- 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.
Thursday, March 24, 2011
There are a number of times where it may be necessary to create a duplicate agreement.
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.
There are a number of potential types of damages that may be claimed:
· Direct damages: Actual losses that are an immediate, natural and foreseeable result of the wrongful act. . An example of a direct damage would be the cost of “cover” which is the excess cost of re-procuring the item from another Supplier.
· General damages: Includes direct damages and damages for losses whose monetary value would be difficult to assign.
· Consequential or Special damages: indirect loss or injury. Losses sustained not as a natural result of the injury but because of the circumstances, e.g. damages relating to the business that are easily calculable in monetary terms. If the damages were reasonably foreseeable at the time of contract that the injury would probably result if the contract were broken. Consequential damages may include lost profits and other indirect injuries caused by the breach of the contract provided the such damages were foreseeable and can be determined with certainty
· Special damages are damages that are peculiar to the situation or circumstance. For example under international property law a court may order treble damages as a special damage to prevent future occurrences
· Incidental damages: Losses incurred in handing and caring for goods, reasonable expenses for cover, all other reasonable damages from the breach that don’t fit any other category. Incidental damages are paid to reimburse the cost of mitigating the damages sustained.
· Expectation damages: Damages that are designed to put the injured party in the position they would have been in had the contract been completed (such as making certain profits).
· Liquidated damages: An amount agreed upon by the parties to the contract as adequately compensating for the loss. Liquidated damages will be upheld if they are reasonable.
· Punitive or Exemplary damages: damages for serious or malicious wrongdoing that are intended to punish or deter the party from doing it again or deter others from behaving similarly.
Limitation of liability provisions will traditionally limit the types of damages that may be claimed. For example the following limitation of liability would limit damages to only direct damages.
Limitation of Liability between Supplier and Buyer
In no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages.
If there were individual commitments or section of the agreement where direct damages would not provide an adequate remedy, those commitments or sections would need to be carved out of the limitation of liability so other types of damages could be collected.
This mutual Limitation of Liability does not limit the obligations and liability of Supplier provided in the Section entitled Supplier Liability for Third Party Claims or the Subsection entitled Epidemic Defects.
For a breach of the named clauses, the Indemnifications and Epidemic Defects the limitation to only direct damages would not apply. There are several reasons why you may want to exclude clauses such as these from the limitation to only direct damages.
First, the indemnifications involve third party claims and are not something that is damage directly between the Buyer and the Supplier. For Intellectual Property infringement, if a court found the infringement to be willful they could award treble (3X) damages as a penalty against that behavior. A penalty is considered a special damage. For something like epidemic defects the Buyer wants to be able to recover the incidental and consequential costs associated with the defect such as field repair costs, re-work costs. Those cost would be excluded if all you could recover were direct damages,
With the exception of liquidated damages, there is a requirement of certainty with respect to damages. It’s not what you anticipate it’s what you actually sustain. For liquidated damaged there is not a requirement of certainty, the pre-agreed damages are only required to be reasonable.
In writing dates, the recommended approach is to spell out the date – February 27. 2010 and not use abbreviations such as 2/27/10 or 2.27.10. The reason for this is that different countries have different date numbering conventions. The US numbering convention is month/date/year. Other countries have numbering conventions of day/month/year. So if for example we have 02/07/12, in the US it means February 7, 2012, but in other countries with a different date numbering convention it could mean the 2nd of July 2012..
There is a substantial difference in time between work days and calendar days so in the Agreement you need to define whether the days are work or calendar. Work days generally include Monday through Friday, excluding recognized holidays. Calendar days include all days of the week, including weekends, and possibly recognized holidays. The difference between the two can be substantial.
90 calendar days is 90 days
90 business days would be 18 weeks or 126 Calendar Days or longer if there were any holidays during the period.
As “days” will frequently be used in many part of the contract you should create a definition of days.
“Day’ or Days”. Unless expressly stated to the contrary, all references to “Day” or “Days” shall mean calendar days.
If you will use the term “Business Days” you need to define whether the Business days are based upon your business days or the Supplier’s business days as the two may be different especially when dealing internationally. I can remember GCM’s pulling their hair out because they didn’t make it clear which applied and in dealing with a Japanese Supplier they weren’t getting deliveries because it was “Golden Week” and the plants were shut down.
If you fail to specify what days mean it leaves it open for a Supplier to want to interpret a particular item in their favor by applying business days rather than calendar days (giving them more time to complete the task). When I’ve encountered that, a tact I’ve taken is to say that since it wasn’t defined we need to manage things consistently. We can choose to operate either as all calendar days or all business days, but it’s not both unless it was specifically specified. When you offer that the Supplier should realize that if everything measured as Business days the comment to pay them in sixty (60) days would mean at least 84 or more business days. Faced with that, they’ll most likely have a different interpretation of days.
Dates instead or Words
Words alone can cause confusion. Does bi-weekly mean twice a week or every other week? When you need something be specific.
“Review meetings shall commence on Tuesday May 10, 2012 and shall be held every fourteen days thereafter. In the event of a holiday occurring on a Tuesday, the review meeting will be held the next Buyer’s business day”.
If you need a report each month tell the Supplier when it must be provided. The report shall be provided no later than the 15th of the following month. That way if the 15th is a holiday for the Supplier, they need to provide the report before the 15th.
“Each quarterly price reduction will take effect Day 10 of a new quarter of Quarter beginning with the start of the first full quarter
You might use:
“Quarterly price reductions shall commence on July 10, 2007 and shall be applied each January10th, April 10th , July 10, and October 10th of the term.
(The difference is in the first day 10 could be measured as either business or calendar days whereas in the second makes it a specific date.
When a number is used in the body of the Agreement, it is recommended that you spell out the number both alphabetically and numerically. This is to eliminate any confusion and in the event of a problem the written word will have priority. This is not recommended for price lists that contain prices for many part numbers where just listing the number numerically is used. Written numbers would not be capitalized as they are not a defined term. Except for multiple of ten (twenty, thirty, forty, etc.) for numbers between 21 and 99 you write numbers hyphenated. E.g. forth-six.
The non-recurring charges shall be one thousand dollars (US$ 1,000.00).
Supplier shall provide the replacement part within five (5) calendar days.
The Price shall be forty-six dollars (US$46.00).
The Price shall be forty-six dollars (US$46.00).
There is something like twenty-three countries that use the term dollar for their unit of currency. Some are small countries; others can be significant trading partners like the United States, Canada, Hong Kong, Taiwan, and Australia. To avoid confusion on currency, spell out the specific currency you are using (ten thousand U.S. dollars (US$10,000.00) where used or through a clause or definition (e.g. ”Dollars” shall mean U.S. Dollars).
When terms used in an Agreement have a specific definition/meaning, they are usually defined either in a Definitions section of the Agreement or, they may be defined in the Agreement by adding language that makes it a defined term.
Example: The XYZ Machine (hereafter referred to as “Product”). So every time you used the work Product in the agreement it would mean the XYZ Machine.
The first letter of Defined terms is always capitalized. In drafting, reviewing and negotiating Agreements you need to check each time a defined word is used throughout the Agreement and any associated documents to ensure it is used properly as a defined term. If it should not be used as a defined term, the first letter must be lower case (“product”). This is important because many terms may have multiple meanings such as material, and the use of the defined term will determine which meaning applies. In reviewing your Agreement, also ensure that the defined terms are used consistently throughout.
“Product” may be a defined term used in the Agreement. The definition of Product could be “those products listed in the Statement of Work” or those products listed in Attachment A. Many of your terms may refer to Product. Many warranties apply to Product. If you purchase something that is not listed in document where the applicable products are listed, you would be purchasing a product, not a Product. That is because the term Product only applies to those items listed on the applicable document. To have coverage of the Agreement, the products you buy need to be added to the applicable document, putting them into the category of Products (the defined term). You can do that by either amending the applicable document to add it or by mutually agree upon an alternative process by which other items may be added to the list of Products.
Many times in a negotiation the other party may want to make changes to the definition of a specific defined term. To understand whether to accept the proposed change you need to identify the potential impact. To determine the impact you need to search for all places within all the documents that make up your Agreement to see where the defined term is used and then see whether the proposed change negatively impacts that commitment. With Word Processing tools it’s easy to search for each time the defined term has been used. For example using Microsoft word under the Edit pull down menu you would select Find and as defined terms must be capitalized you click on “Match Case” and simply type in the Defined term add it will bring you to every time its used.
For example assume that the Supplier made the following proposed changes to the definition of Personnel.
agents, employees or subcontractors engaged or appointed by Buyer or Supplier.
To understand the impact on the the change in the defined terms that deleted “agents” and “Subcontractors” from the definition, you need to search the agreement for the where the defined term “Personnel” was used. You discover that it is used in two places. It’s used in the General Indemnity, and with this change the Supplier would not be required to indemnify the Buyer against negligent or intentional acts of either the Supplier’s agents or Subcontractors leaving the Buyer exposed. You find that it was also used in the Section on Supplier Personnel, and the impact of the change would be that the Supplier would not be responsible for managing contract requirements for Supplier personnel with their agents of Subcontractors. Since it would substantially change the commitments in both these areas and increases the Buyer’s potential liability you would reject the proposed change.
There are two ways that a Supplier can change a commitment in a Section. The obvious one is when they modify the section itself. The more subtle way is by changes to Defined terms that are used in the Section. To make sure you get what you need you have to manage both.