Thursday, April 7, 2011

Compatability - Managing Compatibility In Agreements

I’ve worked for a number of companies where their contracting strategy was to use multiple documents to create an agreement. For example you could have a master agreement that established all the legal terms that apply to all purchases and then have other agreements that incorporate those master agreement terms for a specific purchase. Any time there are a number of documents that make up your purchase agreement you need to ensure that there is compatibility. There are a number of compatibility checks to make.

The first is basic compatibility between template versions. If you are using a master agreement that is older, you need to ensure that it works with the version of the other document(s) you are using. For example it the master agreement looks to other documents to establish a term, you need to ensure that the documents you use establish that term or there are placeholders included to establish the term.

The second check is compatibility and consistent use of defined terms. For example, if the master agreement pointed to a statement of work to establish an Epidemic Defect Rate (a defined term). The statement of work should refer to it as the Epidemic Defect Rate.


If your Agreement is dependent upon an Attachment or Exhibit to establish the requirements of a term, those Attachments must be reviewed to ensure compatibility with the Agreement and you also need to make them part of your agreement by incorporating them by reference. For example, If your Epidemic Defects Rate is established as a multiple of a Failure in Time (FIT) rate measurement a quality document made part of the agreement, you need to identify which rate (as there may be multiple quality rates), and what it is called so that the correct rate is pointed to.


When you have any term that looks to another document to establish the complete term, always follow it through to ensure that the commitment is in fact established. When an agreement uses a cross-reference to another section in the same document or another document, always check that the cross reference is correct.

Here’s an example of the need to check for compatibility and the completion of commitments. I ran into a situation where a master agreement pointed to the statement of work to establish an Epidemic Defect Rate. The statement of work template did not establish an Epidemic Defect Rate, but pointed to a Quality Addendum. The Quality Addendum did not include an Epidemic Defect Rate. Every one of the Supplier’s product failed in the field. Since there was never an epidemic defect rate established, there was no contract right to collect all the incidental and consequential costs that resulted from the failure of all the products. This one failure to fully establish the term cost many millions of dollars.

No comments:

Post a Comment