Tuesday, January 11, 2011

Standards of Commitment

There are different standards of commitment based on the words used in describing the commitment. You can:
1. Intend to do something
2. Agree to agree in the future
3. The party can make a commitment that they may do something
4. Agree to agree in the future with both parties acting in good faith
5. Agree to act in "good faith"
6. Agree to do what is "commercially reasonable"
7. Agree to do what is "reasonable"
8. Agree to do it with "best efforts"
9. Make a conditional commitment (If X happens then we will do Y)
10. Make an absolute commitment ("shall, will")
11. Make a Material Representation
12. Make a warranty.

Understanding the Different Commitments

Intent. A statement that the parties “intend” to do something is not a firm commitment on its own as the parties are free to change their intent. 

Agree to Agree is not a firm commitment as there is nothing that forces the parties to agree and if you don’t agree, there is not commitment.

Saying that a party “may” do something does not obligate the party to do that. For example, in most termination provisions we may terminate the agreement but we are not obligated to terminate it 

“Should” also does not require performance. It merely describes what a party should do, not what they must do. 

Agree to agree in the future with both parties acting in good faith only requires the parties to act in good faith in seeking to agree. If there is no agreement and you can’t prove bad faith (which is difficult) they met their obligation

Agree to act in "good faith“ only requires that they act in good faith,  if they did and you didn’t get what was promised they met their obligation

Agree to do what is "commercially reasonable“ requires them to act in a manner that would be customary for their industry. If something would cost them more to do it may not be commercially reasonable.

Agree to do what is "reasonable“ only requires them to assert reasonable efforts to perform, but requires more than commercially reasonable.

Agree to use "best efforts“ is frequently interpreted to mean that they are required to assert their best efforts irrespective of cost to do something

None of these types of commitments guarantee you will receive performance, they only require the party must exert the committed level of effort to perform.

Making a conditional commitment (If X happens then we will do Y) is an absolute commitment only if the condition is met.  If the condition is not met there is no commitment

Using words such as “Will” or “shall” are unconditional commitments to perform. If you need or want something done, the language that requires it must be in clear, unequivocal terms.

For example saying that a Supplier “should” do something does not require that they do it!  It only says that they should. If they chose not to, they met their obligation.

If it isn't practical or economically feasible to require a firm commitment, (e.g. the supplier will need to stock inventory that you would be obligated to buy) you may consider a two stage commitment approach.
  • For example, the Supplier shall use best efforts to do X within __ days, but X shall be done in no greater than ___ days.
     This provides a best efforts commitment to meet a target or goal, but also an absolute requirement
     to provide it by the no greater than date.

  • Only agree to use reasonable or commercially reasonable efforts when absolutely necessary and always try to get a 2 stage commitment when using them.
  • For example, Supplier shall use reasonable efforts to perform repair or replacement of Defective Products within X days after receipt, but in no event shall repair or replacement be provided in more than Y days.

Modifying Commitments For Impact
As the impact of problems can vary, so you may want to consider language adjusting the standards of commitment depending on the magnitude of the problem. For example:
“Supplier shall use reasonable efforts to perform repair or replacement of Defective Products within X days after receipt, but in no event shall repair or replacement be provided in more than Y days. If the percentage of Defective Products exceeds X%, Supplier shall use its best efforts to perform repair of replacement in ___ days, and in no event shall the repair or replacement be provided in more than ___ days.
      (where each period allows is less time because of the magnitude of the problem)

Time Commitments

When time is important to the commitment, use language that makes the time period clear. For example the difference between a lead-time of 90 days is substantially different whether it is 90 calendar days or 90 business days (which equates to at least 126 calendar days). Define Days as Calendar Days so it clear

Simply saying that they must do something in 5 hours could mean business hours or consecutive hours. If you called at Friday as 3:00 and the Supplier was open 8-5 Monday thru Friday it could mean that it won’t be done until Monday at 11 when you may need it by 8:00 on Friday. Make it clear what you want.

Where language describing requirement could have a dual meaning such as requirements for bi-monthly reports could mean twice monthly or every other month. Make the commitment more exact. For example instead of saying bi-monthly use specific dates like on 1st and 15th day of the month

What standard should Buyer provide?

Except for the Payment obligation (which is probably already conditioned on the receipt of conforming goods or services and an acceptable invoice), Buyers should resist making firm commitments to perform. If the Buyer makes a firm performance commitment, the Buyer may be liable if it fails to meet its commitments. For example, If the Buyer is responsible to provide materials or approvals to the Supplier by a certain date, the Buyer could be subject to claims from the Supplier for damages the Supplier sustains if the Buyer fail to meet that date. If you are forced to make a firm commitment, address and limit the Supplier's remedies for your potential failure.
“"Buyer shall provide its acceptance or rejection within 10 calendar days after receipt from Supplier. If Buyer fails to provide such approvals or rejection in a timely manner, Supplier shall be provided a day for day extension of the performance period as the sole remedy for Buyer's failure to respond on time".
“If Buyer fails to delivery the materials on time, Supplier may cover and Buyer's sole liability shall not exceed _______.”

Words to Avoid in Supplier Commitments:
When you see any word similar to:  aid, assist, attempt, contribute, endeavor, facilitate, help, support, or try you should recognize that none of these are making a firm or a measurable commitment.  If you need something, the lowest level commitment you should agree to is for the Supplier to use reasonable commercial efforts.

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