Contracts
Purchasing, Manufacturing and Distribution AgreementsCase StudiesQuestionsBehaviorPlain English RecitalsCritical TermsCase 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?
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.
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.
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.
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?”
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.
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.
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.”
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”
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!
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.
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
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
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
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.
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.
Contracts
No Competing FormsAgreement 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).
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.
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)
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
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.