi Chi’s.Sysco did prevail on higher, “going concern”

damage claim.Lesson: Don’t limit remedies in contract.

Keep UCC option in play.

Page 9: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 2

Wendy’s v. Pacific Intn’l and A & A FarmingUnderlying issue is e. coli outbreak at

company-owned unit in UtahSeveral people who ate salads illSuspected but not proven vector is lettucePlaintiffs sued Wendy’sWendy’s, in turn, sued its distributor and the

likely grower, a California farm, for indemnity.

Page 10: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 2

Wendy’s Supplier AgreementExecuted in 2004Palletized Lettuce, Romaine, Spring MixAgreement obligates Pacific to

Indemnify, Defend, Hold HarmlessWarranty that all products comply with all lawsGuarantee that product not adulteratedMaintain GL and Product Liability Insurance

naming Wendy’s as “additional named insured.”

Page 11: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 2

Pacific’s ResponseCause of e. coli has never been determinedProbably will never be determined “Typically if there is contamination at the

grower level, many states and many people are affected.” Here, there was only “a small number of complaints.”

“We see no liability”

Page 12: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 2

Wendy’s Suit v. Pacific Filed 8-28-07No resolution, yet.Parties will argue causation

Tough when upstream products co-mingled.Culprit meat supplier never identified in JBX.

How to avoid this? Insurance naming you as ‘additional named

insured.’ And Follow Up!

Page 13: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

BehaviorOps, Purchasing, QA and Legal have to be

in sync.Purchasing must be rewarded/punished on

more than price.E-coli aftermathRancid lobster

It begins at the top.

Page 14: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

Plain English RecitalsUnusually important to Judges, JuriesWhat is this contract for?

Not widgets or auto parts. It’s foodPeople eat it It must be safeThe contract must say this

Page 15: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

Critical Provisions Insurance: naming the restaurant company

as ‘additional named insured.’Get a certificate – track the expiration date

Indemnification: restaurant company should be protected against risks that the manufacturer or distributor control:

Bone chips, foreign objectsShipping / temperature damage

Page 16: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

Critical Provisions (cont.)Warranty:

“Safe and fit for human consumption: “Complies with all applicable Federal, State and

local laws . . . is not adulterated.” (Already obligated—how can they object?)

Product DeliveryNarrow window for deliveryLarge window for rejection

Page 17: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

Critical Provisions (cont.)Audit Rights

Important in ‘mark-up’ contracts.Permit contingent fee auditors

Detailed Food Safety SpecificationsQA should produce / update this. It should be an exhibit incorporated into contractShould detail fat count, weight, size, texture,

color, appearance, detail pathogens and acceptable / unacceptable microbial counts.

Page 18: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

Critical Provisions (cont.)Factory Inspections and Laboratory

Testing If you don’t have a robust QA function, then

access to 3rd Party Reports / AuditsRight to conduct own auditsRight to have samples shipped directly to Labs

RemediesDon’t limit the remedies.

Page 19: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

No Competing FormsAgreement may not be modified by pre-

printed forms, bills of lading, etc.Every vendor argues this one.

Page 20: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 3

When It All Backfires – Libel Suits

Defamation is the communication of a statement that makes a false claim, expressly stated or implied to be factual, that may harm the reputation of an individual, business, product, group, government or nation. Most jurisdictions allow legal actions, to deter various kinds of defamation and retaliate against criticism.

The common law origins of defamation lie in the torts of slander (harmful statement in a transitory form, especially speech) and libel (harmful statement in a fixed medium, especially writing but also a picture, sign, or electronic broadcast).

Page 21: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 3

When It All BackfiresJack in the Box

CEO told media that supplier had provided adulterated product.

While true, Vons argued that the implication was the Jack in the Box had no fault, or that majority of fault was Vons.

At one point all Jack in the Box contract claims were dismissed, while only claim left was Vons claim against Jack in the Box.

Page 22: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 3

When It All BackfiresTaco Bell

70 + customers sickened by e. Coli in late 2006.Taco Bell loses $20 million in operating profit.Taco Bell fingers green onions as cause.Green onions exonerated by FDA. (Lettuce

blamed).Supplier sues Taco Bell for millions (Mar., 2007)

Page 23: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Case Study No. 3

When It All Backfires.There is no upside to blaming suppliers in

the heat of the moment.Consumers just want to hear that you are

Taking responsibility.Fixing the problem.

When the dust settles, and you have certainty, you can blame vendors.

Page 24: Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies.

Contracts

SummaryThe greatest contract in the world is

worthless without changes in behavior—all departments must work together to ensure that the contract mirrors company goals.