Ownership of the supplier’s work product that is commonly addressed “work for hire clauses” is an item that is frequently negotiated. Most buyers are of the opinion that if I pay for it I want to own it. Most Suppliers will have the attitude that I'm bringing all my existing knowledge into this that the Buyer isn't paying for and therefore I should own it or have rights to it. In drafting and negotiation such a clause they key is to understanding why you want it or need it and thinking about why the Supplier will want it.
For items that are copyrightable a work for hire provision is usually there to allow the buyer to have free use of the item in any way they want without having to go back to the supplier each time they want to change something or use it in a different manner. For items that could be patented buyers may want to have ownership for the potential revenue a patent may bring or to have a competitive edge in the marketplace. The last thing you want to do is pay for the development, and have the supplier be able to sell the same thing to the competition for far less than what you paid.
Frequently having 100% ownership of all rights by the Buyer may not work and if you insist upon having them and the supplier agrees, you will pay a premium for that work so total ownership may not be always the best answer.
Letting the Supplier have total ownership may be cheaper in the initial cost, but if you will need to change or modify it, since the Supplier would own the intellectual property right, you would need the Supplier’s approval to make any derivative work, and that can force you into having to go back to the Supplier to have them do each and every change and that can be costly.
In most negotiations the parties can usually find an acceptable middle ground. There are many alternatives available depending upon what the motivation is for ownership on both sides.
The most common variables are who owns it? What license grants to use it are provided?
What restrictions are there on use such as who or what it may be used with or when may it be used? Here are several examples:
1. The buyer could own work product and give the supplier an unlimited right to use it for a license fee. That approach helps recover some of your investment if there are other potential uses.
2. The buyer can own the work product and give the Supplier the right to use it for a fee, but restrict where or with whom it may be used. That approach would be used if you had competitive concerns.
3. The buyer can own it, and allow the supplier to use it without a license fee after a specified period has been exhausted. You could use this approach to allow them to freely use it as competitive value only lasts so long.
4. The supplier can own it where they give the buyer the right to use, modify, etc. make derivatives or, and sublicense the use. That approach keeps you from having to come back to the Supplier each time you want to change or modify it. In this approach I would want to pay significantly less for the work.
5. If you will be jointly involved in the activity where both parties may create patentable or copyrightable items, the Buyer could own what they individually create without any license grant to the supplier on the buyer owned intellectual property and the supplier could own what they create with appropriate license grants to the buyer for the supplier owned intellectual property.
Friday, September 23, 2011
Bonds and Bank Guarantees
In my February 6, 2011 post about managing supplier performance I mentioned some of the financial tools that can be used to help manage performance. Those included the use of items such as performance bonds, bank guarantees, liquidated damages provisions, penalties, releases of progress payments or a delivery date based pricing (with bonuses for early delivery, or credits for late delivery). Today I want to discuss performance bonds and bank guarantees.
A performance bond is a document usually issued by an insurance company (“Surety”) that normally will commit up to the full value of the contract to complete performance if the supplier fails to complete the work. Suppliers or contractors purchase the bonds from the Surety and the cost of the bond will be dependent upon how the Surety perceives the risk of the supplier performing which is largely based upon the contractor’s financial condition. If the supplier defaults, the buyer or owner will make a claim against the bond with the Surety. As a condition of the bond with the Supplier or Contractor, the Supplier will commit to assign the contract and any subcontracts to Surety. As a condition of collecting on the Bond the buyer or owner must agree to allow the Surety to finish the work or hire someone to finish the work. The Surety’s primary goal is to complete the work for the lowest possible cost to reduce the amount they have to pay.
A bank guarantee is different. Normally to obtain a bank guarantee the supplier or contractor will either need to have money in deposit at the bank that will be used to provide the guarantee or they may need a line of credit with the bank that is secured by the Supplier’s assets. Bank guarantees, since they are tying up either the supplier’s actual cash or a portion of their available credit will be much lower, many times as low as ten percent (10%) of the contract value. Bank Guarantees can be direct where payments are made to the holder of the guarantee or they can be indirect where payment would be made to the holder’s specified bank. The specific conditions and process for collecting against the bank guarantee would be spelled out in that document so you need to read it so you see exactly what you are getting and whether that meets the requirements of your agreement for the bank guarantee. Bank guarantees could specify similar requirements to a performance bond where they would be involved to manage the amount paid.
While you could technically require both a bank guarantee and a performance bond where the bank guarantee would be like a deductible to the performance bond, most suppliers wouldn't agree as that both ties up their money or available line of credit and the bond adds additional cost.
While both performance bonds or bank guarantees provide some degree of financial protection against default by the Supplier, many times buyers may not want to have a third party involved in the process whose sole goal is to minimize the cost of completion. If you want to control your own destiny without third party involvement, bonds or bank guarantees may not be a route you want to take. In that case your contracts need to include rights in the event of default. Those rights would be triggered by the supplier’s failure to cure the breach of the contract. Those rights could include hiring their personnel, use their equipment , and having assignment of all subcontracts to you to allow you to complete the work.
If that’s a direction you plan take you need a detailed qualification of the supplier or contractor before you start to minimize the risk. To make sure that you don’t have a large number of unpaid subcontractors the contract should require the supplier getting waivers and releases of liens from subcontractors for the amount of their work included in the prior invoice as a condition of payment to the contractor to make sure the contractor has paying the subcontractors. The agreement should include holding sufficient retainage at all times so if needed, you can use that money to complete the work. Lastly as bonds usually cost a percentage of the contract price, if you don't require them you also have that amount of savings you could add to what it takes to get the work done. Lastly, you also could claim breach and seek damages for both breach of the contract any for any excess costs to re-procure the completion of the work if the Contractor still had any money.
A performance bond is a document usually issued by an insurance company (“Surety”) that normally will commit up to the full value of the contract to complete performance if the supplier fails to complete the work. Suppliers or contractors purchase the bonds from the Surety and the cost of the bond will be dependent upon how the Surety perceives the risk of the supplier performing which is largely based upon the contractor’s financial condition. If the supplier defaults, the buyer or owner will make a claim against the bond with the Surety. As a condition of the bond with the Supplier or Contractor, the Supplier will commit to assign the contract and any subcontracts to Surety. As a condition of collecting on the Bond the buyer or owner must agree to allow the Surety to finish the work or hire someone to finish the work. The Surety’s primary goal is to complete the work for the lowest possible cost to reduce the amount they have to pay.
A bank guarantee is different. Normally to obtain a bank guarantee the supplier or contractor will either need to have money in deposit at the bank that will be used to provide the guarantee or they may need a line of credit with the bank that is secured by the Supplier’s assets. Bank guarantees, since they are tying up either the supplier’s actual cash or a portion of their available credit will be much lower, many times as low as ten percent (10%) of the contract value. Bank Guarantees can be direct where payments are made to the holder of the guarantee or they can be indirect where payment would be made to the holder’s specified bank. The specific conditions and process for collecting against the bank guarantee would be spelled out in that document so you need to read it so you see exactly what you are getting and whether that meets the requirements of your agreement for the bank guarantee. Bank guarantees could specify similar requirements to a performance bond where they would be involved to manage the amount paid.
While you could technically require both a bank guarantee and a performance bond where the bank guarantee would be like a deductible to the performance bond, most suppliers wouldn't agree as that both ties up their money or available line of credit and the bond adds additional cost.
While both performance bonds or bank guarantees provide some degree of financial protection against default by the Supplier, many times buyers may not want to have a third party involved in the process whose sole goal is to minimize the cost of completion. If you want to control your own destiny without third party involvement, bonds or bank guarantees may not be a route you want to take. In that case your contracts need to include rights in the event of default. Those rights would be triggered by the supplier’s failure to cure the breach of the contract. Those rights could include hiring their personnel, use their equipment , and having assignment of all subcontracts to you to allow you to complete the work.
If that’s a direction you plan take you need a detailed qualification of the supplier or contractor before you start to minimize the risk. To make sure that you don’t have a large number of unpaid subcontractors the contract should require the supplier getting waivers and releases of liens from subcontractors for the amount of their work included in the prior invoice as a condition of payment to the contractor to make sure the contractor has paying the subcontractors. The agreement should include holding sufficient retainage at all times so if needed, you can use that money to complete the work. Lastly as bonds usually cost a percentage of the contract price, if you don't require them you also have that amount of savings you could add to what it takes to get the work done. Lastly, you also could claim breach and seek damages for both breach of the contract any for any excess costs to re-procure the completion of the work if the Contractor still had any money.
Subscribe to:
Posts (Atom)