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.

Statements of Work, Scope of Work

Most companies have standard terms that they want to use for their various types of purchases. If you do repetitive purchases with a Supplier you may establish a master agreement and use a statement of work of scope of work to describe and authorize the specific purchase. For one time purchases most of the time a company will have a standard contract template and use a statement or work or scope of work as an attachment to the template to tailor it to the specific purchase.  Statements of work define the scope of the transaction.  They describe the elements that contribute to delivering that scope and the conditions under which the Product will be made and tested or how Services will be performed.


Common elements of an SOW may include:

·       Project Scope: The boundaries that define the depth and breadth of the project, including functionality, organization, major deliverable Materials.
·       Key Assumptions. Environments or conditions under which the scope of work was defined and the estimates were determined. If the SOW has been well crafted and the scope and responsibilities are well understood, use of Assumptions should be limited or non-existent.
·       Supplier Responsibilities. Activities (tasks) that the Supplier will perform (or assist on) to develop the deliverable Materials and complete the project. For each activity (task), the Completion Criteria must be objectively stated (especially for fixed price SOWs.) For Time & Materials SOWs, activities (task) and Completion Criteria are highly recommended. For activities (tasks) that generate a deliverable Material, delivery of that deliverable Material may acts as the Completion Criteria for that activity (task.).
·       Buyer Responsibilities. Activities (tasks) that the Buyer must perform (or assist on), to enable the Supplier to fulfill its responsibilities.
·       Confidentiality requirements.  Any unique or additional requirements.                                                                                                                               
·       Deliverable Materials. Items to be produced during the project by the Supplier, and delivered to the Buyer.  In most cases you will want to own the deliverable materials so that you may use them as you see fit in the future without needing agreement from the Supplier and to prevent the Suppliers use of such deliverable materials with other customers.
·       Deliverables. Items to be performed by the Supplier. If deliverables include tasks define the Upper Level Tasks , Background  Objectives and Sub-Tasks
·       Buyer Deliverables, If any.
·       Acceptance criteria. These should be detailed, objective, measurable conditions, which if stated in an Agreement, must be met by the Supplier to accept deliverable Materials.
·       Completion Criteria (for SOW completion): for “project-based” SOWs, these are objective criteria by which overall project completion of the SOW is measured. For Fixed Price contracts, the SOW Completion Criteria are typically a) satisfaction of the completion criteria in Supplier Responsibilities and delivery of the deliverable Materials.
·       Materials and Equipment.  Any Materials and Equipment to be provided by the Supplier, or that will be loaned by the Buyer during the term of performance.
·       Schedule: the project time frame, from start-up to project completion, which may also include major checkpoints or phase milestones. Period for performance.
·       Charges: the fees for Services (hourly charges for Time & Materials contracts; fixed charges and payment schedule for Fixed Price contracts),, expenses, and other charges related to providing the Services, including Recurring Charges, One Time Charges; Usage Charges; etc.
·       Changes.  How changes will be controlled and the cost established for additions and the value of credits for reductions
·       Deliverable Materials Guidelines. This is a description of each deliverable Material, including purpose, content (size/volume/description), and delivery (format/media.)
·       Project Change Control Procedure. A formal procedure to manage changes to project scope, schedule, hours/charges, and other elements of the SOW that affect the project;
·       Deliverable Materials Acceptance Procedure. This is a formal procedure to manage the review and acceptance of those deliverable materials, including the process for resolving objections, if any.
·       Escalation Procedure. A formal procedure to manage the resolution of conflicts that arise during the provision of Services;
·       Project Management Requirements. This would include anything that you feel is needed to help manage the performance of the work such as project review meetings.
·       Payment. Identify the conditions for making Payment to a Supplier for goods and services rendered such as including a payment schedule that is tied to milestones and deliverables or payment based on the percentage of work completed. .
·       Proprietary Rights If the work will include the use of Supplier’s pre-existing materials, describe what rights the Buyer will have to use such materials if they are included in the deliverables such as a license.  If new work will be performed, describe what each of the parties rights will be with respect to any new proprietary materials or inventions created.
·       Security Requirements If Supplier will be provided highly confidential materials or high value materials or equipment consider including requirements for the level of physical and electronic security that must be in place.
·       Use of Facilities If Supplier personnel will be working at Buyer’s location, include any requirements for those personnel so they understand what is expected of them.
·       Travel If the Buyer will be reimbursing the Supplier for travel, include any reimbursement requirements or guidelines that the Supplier must follow for reimbursement.
·       Training required by your project team, to ensure that maximum benefits are gained from the goods and services provided by the Supplier.
·       Documentation to be supplied, such as an Operating Manual, User Guide, Business Processes or Technical Support Procedures.
·       Describe the types and level of Support required of the Supplier by specifying the support hours needed, response or turnaround times and the level of support to be given.

Statements of Work - Risk Management

Most company standard templates are designed to deal with average risk procurement situations using average risk suppliers. Depending upon the risks involved in the procurement, with the Supplier or that are created by terms that are negotiated in a master agreement, some risks and costs could shift to the Buyer. You may need additional terms and conditions to help manage the cost and risk. Here’s a few examples of what I mean:

Contract / Risk Management Terms
Alternative logistics model requirements such as supplier stocking
Approval of project personnel
Approval of suppliers, lower tier subcontractors
Control over assignment, assignability rights
Audit or examination of books and records,
Background investigations for personnel
Change of control rights in the event the supplier is sold or merges with another company
Change management processes,
Conflict of interest requirements
Coordination of work requirements
Stricter confidentiality requirements
Damages and changes to the types of additional types allowed such as liquidated damages.
Escalation procedures for problem resolution.
Escrow of materials
Exchange rate risk terms
Fitness for a particular purpose (additional warranty)
Guarantees (products, services, satisfaction)
Inspection of facilities rights
Additional insurance requirements
Professional liability and errors and omissions
Employee dishonesty insurance
Key employee restrictions / non-competitive activity
Most favored customer
Multi-year price protection (“option” pricing)
Ownership and license rights in developed materials.
Order of precedence between incorporated documents
Parent / company guarantee.
Payment rerms (alternative)
Progress or milestone payments
Restrictions on recruiting/hiring of employees
Response time / performance criteria
Risk of loss (different from normal delivery terms)
Safety & security requirements
Temporary use of facilities
Temporary use of machines
Termination rights (alternative)
Trigger clauses related to credit rating or other events such as release of escrow.
Uptime / downtime credits
Service level agreements
Warranties (additional),
Stricter warranty response obligations

Statements of Work - Keys In Writing SOW’s

o    Use probing questions with the requisitioner and technical expert to uncover their needs.

o    Use Defined Terms.

o    Manage compatability with the Master Agreement

o    Use the right standard of Commitment” for each commitment.

o    Write in  short active voice sentences.

o    Manage any Incorporation by Reference” of any documents.

o    For every commitment ask and make sure the language addresses the following five questions:

o   Who is responsible to perform the action ?

o   What is their responsibility ?

o   Where must it be done ?

o   When must it be done ?

o   How must it be done ?


For example:
“ Supplier shall deliver the Product to the Buyer on June 1, 2020 ex-works Supplier’s dock in Taipei, Taiwan”

In the above example defined terms for Product, Buyer and Supplier are used
It is written in active voice.
It also answers the five questions:
Who is responsible – The Supplier
What is their responsibility – deliver the Product
Where must it be done – The Supplier’s dock in Taipei
When must it be done – June 1, 2020
How must it be done – under ex-works delivery terms.      
If includes the right standard of commitment – Supplier “shall” making it a firm commitment

Statute of Frauds

The “Statute of Frauds” is a legal principle that started in common law and has been made part of statutory law where a writing between the parties is required in certain situations such as:
  • The sale of goods over $500.
  • The sales of real estate
  • Any contract that can’t be completed within a year

For most of what we do in Procurement a writing is required and that can take the form of an actual writing or it could take another form that was agreed by the parties such as we do with EDI agreements that authorize electronic transmissions to serve as a writing between the parties.

Statute of Limitations

A statute of limitations is established by different jurisdictions (such as states) and creates the maximum amount of time after an event has occurred in which legal proceedings must be initiated. For example under New York law there are different statute of limitation periods for the types of claims that may be brought.
  • Contracts -  Six (6) years.
  • Personal Injury and Injury to Personal Property– Three (3) years
  • Medical Malpractice – thirty (30) months or one year from discovery of a foreign object in the body or when it should have been discovered.
  • Other types of malpractice – three (3) years
  • Libel, defamation or slander – one (1) year
  • Product liability – three (3) years
  • Fraud – six (6) years.

The stature of limitations under a contract may be reduced to a shorter period as long as the parties agree to it. As third parties are not parties to the agreement they are not subject to those limitations. Here’s an example of language that would limit the contract statute of limitations:
Any legal or other action related to a breach of this Contract must be commenced no later than three (3) years from the date on which the cause of action arose, unless otherwise provided by local law without the possibility of contractual waiver or limitation.

The intent of this is to reduce the period that would be allowed for bringing an action under that contract from six (6) years to three (3). It creates the limitation only for breaches of the contract. Other potential liability such as any indemnifications for personal injury and property damage or infringement of intellectual property of third parties would not be subject to the contract limitation. The last part makes it clear that the limitation applies unless local law would prohibit it. 

The period runs from the date on which the cause arose. For example, if you had a warranty breach two years after the completion of the contract, with a three year limitation you would have three years from that date to commence the claim.

In addition to limiting the term,  another key other aspects of the agreement is to make sure that obligations for which there could be liability in the future be included as part of the list of sections that will survive the termination or expiration of the agreement.

Between you and the Supplier most of the time you may want any claims between the parties to extinguish in a short period of time. For example, you don’t want Supplier’s submitting bills for work five (5) years after the work was performed.  Who would be around to know if the work was done ? You do want the Supplier to be liable for any potential third party claims as long as you as the Buyer can be liable.

The most important section in your contract that has a connection with the Statute of Limitations is the Survival section that describes what commitments made by the parties will survive the termination or expiration of the Agreement.  If you specifically list the terms that will survive you need to ensure that what’s included in that list of surviving terms cover all the protection where the Statute of Limitations will not have lapsed. Otherwise a third party could bring a claim against you and you would not be able to make a claim against the Supplier.