Tuesday, January 25, 2011

Proof Reading Drafts and Final Documents

There are two times to “proof read” your contract documents. The first time is before you send it out to the Supplier as part of the bid, quote or proposal process. That is to make sure that its clear what the contract obligations are taken into account in their bid, quote or proposal. If you don’t provide it then, you need to be prepared to listen to the Supplier keep saying that what you are asking for wasn’t included in bid, proposal or quote.  The second time to proof read the document is before you execute it. Once the agreement is executed the intent of the parties will be determined by what’s included within the “four corners” of the agreement. Most agreements also have merger clauses that say that the agreement represents the entire understanding between the parties and courts will only look at information that is outside the agreement (parol evidence) if there is an ambiguity as to the intent of the parties. It’s especially important to proof read the document if there have been major changes and multiple revision levels created during the negotiation process.

Below is a sample of questions you should ask yourself when proof reading a contract:
Are the terms are clear and familiar?  To eliminate confusion and potential conflict always use words that are clearly understood by both parties.

For any terms that are unique or have multiple meanings, has a defined term been created to make it clear what it means?  For example, day can mean calendar day or business day and the difference between the two can be significant.

If there are multiple documents that make up the contact, have the terms used been checked to ensure they are consistent between the documents? In interpreting the contract all documents will be considered complimentary so you need to use the same terms throughout.

Have all sections and paragraphs of all documents been properly numbered for easy of use, and reference?  For example is you will point to a commitment in another section that cross reference needs to be correct.

Do all documents that will be incorporated into the Contract have titles and revision numbers or dates that make the description of them unique to that document? As there may be multiple documents you need to define which exact document is part of the agreement.

Does the incorporation by reference matches those descriptions? For there to be a valid incorporation by reference, the reference needs to match the document being incorporated.

Have all cross references made in the documents been checked and verified? This is important if you are relying upon a reference to held define a term or establish a commitment,

Have you reviewed the use of the words “and” and  “or” throughout the contact to ensure that their use is appropriate?  When you use “Or” it means that any of the options are acceptable and the party can select which of the options they want. If the options have a different financial impact on you, you may not want to provide options.

Has the order of precedence been established for all documents that are part of the agreement? Orders of precedence should establish the priority between all the documents that make up the agreement and any documents that are incorporated by reference into the agreement or documents.

Have all representations and promises made by the Supplier that have enticed you to award them the business been included in the contract?  Most contracts will have merger clauses that exclude everything except what’s written in the contract or incorporated into the contract and under the “4 corners” rule of contract construction, courts would only look outside of the contract if there was ambiguity.

Did you write the agreement in the active voice where sentences follow the normal sentence order of subject, verb, object? Active voice sentences are clearer and also define who is responsible for commitments.

Does each commitment define who, what, where, when and how the commitment will be performed?  For example: Supplier shall deliver the Product on June 30, 2012 Ex-works Suppliers dock

Are the words used to establish the committed performance clear? 

Do the words used represent the desired standard of performance for those commitments? The words you use establish whether it’s a firm commitment, or a level of effort that must be applied.

Are obligations defined as a right or duty? A duty you must perform, a right provides you with an option as to whether or not to exercise it.

For any conditions precedent, are those conditions clear? A condition precedent is an event or fact that must exist to trigger the commitment, If the commitment is important the things that trigger the commitment need to be clear. 

Have you reviewed the remedies for the failure to meet obligations?  Are they clear?  Are they adequate to meet your needs?  Can the remedy be reasonably expected to drive the desired Supplier behavior?

Is the limitation of liability is appropriate for all commitments and remedies? Do you need to carve certain commitments out of the limitation?

Are the contracting parties are appropriate for the commitments? Does the party that you are contracting with have the assets and resources to stand behind the commitments they are making?

Do the individuals who will sign the agreement have the requisite authority? The lack of authority makes a contract voidable.

If the contract is with a higher risk supplier, have terms been added or modified to help manage the potential risk? Most Buyer templates are written for use with average risk purchases from average risk suppliers.

Has the effective date and the term for the agreement been clearly established? For the contract to be enforceable it must be effective. A party has met their obligations if the term has lapsed.

Have you included rights to terminate the agreement for cause and without cause? Change occurs and you need termination provisions for suppliers that either don’t perform or can’t meet your changed needs.

Are Buyer’s liabilities in the event of termination clear and limited? Part of any limitation of liability should be a cap on what Buyer’s maximum liability will be for both orders and terminations.

Is the product, service or software being purchased clearly defined in the documents?

Has Buyer’s rights of acceptance and any acceptance requirements been established?

Does the agreement include appropriate terms for manner in which you will actually conduct business? For example, if the Supplier will have a replenishment logistics hub, are the delivery terms, lead time, etc, consistent with that?

Are all Prices, Payment amounts and currencies clear and are written in both words and numbers?

Have you defined the meaning of time durations?  Are days calendar or business days and if business days, whose business determines it. For responses in hours, do you mean consecutive or business hours? Have you avoided time duration words that have multiple meanings like bi-monthly?  

Has the document been proof read to check the spelling, and correctness of the words used and punctuation is correct. Word processing spell checks only identify spelling errors. If a word is spelled correctly, but is inappropriate for use, it won’t catch those.

If working off Supplier’s document, have you reviewed it against your standard template to identify potential missing issues that may need to be added?  The key in supplier documents is to look at what’s included and what’s been deliberately not included.

Does the document clearly show the intent of the parties with respect to the commitment?  If needed include “recitals” in preamble of the Agreement to describe the circumstances and intent for entering into the agreement.

If the agreement points to another document to establish the complete term, you have verified that the term has been established and the language used and the use of defined terms is consistent?  If a commitment is important make sure it gets established.

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