Contract Corner: Global versus Local Agreements
When an organization is contemplating a large commercial agreement or outsourcing arrangement covering global operations across multiple service locations, subsidiaries, or affiliates, it should consider the advantages and potential pitfalls of using a single global agreement versus local (or “site-specific”) agreements to govern the transaction.
Global agreements are typically used when a service provider will be providing (or may provide) services to a large company together with its subsidiaries and affiliates. Global agreements often take the form of a master services agreement that allows the service provider to provide services to multiple customer locations, and for subsidiaries and affiliates to utilize the service provider for services in accordance with the terms of the single master services agreement.
A single global agreement is an efficient approach for a number of reasons:
Only negotiated once. The ability to negotiate the terms of the services once and not have to engage in separate negotiations with each customer division or subsidiary can save time and money and avoid reopening settled positions in negotiations.
Centralized legal and business review. A single global agreement allows the legal and business teams to manage the contracting process for all divisions, subsidiaries, and affiliates and ensures uniformity and alignment with internal business and legal mandates.
Ease of amendment. As the business relationship and/or the market changes, the parties may want and/or need to renegotiate the terms of the business deal. This is obviously much easier to implement if it can be accomplished within one document instead of having to negotiate and draft multiple amendments.
Standard provisions. Having one agreement ensures standard provisions and negotiated terms will apply across the entire customer organization. This can be helpful when the contracting party has the leverage to obtain terms that are more favorable than a division, subsidiary, or affiliate would be able to obtain on their own and/or in connection with their particular order.
Local or “site-specific” agreements refer to site or facility-specific agreements. These agreements are separately negotiated by each division, subsidiary, or affiliate—even though they may all do business with the same service provider. Site-specific agreements enable the negotiators to focus on provisions that are important to the particular business deal:
Local business issues. The local business team understands the specific transaction and any potential issues between the contracting parties and/or in connection with the products and/or services being provided.
Location-specific terms. The parties can negotiate provisions that are specific to the facility and project. Provisions can be crafted to address unique business needs based on specific products and services and to address local regulations that may be applicable to the services.
Flexibility to negotiate more favorable terms. A specific business unit may have the ability to negotiate more preferable terms based on the volume they’re purchasing or the specific business deal than would be available in a global agreement.
Whether an organization chooses to use a global agreement, local agreements, or some combination of the two, parties should take care to avoid some common pitfalls:
General terms of global agreements may not address specific situations. Parties using a global agreement often rely on the fact they have a master agreement in place, and therefore local representatives of the parties may not spend time addressing (in writing) the specific terms of a deal being entered into by their specific divisions, subsidiaries, or affiliates. For example, a subsidiary might issue a spot purchase order that refers to general terms that include a cap on liability that is not adequate to cover the risks in connection with that order.
Accountability for affiliates. A global agreement may not address whether and to what extent signing parties are responsible for the actions of their subsidiaries or affiliates, potentially leaving one party inadvertently responsible for the acts of its affiliates or another party without an adequate remedy. This should be clearly set forth in any global agreement, including whether a party may proceed directly against another party’s subsidiaries or affiliates. Using local agreements may be helpful if the ability to proceed directly against a party’s local affiliates is a priority.
Divergent terms. Local agreements may contain terms that are not in line with the parent company’s legal or business mandates for commercial agreements. This can significantly increase a company’s risk and potential liability.
Order of precedence. A global or master agreement should clearly state whether and when the terms of the global agreement control in the event of a conflict with local agreements. A common approach is for the global agreement to control in the event of any conflict unless the local agreement specifically provides otherwise, but how conflicts are resolved may depend on the number of local agreements and how much central oversight is given to the negotiation process for local agreements.
A Middle Ground Framework for Global and Local Agreements
An effective general approach to benefit from the advantages of using a global agreement while avoiding its potential pitfalls is to enter into a single global agreement applicable to all services from a single service provider that either requires or permits (as appropriate) the divisions, subsidiaries, or affiliates of the parties to enter into separate local agreements. The local agreements should incorporate by reference the terms and conditions of the global agreement, include terms applicable to the specific business deal (such as pricing, volume, term, and specifications), and address any legal or regulatory requirements specific to the location covered by the local agreement.
This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our previous Contract Corner posts on the Sourcing@MorganLewis blog for more on contracts, and be on the lookout for future posts in the series.