Thursday, March 24, 2011

Duplicate Agreements

There are a number of times where it may be necessary to create a duplicate agreement.
For example:
  • If you have an agreement with a Supplier and want to contract with a different Supplier legal entity.
  • If you want to have a different Buyer entity contract with the Supplier.
  • If you have a situation where the Buyer and Supplier have an agreement between the parent companies, but you want to purchases to be made between different Buyer and Supplier entities.
  • Where your company wants to assign a portion of its business to a third party, but you still need to retain the existing agreement as you will still need to conduct business.
  • Where the Supplier needs to assign a portion of their business to a new company and you need to do business with both the Supplier and the new company.
  • Where a Supplier has divested, or spun off a business and you want to quickly put a new agreement in place with the new entity.

Why would you want to create duplicate agreements when you are only dealing with a Subsidiary of a Supplier?  One reason is if you allow that Subsidiary to operate off your agreement, you could be responsible for the actions of that subsidiary and the Subsidiary’s actions could potentially be cause to terminate your agreement. While this may be of lesser concern when you are dealing with wholly owned subsidiaries, many times companies may only have controlling interest in a subsidiary and would not want to be liable for the Subsidiaries actions. Another reason is maintaining the activities separate is good to separate the companies for tax purposes.

Duplicate agreements are simple documents that use incorporation by reference. You can incorporate by reference all the terms of the existing agreement that you want to duplicate and then in the body of that new agreement either add or remove terms from that agreement to make it applicable to the current situation. For example you could make changes to comply with local law or trade practice, and you could include terms that would be limited to only those Products or Services that are required under that new agreement. Once executed, each agreement is independent and would stand on their own and actions on the agreement that was incorporated will not affect the new agreement and vice versa. As it is a point in time incorporation, bringing in only the terms and conditions that were in effect when the duplicate agreement was made, it will not incorporate any changes to the original agreement unless the parties to the duplicate agreement agree to include those future changes.

The biggest risk in duplicating agreements is you may be also duplicating commitments that will stand on their own. For example, if the original agreement committed  a firm volume be purchased, if you didn’t exclude that within the body of the duplicate agreement you would now have the same commitment and because they are separate agreements one doesn’t count against the other.  A Supplier’s biggest concern with duplicating agreements frequently involves their potential liability. For example, if the original agreement had a $US 25,000,000 cap on a specific type of liability, by agreeing to the duplicate agreement they would now have the same cap in both agreements thereby doubling their potential exposure.

Duplicate agreements can be written against any type of agreements, When dealing with Subsidiaries of Suppliers the Supplier entity that you will be dealing with either needs to be financially qualified on their own or you may need a parent or company guarantee. As an independent agreement, it will remain in effect on its own, even if the other agreement is terminated.

Incorporation by reference allows you to incorporate almost any document whether its existing or may have expired, the key is you need to be able to prove the terms of that document so both parties should have copies of any incorporated document.

One additional caution in creating duplicate agreements.

If you will be creating a duplicate of multiple agreements such as a Master Agreement and a separate Statement of Work, you should keep them separate by either creating a duplicate of each individual agreement as a separate agreement, or if you include them into a single document you want that document to establish separate agreements for each document you are creating a duplicate of.  For example if you have an Agreement that is evergreen as to its term and a Statement of Work that had a two year term, if you merge both documents into one agreement without making them separate agreements the resulting agreement will be controlled by the order of precedence in the terms. So in the example, if the Statement of work had precedence over the Agreement, when the SOW that had a two year term  expires, the Agreement would also expire on the same date. That is because you created
one agreement that had conflicting terms, and the precedence was for the terms that were listed in the SOW which made the term of that agreement 2 years.  If you created separate duplicate agreements, the duplicate Agreement would remain in effect for future use. Where this is even more important is if you were also to make a duplicate of a Confidentiality Agreement. You always want that to be separate.  

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