The Mystery Of Legal Terms In Contracts - A Simple Guide

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Ian MoodyLead TutorChartered Institute of Procurement and Supply (CIPS)

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Your Presenter

Ian MoodyIan Moody Associates Ltd, Management Consultants

Ian Moody has more than 25 years experience in senior management positions. Ian has set up and developed various highly profitable companies and has specific experience in creating exit strategy.

His practical knowledge of strategic development and operational management coupled with a strong sales and marketing emphasis allows Ian’s clients and students to benefit from a ‘real life’ approach to his consultancy and training assignments.

Ian works as a lead tutor and assessor for CIPS both in in the GCC and at London University

Ian’s core expertise lies in the areas of planning, finance and communication at all levels of the organisation. In addition to his work with CIPS he is accredited by major international examining bodies such as the ACCA, & ILM and works throughout Europe, Asia and the Middle East.

He is a Senior Consultant of The Corporate L.I.F.E.™ Centre International, Canada; a world leading consultancy in Business Strategy & Development

The Purchasing Cycle

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• Set the contract terms

• Identify the need

• Appraise the suppliers

• Select the suppliers• Negotiate VFM

• Receive the goods/services

• Carry out Vendor rating

• Evaluate the bids

• Source the market

• Award the contract

• Make payments

What is a contract?

A contract is basically a statement of:

– Exactly what two or more parties have agreed to do or exchange– Conditions and contingencies which may alter the arrangement– The rights of each party if the other fails to do what it has agreed to do– How responsibility or ‘liability’ will be apportioned in the event of

problems– How any disputes will be resolved

– Can be oral or in writing

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Jurisdiction

• Local Law – but whose?

• International - United Nations Convention on Contracts for the International Sale of Goods

Spot purchases– Low-value new purchases (or occasional re-buys)

• A replacement item of office furniture • An unusual stationery or production requirement

– The contracting of a one-off service• An office re-decoration or re-location

– The procurement of a high-value, long lifecycle capital asset

• A building• An IT system• Plant and machinery

Main features of spot buying

– It commits both buyer and supplier to all the terms relevant to supply of the specified requirement, in a specific case

– It only commits the buyer and supplier to purchase and supply of the specified requirement, in a specific case

– Standing offersa general invitation to supply a series of things as and when required

– Blanket orderinga supplier agrees to provide an estimated quantity of items over an agreed period of time at an agreed price

– Call-off contracta contract set up between the buyer and seller where there is an overall commitment to purchase a given quantity of items or services over the period of the call-off contract

– Systems contractinga broader arrangement where the buyer sets up an agreement on terms and conditions for the recurring procurement of a particular item or items.

– Term contractsapplicable when a contract might or might not be renewed at the end of the term

Blanket orders, call-off and systems contracts

Framework agreements

– To issue call-off orders against the framework with a selected supplier, on the terms agreed in the framework. This then forms a contract.

– To run a further mini-competition (competitive tender) between multiple suppliers included in the framework, in order to place a contract with the supplier making the best bid (usually the cheapest bid).

– To go elsewhere (utilising appropriate contract tender and award procedures) if the framework does not provide value for money for a particular requirement.

• When a need arises for works, goods or services, the buyer has three basic options:

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Express terms

• Details of the contract specifically and mutually agreed upon before or at the time the contract is made

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Implied terms• A contract term that has not been expressly agreed,

drafted and included in a contract

• It is ‘implied in the contract’ by law whether or not both parties agree or not

• Can be implied through statute• Common law• Commercial custom

Implied terms

Terms may be implied into a contract by virtue of:

– The nature of the contract– The need for business efficacy– Statute law– Custom of the trade

Conditions v Warranties

Conditions

A major term– In case of a breach

• Allows the injured party to seek damages

• Allows the injured party to terminate the contract

Warranty

A minor term– In case of a breach

• Allows the injured party to seek damages only

General contract structure

The agreement Names and signatures of the parties to the contractDefinitions Definition of names and terms, to avoid repetition of long sentences in the

body of the contract.General terms • General agreements clause

• Changes, alterations and variations clause• Notice clause: how and by what method any notice relating to the

contract is to be sentCommercial provisions

Rights and obligations of the supplier and of the purchaser. Standard terms of purchase, for example, might include:• Passing of title/ownership• Time of performance• Inspection/testing• Delivery/packing• Assignment• Liability for damage or loss in transit• Rejection• Payment terms

General contract structure (cont.)Secondary commercial provisions

• Confidentiality and intellectual property protection (where relevant)• Indemnity• Guarantee clause• Termination• Arbitration

Standard clauses These may include:• Waiver• Force majeure• Law and jurisdiction

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Forms of Contracts

When developing Terms we have three choices:

• Use our standard company Terms

• Tailor our Terms to each contract (bespoke)

• Use an industry standard or Model Terms

Model form contracts

– CIPS has published a range of model form contracts and contract clauses

– The Freight Transport Association has developed a model form of conditions of carriage, for carriage of goods by road in the UK

– The Chartered Institute of Building has developed a model form contract for the commissioning of facilities management services

– FIDIC for international construction projects– The Joint Contracts Tribunal (JCT) publishes a Standard Form

of Building Contract– The Institute of Civil Engineers (ICE), the Association of

Consulting Engineers and the Federation of Civil Engineering Contractors issue standard forms for civil engineering

ADVANTAGES DISADVANTAGESHelps reduce time and costs of contract development

Terms may not be as advantageous to a powerful buyer as if contract was negotiated

Avoids ‘reinventing the wheel’ Terms may not include special clauses Industry model forms are widely accepted

Legal advice is still required if significant amendments or variations are to be made

Designed to be fair to both parties Costs of training buyers to use model forms

Advantages and disadvantages of model form contracts

Interpreting key terms– What type of clause they are and what they are

designed to achieve– The legal and operational effects or implications of

the clause for the buyer and the supplier– Whether the example clause, as given, expresses

the buyer’s requirements (and best interests) clearly

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Key Terms

Indemnity Clause• The effect of an indemnity clause is to pass liability to

a supplier

• If A buys components from B and inserts an indemnity clause, if C sues A, the losses can be recovered from B

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Indemnity

• Compensation for a loss or liability incurred

• Under an indemnity the person indemnifying takes on a separate liability

• ‘’The supplier indemnifies the buyer against all costs or claims incurred by the buyer as a result of the supplier’s breach of any obligation contained in this contract’’

Insurances

– Employer’s liability insurance– Public liability insurance– Professional indemnity insurance– Product liability insurance

A breach of contract occurs:

– When a party fails to perform an obligation under the contract: is in breach of a condition; improperly repudiates (ends) the contract; or prevents completion of the contract on his own side or by the other party, during performance. These are examples of ‘actual breach’.

– When, before the time fixed to perform an obligation, a party expressly or by implication repudiates the obligations imposed on him by the contract: ie shows an intention not to perform. This is called ‘anticipatory breach’.

Examples of ‘frustration’– Destruction of the contract subject matter– Non-occurrence of the event on which the

contract was based– Incapacity to provide personal performance– Extensive interruption which makes further

execution of the contract impracticable or different from that originally agreed

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Liquidated Damages v Penalties

• If a liquidated damages clause is a genuine pre-estimate of the loss it will be valid

• Penalty clauses are not allowed. Please note Penalty is not the same as a Damage

• Islamic law prohibits gharar (uncertainty) in contracts, and liquidated damages provisions are a favored mechanism to overcome uncertainty regarding contractual damages. This also means unliquidated damages are not allowed.

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Other Key Terms

• Passing of Title• Force Majeure• Guarantees• Exclusion • Health & Safety

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Sub-Contracting

• It is common for the buyer to seek to prevent the supplier from sub-contracting work without prior written consent.

• ‘If the Contractor subcontracts work, he is responsible for performing this contract as if he had not subcontracted. This contract applies as if a Subcontractor’s employees and equipment were the Contractor’s.’

Ethical sourcing and supply

– The promotion of fair, open and transparent competition in sourcing

– The use of sourcing policies to promote positive socio-economic goals

– The specification and sourcing of ethically produced inputs– The selection, management and development of suppliers in such a

way as to promote ethical trading, environmental responsibility and labour standards at all tiers of the supply chain

– A commitment to supporting the improvement of working terms and conditions throughout the supply chain

– A commitment to supporting sustainable profit-taking by suppliers – Adherence to the ethical frameworks and codes of conduct of

relevant bodies – A commitment to compliance with all relevant laws and regulations

for consumer, supplier and worker protection

• End of webinar

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• Thank you for your time