Here is an interesting little contracts problem I ran across while working for a computer parts assembly subcontractor in China:
Background: My company (10,000 workers by the time I left) entered into a 1 year contract with the Japanese subdivision of a major computer company headquartered in the United States to produce a variety of printed-circuit board cards
Quantity: 8 million units of control cards. The 8 million units is a "soft-quota" divided into 12 monthly quotas with progressively more quota each successive month.
Price: The unit price for labor costs to our client was based on the number of solder joints on the sample card which was directly related to the number of components we were instructed to mount on the cards. At the time of the original contract, the price was $5/unit and our profit was 50 cents per card.
Problem: Everything was going fine and dandy until our clients instituted an engineering change (EC) to the products that we had been producing for them. The new design eliminated 2 components spanning 20 solder joints. Since the original contract did not account for pricing changes, our client had to reform their contract with us by adding an additional term reflecting the rates for increases or decreases in solder joints arising from engineering changes. They sent us a draft of this "mini-Contract" which stipulated that delta solder joint changes the unit price by 15 cents. This could go either way...we can earn more if more components are added, but we will earn less if they take components out.
Deliberations: As the management team pondered over how to respond to this "offer", we had to consider our interests and watch out for pitfalls item by item. Here is what we came up with:
1) Will we still be profitable if we accommodate for this change? As it is, we are earning a profit while charging a low unit price because of our economy of scale. If we lose the current profit margin while our overhead costs stay fixed, the reformed contract will be a losing proposition.
2) Will conceding to our client's requests bolster or weaken our bargaining positioning for next year's contract? Our client may be please that we are willing to go along with their "fair" proposal, but may also feel that we are "pushovers" if we concede too quickly or without putting a fight.
3) Assuming we still make a profit on the current EC, what happens if they take more components out so that we start losing money for every unit we produce for them? This will unlikely happen but it is a possibility. Our client had made it clear to us that they would like to have a long-lasting and friendly partnership with us. However, we still had reservations: 8 million units is not a small number. We are in the business to make money, not to provide free labor.
Resolution: We concluded that our client will not screw us over, but in the event that they do, we have recourse. We can attempt to renegotiate the terms when profits turn into losses. Although there is the concern that we may be bound by the contract to produce 8 million pieces, we were pretty certain that our client has no interest in seeing us lose money. At the end of a 2 hour meeting, we decided to leave the offer unamended and faxed over the signed copy. We also sent them 2 copies of the original we had signed on and requested that they sign on one and mail it back to us.
When we communicated our worries to the client, they (being infinitely wiser) assured us that they are in the partnership for the long-haul and are interested in our success. In addition, the project leader for their side orally promised that we would not be bound by the contract if we were to start losing money. It was understood by both sides that oral, informal agreements are enforceable (perhaps because we were Asian companies/branches) when they are made by a company of my client's stature. In fact, writing minor/nitpicky details may show distrust, not discreetness.
The lesson that I learned (from this and other experiences at the factory)? A good balancing of the business culture, legal environment, and social norms are all ingredients to a successful business transaction/relationship.
http://www.celestica.com/cfm/home.cfm
Celestica: This company is a model electronics subcontractor. Its company profile provides excellent background for this article as well as the industry itself.
http://news.com.com/2100-1040-267877.html?legacy=cnet
Many factories (including the one I worked in) in China are built on Taiwanese capital and management.
http://fatty.law.cornell.edu/topics/contracts.html
Contracts is a subject we're all familiar with. Just in case, though, here is a nice overview of what we learn as 1L's.
25 B.C. Int'l & Comp. L. Rev. 59
This law review article introduces the current legal environment in China, which all foreign companies in China have to deal with.
