General Motors recently started introducing a new clause in its purchase orders that results in a significant change in the supply relationship and may go unnoticed by its suppliers. The clause is titled “Program Extension Clause” and allows GM to extend the duration of purchase orders essentially indefinitely. If you are expecting to receive a new GM purchase order, or if you have negotiated a price increase and are expecting an amended purchase order, this clause could apply to you and could significantly change your expected obligations to GM.
What Does it Change?
Currently, GM purchase orders have an explicit duration clause on the face of the purchase order that provides the effective start and end dates. There are no clauses in the purchase orders or the General Terms and Conditions (GM Terms) that allow for extension of this defined duration. Having such a defined duration gives suppliers an opportunity to negotiate commercial terms if extensions become necessary.
The new Program Extension Clause seeks to change this defined duration to remove the opportunity to negotiate new commercial terms. Instead, it purports to give GM the unilateral option to extend the duration of a purchase order without limitation, including multiple later term extensions, by simply providing the supplier with written notice of the extension.
How Does it Work?
The clause requires GM to provide six-months’ notice to the supplier regarding the extension. The clause then provides for “good faith” negotiation regarding pricing that would apply during the extended period. The clause also requires the seller provide four different types of information to GM before the parties meet to discuss any change in pricing, as well as any other information GM requests.
Beware: while this clause does provide for price negotiations, it does not obligate GM to agree to new prices proposed by the supplier.
How is Pricing Adjusted?
After all the required information is provided by the supplier, the pricing may be adjusted for the extended period by agreement. If agreement cannot be reached, GM on its own may “equitably” adjust the price. In other words, if the parties do not agree to a price change, GM decides what price change there may be during the extended period. This essentially eliminates the leverage a supplier may have to appropriately change commercial terms for any extension under current purchase orders with a defined duration.
When Does the New Clause Apply?
The new clause applies to all contracts entered into after Sept. 20. If you received a recent purchase order from GM, it likely includes this clause and the clause likely applies to your contract.
But the clause also purports to apply to any amendment to an existing purchase order issued after Sept. 20, if the amendment includes a price increase (other than indexed price increases agreed to before Sept. 20). In other words, if you recently were successful in negotiating a price increase with GM and received, or are expecting to receive, an amended purchase order with the new price, you may now pay for that price increase by giving GM unlimited extensions of the purchase order at GM’s option.
What Can You Do?
GM’s purchase orders under the GM Terms, which are typically included in GM’s purchase orders, can be accepted either through writing or commencing performance consistent with the purchase order. If extensions of the duration of the purchase contract at GM’s option are unacceptable, you should take care in what you do when you receive a GM purchase order or purchase order amendment that includes this clause. You should consider immediately rejecting it in writing. You should take care in commencing any work on the purchase order that could be considered acceptance. How you respond will depend on the particular circumstances of your business with GM. And there could be other legal arguments available to you in response to this new clause.
