D2 - 3.0 Understanding Contract Clauses

Front 1

Outline FIVE examples of contractual terms that might be used in a commercial agreement

Back 1

* Limitations
* Force majeure
* IPR
* Sub-contracting
* Duration
* Price variations
* Insurance
* Indemnities
* Liquidated damages
* Title an risk
* Dispute resolution

Front 2

Suggest conditions that may be included in a contract to ensure a supplier complies with recognised ethical and labour standards

Back 2

* Adherance to fair-trade rules
* Bans use of child-labour
* Health and safety requirements
* Compliance to CSR
* Compliance to International Labour Organisation standards ILO
* Ethical Trading initiative (ETI)

Front 3

Explain THREE sources of contractual terms for contracts between purchasers and suppliers.

Back 3

- expressed terms

- standard terms

- model form contracts

Front 4

Outline TWO types of insurance that a buyer might require a supplier to have as part of a commercial contract

Back 4

* Employers insurance:
* Professional indemnity:
* Public liability:

Front 5

Explain THREE areas where a supplier’s and a buyer’s terms may differ prior to the agreement of a contract.

Back 5

* Delivery
* Payment terms
* Pricing
* Force Majeure or Liabilities

Front 6

Explain the following express contract provisions commonly used in outsourcing contracts:

(a) Confidentiality

(b) Indemnities

(c) Performance management

(d) Liquidated damages

(e) Dispute resolution.

Back 6

Confidentiality:
designed to protect both parties in situations where they need to give the other party access to information about their operations.
define the nature of the confidential information covered
make a provision that the other party will take all necessary steps to keep that information confidential.

Indemnities:
Is designed to secure an undertaking from the outsource provider that it will accept liability for any loss arising from its performance of the contract
An indemnity provision might include costs, such as the reimbursement of any legal costs incurred by the outsourcer as a result of a breach of contract by the outsource provider, loss or damage to the outsourcer's property, or injuries to staff or customers as a result of the outsource provider's negligence

Performance Management:
Designed to ensure that the outsource provider achieves specific Key Performance Indicators (KPIs) or critical success factors (CSFs) and explains how performance shall be monitored and measured.

Liquidated damages:
where the contract expressly provides for the payment of a fixed sum on breach. Clause needs to be a genuine attempt at calculating the loss.

Dispute resolution:
designed to determine how any future disputes between the two parties will be settled. In the event of no dispute resolution provision, any dispute would be settled by litigation, which is costly, subject to significant time delays and in the public domain

Front 7

Explain what is meant by an indemnity clause and provide an example of how such a clause may be used.

Back 7

- similar to guarantee

- indemnifer assumes primary liabiltiy either for itself or third party

- may include costs or debts from breach

Front 8

Explain the differences between these pricing arrangements:

(i) Cost plus arrangements (10 marks)

(ii) Target costing arrangements. (5 marks)

Back 8

Cost plus arrangements:

* Buyer agrees to cover all direct costs to perform the contract
* Plus an agreed fixed fee or percentage for suppliers profit
* Pioneered by Japanese firms
* The supplier estimates the max selling price and works backward from there to calculate what production cost must be achieved to the deliver the product
* Requires close cooperation between supply chain

Front 9

Explain FIVE types of pricing arrangements that may be used in contractual agreements.

Back 9

* fixed price
* lump sum
* firm price
* the various methods of ‘cost plus’ arrangement
* market penetration
* Market skimming

Front 10

Define the term ‘total lifecycle costing’

Back 10

An economic assessment which considers all projected cost flows over the operating life of an asset, expressed in monetary terms.

cost/price iceberg

Front 11

Describe FIVE costs that should be considered when calculating the lifecycle cost of an item, apart from the purchase price of the item.

Back 11

* maintenance costs
* operational costs
* disposal costs
* fuel costs
* servicing costs
* training costs
* disposal costs

Front 12

Explain the following types of pricing arrangement and their use:

- Cost plus fixed fee

- Cost plus incentive fee

- Cost plus award fee

Back 12

Cost plus fixed fee: costs are covered in full; and the extra fixed fee is based on a pre-determined fixed amount on successful completion of the contract. The costs are unknown, although they can be capped; but the fixed fee remains constant. e.g. for some Research and Development contracts

Cost plus incentive fee: costs are covered as for ‘fixed fee’; but then an additional incentive fee is offered if the supplier should meet or exceed predetermined KPIs. Both parties may then share the cost savings. This pricing arrangement may be used particularly where there is plenty of scope for cost reductions

Cost plus award fee: costs are covered as for ‘fixed fee’; but then an additional incentive award fee is offered if the supplier should meet, or exceed, some predetermined aspects of contractual performance that are not easy to measure quantitatively. The award fee may be paid to the supplier in recognition of qualitative assessment of the supplier's application of effort to meet the buyer’s needs, probably on a subjective evaluation

Front 13

What are expressed terms?

Back 13

inserted into a contract by agreement of the parties.

Front 14

What are implied terms?

Back 14

automatically included in contract by relevant statute e.g. goods of sale act

Front 15

What are the two types of 'importance' for contract terms?

Back 15

Conditions: deal breakers, failure to perform result in repudiation of contract and damages claim

Warranties: non-vital terms, breach entitles claim to damages

Front 16

What are the implied sections of the Goods of Sales act for all goods contracts?

Back 16

Sections 13-15

13: Sale by description

14: Quality and fit for purpose

15: Sale by sample

Front 17

What secions of the Goods of Services act are implied to all services contracts?

Back 17

Sections 13 - 15

13: Care and skill

14: Time of performance

15: Consideration

Front 18

List a general contract structure

Back 18

1. definitions

2. general terms: changes, notice period

3. commercial provisions: rights obligations, passing of title/risk, payment terms, delivery

4. secondary commercial provisions: IP, indemnity, termination

5. standard clauses: force majoure, jurisdiction

Front 19

What is 'Battle of the forms'?

Back 19

T&Cs on docs differ, last shot wins

Front 20

How do you prevent battle of the forms?

Back 20

1. Agree terms in contract

2. send acknowledgement on POs for buyer to send back

3. stamp delivery notes

Front 21

What are model form contracts?

Back 21

- published by third party experts for specific industries

- fair balance for buyers and suppliers

- mostly used in engineering and construction

Front 22

Describe: Passing of title/risk terms

Back 22

- when the ownership of goods passes

- as a rule, passes when parties intend it to

- if intention not made clear section 18 of SGA rules

- Romapla clause is when title passes on payment not delivery

Front 23

Describe liquidated damages:

Back 23

- purpose is to put injured party to the the poistion it would have been if contract had been performed correctly

Front 24

Describe unliquidated damages:

Back 24

- if no liquidated damages are specified in contract, in the exent of non-perofrmance and claim for damages the court will decide

Front 25

What is a penalty clause?

Back 25

Where the LD clause is framed as a deterrent or disincentive.

not enforcable in law and will go to court as unliquidated damages

Front 26

What is Force Majeure?

Back 26

- Releases parties from liability in circumstances beyond thier control which could not have been avoided or overcome e.g. flood, war, tax

Front 27

What is a Guarantee?

Back 27

- included in most contracts

- guarantee to make good any decfects or failures

- or gurarantee the liability for debt or non-perofrmance

- e.g. guantor on a loan

Front 28

Exclusion clauses?

Back 28

- exclude liability

- restrict or limit liability

- to be valid must pass common law test:

1. must be included in contract

2. must be clear and precise

- cannot exlcuse liability for negligence resulting in death or personal injury