Contracts Purchasing, Manufacturing and Distribution Agreements Case Studies Questions Behavior Plain English Recitals Critical Terms Case Studies
Contracts Questions: The What Ifs? What if we have a problem? What if we cant identify the vector? What if the vendors go out of business? What if they dont have enough insurance? What if we dont have a contract? (Could be better off than with a bad contract.) What if we do have a contract? Will it protect us?
Contracts Case Study No. 1 Chi Chis Hepatitis A on green onions kills 3; 660 ill; thousands more get gamma globulin shots. Chi Chis 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 Chis. Chi Chis sues vendors.
Case Study No. 1 Chi Chis (cont.) Green Onion trail: Mexican Grower sells to American Distributor, who sells to Castellini Produce, who sells to Sysco (Sigma Distribution). Litigation with first three in chain on-going. Arbitration with Sysco recently completed.
Case Study No. 1 Chi Chis (cont.) Chi Chis and Sysco had a contract. Clauses included Indemnification and limitations on liability and remedies. Sysco argued that an express provision limited remedies. Chi Chis argued that remedies werent limited to the contract, that UCC remedies also existed.
Case Study No. 1 Chi Chis (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 Chis?
Case Study No. 1 Chi Chis (conclusion): Arbitrator held that despite the existence of the contract and indemnification provisions, Chi Chis was not limited to just the contract. Awarded $7.5 million to Chi Chis. Sysco did prevail on higher, going concern damage claim. Lesson: Dont limit remedies in contract. Keep UCC option in play.
Case Study No. 2 Wendys v. Pacific Intnl and A & A Farming Underlying issue is e. coli outbreak at company-owned unit in Utah Several people who ate salads ill Suspected but not proven vector is lettuce Plaintiffs sued Wendys Wendys, in turn, sued its distributor and the likely grower, a California farm, for indemnity.
Case Study No. 2 Wendys Supplier Agreement Executed in 2004 Palletized Lettuce, Romaine, Spring Mix Agreement obligates Pacific to Indemnify, Defend, Hold Harmless Warranty that all products comply with all laws Guarantee that product not adulterated Maintain GL and Product Liability Insurance naming Wendys as additional named insured.
Case Study No. 2 Pacifics Response Cause of e. coli has never been determined Probably 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
Case Study No. 2 Wendys Suit v. Pacific Filed 8-28-07 No 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!
Contracts Behavior Ops, Purchasing, QA and Legal have to be in sync. Purchasing must be rewarded/punished on more than price. E-coli aftermath Rancid lobster It begins at the top.
Contracts Plain English Recitals Unusually important to Judges, Juries What is this contract for? Not widgets or auto parts. Its food People eat it It must be safe The contract must say this
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 objects Shipping / temperature damage
Contracts Critical Provisions (cont.) Warranty: Safe and fit for human consumption: Complies with all applicable Federal, State and local laws... is not adulterated. (Already obligatedhow can they object?) Product Delivery Narrow window for delivery Large window for rejection
Contracts Critical Provisions (cont.) Audit Rights Important in mark-up contracts. Permit contingent fee auditors Detailed Food Safety Specifications QA should produce / update this. It should be an exhibit incorporated into contract Should detail fat count, weight, size, texture, color, appearance, detail pathogens and acceptable / unacceptable microbial counts.
Contracts Critical Provisions (cont.) Factory Inspections and Laboratory Testing If you dont have a robust QA function, then access to 3 rd Party Reports / Audits Right to conduct own audits Right to have samples shipped directly to Labs Remedies Dont limit the remedies.
Contracts No Competing Forms Agreement may not be modified by pre- printed forms, bills of lading, etc. Every vendor argues this one.
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).common lawtorts
Case Study No. 3 When It All Backfires Jack 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.
Case Study No. 3 When It All Backfires Taco 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)
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.
Contracts Summary The greatest contract in the world is worthless without changes in behaviorall departments must work together to ensure that the contract mirrors company goals.