Tuesday, January 24, 2012

Financial Obligations at Contract Close

The financial obligations that you will have at contract close will vary based upon the industry, the type of contract, and whether you are the buyer or supplier. For example, if you had a construction contract that was based upon measured quantities, the actual amount to be paid my not be established until the quantity surveyor does a final measurement of the quantities and all claims are established and sorted through.

For other industries the obligations are different and most will vary based upon the specific terms of your contract. For example as a buyer if you:
1. Made no firm commitments for the quantity you will purchase, and
2. Didn't have the supplier amortizing any one-time costs into the price, and
3. Didn't have the supplier holding inventory of any kind for logistics programs, and
4. Met all other obligations of the agreement,
You would probably have no further financial obligations or liability at the time of contract close.

As a buyer where you would have financial obligations and potential future liability is:
1. You made firm commitments for the quantity, that you didn't meet or,
2. You had the supplier amortize one time costs in the price and failed to purchase the complete quantity for that to be fully amortized, or
3. You had the supplier holding inventory for logistics programs and failed to consume that, or
4. You terminated the agreement early where your termination without cause provision would determine your liability, or
5. You failed to meet all other obligations of the agreement where they would have potential claims for damages etc.

If you were the supplier you would have financial obligations and potential future liability for:
1. Any obligations to pay or refund the buyer with monies that have not been paid.
2. Failure to return any buyer owned or loaned materials.
3. Any liability that you would have for any breach of the agreement that resulted in damages to the buyer.
4. Any future financial obligations necessary to meet terms that have been agreed to survive the termination or expiration of the agreement, such as cost of warranties that will extend past the contract close.
5. Any liability that you may incur in the future as a result of failing to meet the obligations of the agreement that were agreed to survive the termination of expiration of the agreement. For example indemnities for third party claims for personal injury or property damages, product liability claims and intellectual indemnity indemnification claims normally survive until the statute of limitations expires.

If you entered into a confidentiality or non-disclosure agreement the party receiving confidential information would be liable for wrongful disclosures during the term that the parties agreed that the information be held as confidential as long as that commitment survives the expiration of the contract, or when the obligation is excused by other actions that are specified in the agreement.. For example the recipient could be excused because the information was made public through no wrongful act on the recipient’s part, That would end the recipient’s potential liability for any future disclosures. It would not excuse the recipient for any wrongful disclosures that occurred prior to that point.

Individual country laws may specify how long a specific obligation will exist. If there isn’t a specific law obligations terms that are specified to survive the expiration or termination of the agreement will be in effect until the agreed time period has passed. If no time limit for those surviving obligations was specified, they would cease when the statute of limitations for that specific type of obligation or claim would expire (See post on statute of limitations).

For example, assume you wrote a confidentiality agreement with a two year term. You included a five-year period to hold the information confidential. You failed to include language that has the confidentiality obligation survive the term of the agreement. In New York State the statute of limitations for contract claims is two (2) years after the expiration or termination of the agreement. The impact of this would be that since you failed to have that specific provision survive the expiration of the contract you could not sue the recipient if they made an unauthorized disclosure still within the five-year period but after the statute of limitations for contract claims had expired.

Always make sure that any obligations that you want to remain in effect after the termination or expiration of the agreement are specified to survive the expiration. If you need a longer term that what the statute of limitations would provide specify it.

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