Companies that conduct business on an ongoing basis with another company often find it useful to have a Long Term Agreement (LTA) to govern the continuing transactions. Using an LTA, companies can set the framework that other and further agreements, like purchase orders, will supplement and modify. One of the key benefits of an LTA is efficiency. Creating an LTA can limit and focus the drafting and negotiation process for each purchase order to the terms not already covered by the LTA. Instead of having to renegotiate every detail in each P.O., from warranties and indemnification, to forum selection, the parties can work under one LTA and only need to draft and negotiate an agreement related to the specific purchase and sale of that specific transaction.
There are some provisions that every LTA should address. Importantly, if properly drafted, the purchase order or other agreement governed by the LTA will still have the ability to modify, add, or eliminate business (but not legal) terms of the LTA based on the specific needs of the present transaction.
Pricing Over LTA Term.
LTAs should provide how pricing over the term will be handled. This includes whether shipping and handling is included in the price. Depending on the term of the LTA, it may also be necessary to include a price adjustment provision to allow adjustment based on a change of specifications or manufacturing cost increases.
An important issue for consideration in any LTA is what type of warranty is provided by the supplier if a defect is alleged to exist within the product. The LTA should specify whether the supplier is to provide only replacement and/or repair of defective items and who is responsible for the cost of such replacement or repair. The LTA should also provide how long the warranty lasts, and avoid assuming liability for any claims by purchaser’s customers arising from warranty claims. This section of the LTA should also include a warranty that the parts supplied are not surplus, used, remanufactured or reconditioned.
Indemnification and Liability.
If a product claim is made based on the part supplied, the LTA should make it clear how liability is apportioned. In many agreements, parties agree to indemnify the other party if a claim is based on the actions (or lack of action) of the indemnifying party. There can be limitations to the indemnification if (a) such action of the indemnifying party was due to the design or specifications of the indemnified party, (b) negligence by the indemnified party, or (c) the parties agree upon a limitation of liability “cap”.
Intellectual Property Ownership.
In most cases, parties to an LTA will need to exchange intellectual property (IP) to facilitate the working relationship of the parties. As this IP is exchanged, it is important that the LTA address the ownership of the IP. In most cases the parties do not intend their agreements to amount to a change of ownership of the IP or its “derivatives”, but merely a limited right to use the IP for the purpose of the agreement. The LTA should specifically set forth what the IP may and may not be used for and (in most cases) that the party to whom the IP initially belonged to retains all ownership rights of the IP and any derivative works.
Order of Precedence.
In each LTA, the agreement should contemplate the fact that the LTA governs other and further agreements, and should be first in precedence over Purchase & Sale Terms & Conditions, issued P.O.s, specifications and quality control documents. It is important that the LTA refer to the other and further agreements and provide which agreement will have the highest precedential order should there be a conflict between the terms of the LTA and the other agreements.
Aftermarket Pricing and Terms.
There are often parts that need to be purchased after the term of the LTA has expired or beyond the set quantity (if applicable) of the LTA. The LTA should not limit supplier’s right to use after market pricing and limit purchaser's ability to “shop” supplier’s specifications to other after market sources.
Venue and Jurisdiction.
An important part of every business agreement is where disputes related to that agreement will be resolved. The LTA can also provide how disputes should be resolved. Many companies agree that the first step should be negotiation between leaders of each of the parties. Parties need to decide the venue (i.e., which court), the jurisdiction (i.e., which state or country) and the rights of the prevailing party (i.e., recovery of costs and reasonable legal fees).
Many companies make the mistake of focusing too much attention on purchase orders and not enough time drafting and negotiating LTAs. We suggest that our clients ensure that their LTAs are drafted to protect what is most valuable to them and ensure a mutually beneficial working relationship with the other party that properly anticipates potential issues