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Congratulations! You're our “Plan B” – Alternate Supplier Checklist

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Part I
Jean G. Schtokal
Foster Swift Business & Tax Law News
June 29, 2020

Inspection ChecklistThe COVID-19 Pandemic has wreaked havoc on supply chains. Supplier changes that are usually planned over years are taking place over months or weeks. Whether you are the Buyer or Supplier, here is a bullet by bullet checklist to help both parties reduce risk:

  • Due diligence is still key. You are trying to fill a hole, but you don’t need to jump into it and bury yourself. Even the best drafted contract won’t protect you if you have chosen to deal with a snake. The English rule on loser pays costs of litigation seldom applies in the U.S. To prove you are right on a point of dispute you will be paying a lawyer’s salary for a year, or more. One of the best ways to protect your company is to conduct due diligence on new transaction parties.
  • In addition to background, litigation and financial checks, if you are not normally a Buyer or Supplier for this particular product or service, you need enhanced due diligence. There may be certification requirements, registration requirements (for you, the facility, and/or the product), due diligence to be conducted regarding pricing (including a check for red flags, for example in the case of Buyers regarding product origin, such as embargoed nations), and license/approval issues. In some cases, significant fines, penalties, product liability and/or jail time can result from a violation of such requirements.
  • If you or the other party are using a third-party intermediary such as a broker/agent or distributor and are not dealing directly with the Buyer or Supplier, then due diligence should also be conducted on the third-party intermediary, (as well as the Buyer or Supplier). This includes restricted party screening and registration and licensing requirements. If this is not the third-party intermediary’s normal line of business or if it has no expertise with regard to the product or does not have a history in the industry, don’t expect or count on any recourse, assistance, or assurances from that third-party intermediary. This can also be a red flag.
  • Here is a best practices list:
    • 1) background checks,
    • 2) litigation searches,
    • 3) Google and Google Earth searches,
    • 4) checks through trade associations,
    • 5) restricted party screening,
    • 6) review license, approval, certification and registration requirements (can be product, facility and/or party based),
    • 7) understand the other parties’ supply chain/customer base and the potential uses of the product,
    • 8) conduct pricing and costs/expenses analysis to rule out violations of law (for example, domestic price gouging, anti-corruption or anti-bribery laws violations),
    • 9) talk to some of the other party’s customers/suppliers,
    • 10) document the intended transaction in a written contract, even in the case of a “one off” deal. There is normally a tendency to conduct less due diligence for “one off” transactions, so you will need all of the contract risk reduction techniques at your disposal. Written contracts reduce risk, and can also allocate risk between the parties.
  • If you are just relying on standard order or quote forms and are not using a specific written contract, consider legal review and update to your form terms and conditions, including the provisions at the end of the form terms and conditions which often appear under a “miscellaneous” or “other” heading. Use the “special” or “additional” terms section of the quotation form or purchase order to document anything agreed upon that you are relying on that is not included on the quote or order form. Contract terms that were considered “boiler plate” before are now critical regarding risk reduction. Those include but are not limited to: Choice of Law, Dispute Resolution, Jurisdiction, Force Majeure, Amendments, Compliance with Laws, etc.

If you have further questions regarding due diligence of alternate suppliers, contact Jean Schtokal at 517.371.8276 or at jschtokal@fosterswift.com.

Stay tuned for future publications in this series: 

  • Part II - Due Diligence Details/Parties
  • Part III - Due Diligence Details/Product
  • Part IV - Due Diligence Details/Third-Party Intermediaries
  • Part V - Contracts Best Practices
  • Part VI - Houston, we have a problem - Dispute Resolution