Tuesday, May 29, 2012

Limitations of Liability -what were they thinking!

Every once and a while I come across language in a contract that makes be ask that exact question. The language in question was in a contract involved with a lawsuit between The London Fire and Emergency Planning Authority v Halcrow Gilbert Associates and Others.

The specific limitation of liability read as follows:
“Neither the contractor nor the purchaser shall be liable to the other by way of indemnity or by reason of any breach of the contract or of statutory duty, or by reason of tort (including but not limited to negligence) for any loss of profit, loss of use, loss of production, loss of contracts or for any financial or economic loss or for any indirect or consequential damage whatsoever that may be suffered by the other.”

The first thing I always recommend when you have a commitment that runs on like this is to split it down to what each of the individual commitments are to make sure that you understand it and each works for you. In this paragraph the language disclaimed liability for both parties for six different things. Let’s take a look at each of these to see the real impact of the language;

1.“Neither the contractor nor the purchaser shall be liable to the other by way of indemnity. This means that even if there was an indemnity provision in the agreement the party providing the indemnity was not liable under the indemnity making it useless.

2. "Neither the contractor nor the purchaser shall be liable to the other by reason of any breach of the contract or of statutory duty”. This eliminates the potential for either party to be liable under contract law for either breach or failing to meet a statutory duty.

3. “Neither the contractor nor the purchaser shall be liable to the other by reason of tort (including but not limited to negligence” This eliminates either party being able to claim not just under contract, but also by tort for injuries or damage sustained by a tortuous act.

4. “Neither the contractor nor the purchaser shall be liable to the other for any loss of profit, loss of use, loss of production, loss of contracts”
This excluded claims for loss of profits, use, production or contracts

5.“Neither the contractor nor the purchaser shall be liable to the other for any financial or economic loss”. This eliminated the right to claim for any financial or contractual loss.

6.“Neither the contractor nor the purchaser shall be liable to the other for any indirect or consequential damage whatsoever that may be suffered by the other.” This excludes any indirect or consequential damages.

The net effect of all of these exclusions was that neither party would be liable to the other party for anything. It eliminated all potential claims for damages. It eliminated all remedies available under contract or tort. The only potential claim that could still be made would be under equity. The two primary remedies under equity are specific performance and injunctive relief. In a contract situation unless what you offer is so unique to you that only you could provide it, courts won’t order specific performance. Injunctive relief is used to stop people from doing things and I don’t think you can stop someone from not working or not performing as that would be equivalent to ordering performance.

In the end the court will try to enforce the intent of the parties to the contract and here, with respect to liability the intent was clear that neither party would be liable to the other party for anything. While one party such as a buyer may want to be absolved of liability for everything except payment, this was the first time I ever saw a clause that completely excused both parties of any liability whatsoever.

What were they thinking?

Business Interruption Insurance

Business Interruption Insurance (also known as business income coverage) is a policy that may be purchased where in the event of a catastrophe, such as a fire, tornado, explosion, or other disastrous event causes your place of business to be temporarily unusable, forces you to relocate, or close down your business for a period, the policy would pay for:

1.Profits that you would have earned had you property not been damaged. This would normally be calculated based upon your past financial records of earnings.
2.Operating expenses that will still occur at the location. For example you could still have taxes, insurances, security and other expenses at the site even though you are not able to use the site.

They will normally not include labor or management costs as those costs are usually covered by unemployment benefits. Business interruption insurance may include as a separate item “extra expenses”. Extra expenses would be additional expenses that you incur that help decrease the cost of the business interruption. For example extra expense insurance could cover incremental expenses required to operate out of a temporary location if that would decrease the cost of the business interruption.

While this is not an insurance that you would require the to Supplier maintain under a contract, it’s an important concept for negotiators to understand especially when negotiating force majeure provisions.

For example: Assume that you had a contract to purchase 100,000 units of a product over a year and the supplier had a disaster such as a fire after only delivering 10,000 units. It was the only location where they produced the item. They cannot produce it in another location as the capital equipment required to produce it was destroyed in the fire. It will take them a year to recover. In a normal force majeure clause the party that suffered the force majeure event is excused from performance during the period of the force majeure. The party that did not suffer the force majeure is not excused. This means that a year from now the buyer would still have the obligation to purchase the remaining 90,000 units. You may not want that obligation and as part of the negotiation of the force majeure clause you include language that if there is a force majeure and the supplier is unable to recover within one hundred and twenty (120) calendar days, you have no obligation to purchase the remaining volume.

The Supplier seeing the potential loss of revenue and profit is opposed to agreeing to this. You then ask the supplier whether they have business interruption insurance. If they do, it becomes a simpler argument. If the insurance is already paying them for the lost profit they didn’t make for not performing, and insurance is paying them for the losses they sustained to the equipment or materials on hand that were damaged, haven’t they already been compensated? They have been made whole.

Forcing you to purchase it a year from now may:
1. Be selling you a product that you no longer need.
2. Be requiring you to shut off an alternative source of supply that helped you and that you had to invest in to not be impacted by their force majeure
3.Be selling you something that is no longer state of the art.

Any investments they made to produce the product for you will either have been paid for out of the insurance proceeds for the lost equipment or would have been paid for out of the profit they were paid by the business interruption insurance. I would then remind them that force majeure is about providing excusable delays when there are disasters. They are not there to guarantee future revenue and profits.

Saturday, May 26, 2012

Net Payment Terms

Simply including a net payment term like Net 45 days, is like an accident looking for a place to happen. It is full of potential conflicts between the parties in terms of how each may interpret it. One of the keys in negotiating contracts is to understand all the internal processes and constraints that must be followed so you aren’t promising something you can’t delivery.

Many companies simply do not make daily payments so the date when the supplier invoices or the date the buyer received the invoice usually has no impact on when the payment will be made. In fact many companies do batch payments twice a month and will not issue checks on other dates unless it’s an emergency. To most accounts payable groups a routine payment to a supplier is not an emergency. To manage against requests for special payments that don’t fall within their normal process the accounts payable group may require approval of a senior manager. So its never best to establish a specific date that won’t get supported by your accounts payable group.

Days can be interpreted to be calendar, bank, or business days. Most payment clauses will identify what information the supplier must include on the invoice for processing. If that information is not included accounts payable will return the invoice for correction. The same applies if the invoice is not correct such as having an error in the math or the invoice does not comply with what is actually due the supplier. There is always the question of what triggers the payment term to start. Is it the date of the suppliers invoice or is it the date when the invoice is received by the buyer? The same applies to when payment is made. Is it when the buyer issues the payment or when the supplier receives the payment? Payments may be hard copy or electronic and there can be a significant difference in time between the two. To avoid all these potential conflicts you need to be clear. For example: If you defined “Correct and Conforming Invoice” to mean an invoice that is mathematically correct, is accurate in the amount due the supplier under the contract and the invoice contains all of the following information: (include the list of all information required to be on the invoice)

Your payment term could be
"If Buyer receives a Correct and Conforming Invoice prior to the end of the month, Buyer shall make electronic payment to Supplier no later than the fifteenth of the second month following the date of the invoice."


If Buyer receives a Correct and Conforming Invoice prior to the end of the month, Buyer shall make electronic payment to the Supplier not later than forty-five calendar days after the 1st of the month following the date of the invoice.

This makes it clear that supplier's responsibilities for invoicing are
1). The invoice must be correct.
2). The content included must conform to the contract or order requirements for invoicing,
3). The invoice must be received by the Buyer before the end of the month.

If the Supplier has met those conditions, the Buyer buyer’s first responsibility is they must issue payment electronically.

Under the first approach payment would always need to be made on or before the 15th of that following month. If the 15th was a weekend or holiday they would not be excused and the buyer would need to make the payment earlier. Under the second approach the buyer would need to make payment on or before that specific time period has lapsed. You made it clear that measurement is based upon calendar days. As the number of days in a month varies, the actual date that payment would also vary. This also makes it clear that irrespective of the suppliers invoice date, the period for payment will always be measured against the 1st of the Month following the date of the invoice. It makes it clear that payment will be made when it is issued electronically. More importantly in structuring it this way, it will be something that will fit into your accounts payable process and be able to be processed under their batch payments.

Friday, May 25, 2012

Customer Supplied Material

A reader asked me about the use of customer supplied material or equipment that would be used in an OEM product and how to deal with it with the customer. The problem this creates is you have no privity of contract with the original supplier of the material or equipment and the customer is requiring certain commitments with respect to the sale of the product which you are not getting in turn from the material or equipment supplier. This creates an uncovered risk for you that needs to be managed in the agreement with the customer.

There are a number of issues that you must deal with in this situation. Those are:
1. Performance of quality problems with the material being supplied.
2. Potential third party claims resulting from the use of that equipment or materials such as claims of personal injury or property damage they cause, claims of infringement of intellectual property rights or claims by governments for the equipment or materials failing to comply with laws.
3. Potential claims against you by the Customer.

There are basically two general ways in which to manage potential third party claims. One is the customer could assign their rights under the contract with the supplier of those items to you so that you have privity of contract. The problems with that is the commitment they had from the supplier may not match what the customer is requesting of you. The second problem is it makes you responsible to collect from that supplier and to pay any costs of litigation as they would be your supplier. If you took this approach you would want two things. The customer should reimburse you for any costs of litigation with that supplier. Second , you would want to limit the recovery from you for any claims the supplier causes to be limited to only those amounts that are recovered by you. For any claims that involve joint liability, in addition to the above you would also want your liability capped based upon your percent of the problem. The goal is to assume no responsibility for their actions over what can be collected and have the customer pay any costs of collecting.

The second approach is to have the supplier not be assigned. While that would excuse you from indemnifying the customer, it doesn’t protect you from potential liability because you sold a product that contains the supplier’s material or equipment. In this situation since you have no privity of contract with the supplier, you would want the customer to indemnify you against any claim that involves the supplier as they should have the indemnity from the supplier to cover that risk.

As to performance or quality problems, irrespective of which approach you use for third party claims, you need to establish a standard for your responsibility in managing the supplier. For example you will use commercially reasonable efforts to manage the supplier’s quality and delivery performance. You then need to look at specific commitments you make to the customer and the impact the supplier’s non-performance will have. For example:
1.For late delivery caused by the supplier, you want to be excused from any remedies or damages for late delivery.
2.For quality or reliability problems you encounter, you may want to establish a threshold of acceptable levels included with you price in managing the supplier, where you are reimbursed by the customer for you actual and reasonable costs associated with quality or reliability problems that exceed that threshold. The customer should assume the cost of repair or replacement of all defective items so your cost on failures that are less than the threshold are only the re-work of your product to replace the defective item. If your product cannot be reworked or is damaged so it can’t be repaired and the cause of that is the supplier’s product, you should have no obligation to provide a repaired or replaced item.
As to potential customer claims for anything other than third party claims and quality and performance claims, you want to be excused from liability for any potential claims the customer may have the right to claim under the contract to the extent cause of the claim was caused in whole or in part by the Supplier. If a customer does not want to excuse you for items in which you were partially at fault, you want to limit your liability on a comparative basis. For example, if the total liability was $100,000.00 and the portion attributable to you is thirty percent (30%) your total liability should be no more than $30,000.00

In these situations it’s important to make it clear that you had no role in the supplier qualification or selection. You had no ability to control the terms of the supplier’s contract and you are not a party to that contract. For that supplier you are providing a simple management service. In providing that management service you cannot assume liability for their actions. You also cannot assume costs their supplier creates above a certain levels (the thresholds you agree upon). What you are agreeing to be responsible for is all the work and materials and services you provide which includes your committed efforts to manage that supplier. You are not committing to be responsible for that supplier.

Sunday, May 20, 2012

Dual Party Payee Checks

Ever have a situation where you need a subcontractor to do something but they won’t because they haven’t been paid by the prime? Have you had the situation where you don’t trust that the prime will make payment to the subcontractor? If you were to pay the subcontractor directly, the prime could still demand payment from you, as it’s a contract obligation you have with them and you do not have privity of contract with the sub-contractor.

An approach that works is to make it dual party payee check. In a dual party payee check you would include the prime contractor’s name, the subcontractors and include “and” between the two names so it’s clear that the check needs to be endorsed by both parties. If you simply listed both parties on the check and didn’t include “and” technically either could deposit or cash it, although banking institutions may require both parties endorse the check.

When you write the check to Contractor A and Subcontractor B, the use of “and” requires both parties to endorse the check for it to be deposited or cashed. When you do this, since one of the payees on the check was the contractor you have the endorsed check as proof of payment to them. The prime contractor alone cannot cash or use the check, they need the endorsement by the subcontractor. The subcontractor won’t endorse the check unless they get the proceeds. Once the subcontractor endorses the check, you have proof of payment to them from the perspective of managing against potential liens or claims for non-payment by the contractor.

If the contractor refuses to endorse the check and provide that to the subcontractor for their endorsement and use, you lose nothing. They can’t cash the check and you still have the funds to deal with any potential claims in the future.

Thursday, May 17, 2012

Letters of Credit or Payments

In LinkedIn someone asked the question if to get a reduction in price whether it was possible for an employer to issue a letter of credit (LC) to a major equipment supplier for the purchase of capital equipment to be used in the work. The same question could also apply to whether you could make payment. My assumption was there was at least four parties involved, the supplier, the electrical subcontractor, the prime contractor and the owner. In this case the owner has no privity of contract with either the supplier or the electrical subcontractor and you don’t want to make any payments to someone you don’t have privity of contract with as you have no legal relationship with that party. I offered two suggestions:

One way would be to have the contract between the subcontractor and the supplier for the purchase be assigned to the employer. That creates privity. The employer can then issue the LC or make payment. They would then later assign and novate that agreement to the prime contract contractor subject to a deduct in the LC amount. The Prime contractor would treat the equipment as consigned material to the subcontractor or could also assign the contract to the subcontractor, less the deduction in the sub-contract amount.

A second approach would be to have an amendment with the contractor, where in consideration of the Employer issuing the LC or making payment directly to the supplier, the contract price is reduced by the amount of the LC. The prime contractor would need to make similar adjustments in their contract with the subcontractor.

Never make a payment for anyone without a writing in place that establishes your ownership of the equipment until you are either paid or get the appropriate credit from the party your contract is with. The simple reason for that is if the equipment had been delivered but not installed and in the interim the subcontractor went bankrupt unless you can show ownership interest in the equipment it would be considered part of the subcontractors assets which could be disposed of in payment to their creditors.

Wednesday, May 16, 2012

Exclusivity Clauses

In LinkedIn there was a question about whether a contract that had a defined term also needed to have a specific term for an exclusivity requirement for it to be enforceable. The answer to that is the parties may, but are not required to establish a specific term for the exclusivity. Exclusivity terms are the same as requirements contracts where the requirement is to purchase one hundred percent (100%) of the demand from the supplier. Without a specific period the exclusivity commitment would end when the contract expired. If the exclusivity term was specified to survive the expiration of the agreement, it would most likely be considered unconscionable, and may not be enforced by the court. It would be forcing the buyer to continue to purchase from the supplier without any agreed terms or at any terms the Supplier elected to sell under.

Normally exclusivity requirements may be for a shorter period than the contract term. Whether the parties to the contract would agree to a shorter term for exclusivity would really be dependent upon several things. Exclusivity may be required because one or both of the parties made an investment that they need to recover. In that case in considering a shorter period the question would be what did the parties in the relationship invest and at what point in time or volume will they have that investment fully liquidated?

Exclusivity may also be desired for a competitive advantage where a buyer may want to restrict the supplier’s sales to competitors. In that case from a supplier’s perspective they would want to consider what value they potentially gave up to get that restriction and how long they want the buyer’s commitment to compensate them for that value they gave up. The buyer will consider how long they
will really get a competitive advantage from the exclusivity and will then want to be free to source wherever its best for them. Exclusivity clauses for competitive advantages usually are shorter in duration than exclusivity clauses used to protect investments.

In a separate post “Requirements Contracts” I describe conditions a buyer should include in their agreement that make the requirements commitment conditional upon performance and on-going competitiveness. Those same conditions should also be applied for any exclusivity commitment
Where the supplier is requiring the buyer to purchase 100% of their needs from them.

Tuesday, May 15, 2012

Contracts Questions and Answers

After belonging to a number of linkedIN contracts groups, I've become concerned with all the clutter. If someone has a question on contracts they should be able to ask it and get a knowledgeable answer without having to wade through all promotions, recruiting, help with hiring and articles reposted from other sources etc. If you read multiple sites which I do, you find this clutter on all of them.

I started a new LinkedIN group that will be a managed group called "Contracts Questions and Answers" The intent of the group is to keep it simple and be a forum where individuals can ask questions about contracts issues and get answers.

While you can always ask me a question directly via my website, or provide comments or suggestions to any of my blog posts, I'm hoping this new tool will help a broader group learm about contracts.

Monday, May 14, 2012

Differences between production procurement and retail procurement

To explain the differences between procurement for production versus procurement for retail/resale
I generated a list of contract terms and explained how each are different as the impacts to the two by a supplier, and supplier’s performance are different and the relationship with the end customer is also different.

Acceptance acceptance criteria:
Production view: Based upon complying with the product specification.
Retail view: Based upon complying with the supplier’s current specification

Acceptance or rejection of non-conforming work
Production view: Requires return to the supplier.
Retail view: Requires return by customer to supplier. (Reseller may never open package)

Accept Conforming Purchase Orders
Production view: May be important term for continuity of supply.
Retail view: Less of an issue as fewer potential changes will occur.

Access To future Products
Production View: Depends on need, May be important.
Retail view: Desirable to continue resales

Allocation Of Supply
Production view: Important activity to address especially if single sourced.
Retail View: Depends upon relationship. The more dedicated to the supplier you are the more protection you would want.

Assignment rights
Production view: Usually prohibits assignment to manage quality and performance.
Retail view: Less of a concern as no production is involved that a change would impact.

Availability of Spare Parts, Repairs, Support
Production view: Important to protect the life cycle cost of the purchase or to provide customer warranty and service support.
Retail view: More of the customer’s problem.

Buyer’s right to make changes To Specifications
Production view: Requires mutual agreement
Retail view: Usually not included. Reseller sells what supplier makes.

Carrier selection
Production view: Important for any non DDP delivery terms.
Retail view: Same

Production view:All changes require mutual agreement to ensure changes work in buyer’s application.
Retail view: Supplier free to make changes as buying saleable product

Compliance with laws, regulations or ordinances
Production view: Important as can impact the ability to sell or use the product.
Retail view: Important, as you don’t want to buy products you can’t import or resell

Contract Term
Production view: A defined period of time. Usually long enough to recover all investments made to qualify and use product.
Retail view: May be short if reseller’s investment is minimal.

Cost reductions
Production view: Frequently needed for long term relationships.
Retail view: Focus is on market competitiveness and maintaining margin versus cost

no difference

Delivery terms
Production view: Agreed by the parties, normally ex-works supplier.
Retail view: Same, but may require delivered terms with location stocking.

Delivery Flexibility
No difference

Delivery performance
No difference

Early Shipments
No difference, neither want things early.

Epidemic Defects
Production view: Major concern to deal with cost that occur in the field and rework to correct problem.
Retail view: Not an issue as all supplier returns managed by supplier.

Entire Agreement or Merger provisions
Production view: Included as there may have been discussions prior to agreement about the supplier’s product.
Retail view: May be heavily influenced by common standards of trade within the industry.

Force Majeure
Production view: Important for both buyer and supplier
Retail view: Usually less important. May not be making firm commitments to reseller and reseller may not be making firm commitments to customers

Governing law
No difference Buyers may want it to be location of sale.

Guaranteed period of availability of product
Production view: Very important, especially if you are single sourced.
Retail view: More of a customer impact. Would want commitment if you are prevented from selling competing products.

Intellectual Property Indemnifications
Production view: Important because of the potential magnitude (could affect huge number of products).
Retail view: Less important because reseller would traditionally only pass through supplier commitments.

Production view: Key issue in managing inventory.
Retail view: Less of an issue as not linked to production, production down-time. Would be more of a concen for seasonal sales

Limitations on liability
Production view: Important, usually concerned with the overall value of the purchases over time.
Retail view: Less important as reseller isn’t changing anything and only passing through supplier commitments.

Long Term Support
Production view: May be required as long as the Buyer has support obligations to their customers.
Retail view: Not required

On-time delivery
Production view: Important to manage to the production schedule.
Retail view: Less of an issue because impact is less.

Packing And Packaging
Production view: Important to manage against potential damage if delivery term has you assume risk of loss. Also important from inventory perspective.
Retail view: Important to manage against risk of loss.

Payment terms
Production View: Traditionally net terms X days after delivery.
Retail view: Same, but may also be based upon sale.

Performance improvement requirements
Production view: Important for longer term relationships.
Retail view: Not as important as don't have the same quality cost impact.
Personal Injury.
Production view: Concern applies only to product liability or automobile caused injuries and property damage.
Retail view: Concern applies primarily to product liability which cannot be disclaimed.

Production view: Unit based, more focused on cost.
Retail view: Unit based, more focused on margin.

Price Changes
Production view: May occur at the end of the term before any new term or must be agreed by the parties
Retail view: May occur more frequently but more tied to margin (suggested selling price with discount).

Property Damage
Production view: Concern only with product liability and automobile liability
Retail view: Concern with product liability.

Product Withdrawal - End-of-life
Production view: Can be a major issue if no replacement product or replacement does not work in your application
Retail view: Less of a concern if supplier has a replacement you can sell

Production view: Usually requires restocking fee and may be limited to new.
Retail view: May provide for customer remorse returns.

Total life cycle cost
Production view: Significant concerns about life cycle cost as warranty term, cost of maintenance, spare parts or repairs affect profitability. Retail view: Total life cycle cost is a supplier / customer issue.

Quality Levels & requirements
Production view: Important to manage on-going quality cost of production.
Retal view: Seldom a concern as cost of quality issues such as returns are borne by supplier.

Remedies for late delivery
Production view: May include things like right to cancel order, require premium shipment etc.
Retail view: Less of a concern because impact of late delivery is less.

Reschedule Orders
Important tool for both to manage supply versus demand.

Survival provision
Production view: Key to identify terms that will survive termination or expiration of the contract because of commitments to customers
Retail view: Key is to identify the terms that survive the delivery of the product (limited only to issues between supplier and reseller)

Taxes and Duties
No difference

Technical Support needs.
Production view: May be required for determining root cause of problems experienced by customers under warranty.
Retail view: Usually none, as supplier provides customer support.

Warranties and Representations
Production view: Will contain many warranties about the product.
Retail view: Will include pass-through warranties supplier provides to end customer. Reseller seldom provides to customer.

Warranty Redemption, RMA processes
Production view: Important process to ensure you get committed warranties.
Retail view: Customer issue. Reseller usually avoids being involved or gets paid to provide warranty support.

Thursday, May 10, 2012

Including, but not limited to...

If you include a list of examples such as a list of tasks to be performed or deliverables to be provided, that list may be considered all inclusive and may limit what you get to only that list. As a result drafters may seek to not have that list be limited by including a preamble such as "The work shall include, but not be limited to" after which a number of items are listed.  The problem with such an approach is there is no clear meeting of the minds on exactly what is required. This can result in disputes. A second problem with this it's potentially unlimited. Any time a supplier can't quantify exactly what they need to provide they will included contingencies to cover the potential risk or cost. If the term is used by the supplier, the buyer can't quantify exactly what value the supplier will provide.

I'm of the opinion that if something is important to you, you shouldn't use "including, but not limited to" and you should spell out exactly what is required so its clear exactly what must be provided. If it isn't practicable to do that, I would make sure my list included all the things that I knew I wanted to be provided as part of the list so it's clear that as a minimum those were agreed and need to be provided.

To prevent the commitment from being perceived to be unlimited which might significantly add to the cost through contingencies, I might also disclaim specific items or tasks that I knew I didn't want to be provided.  For example: Supplier's deliverables shall include, but not be limited to, 1, 2, 3, 4,. Supplier shall not be required to provide 5 and 6.  That way, while you initial list could include more items it's clear to both parties what is not required to be provided.

The fewer things you leave open to interpretation, the fewer disputes you will have and fewer contingencies and costs you will have built into your price for things you either don't want or need. 

Wednesday, May 2, 2012


Frequently on LinkedIN individuals will ask questions about the difference in the meaning of certain terms. The most recent one was the difference between variations and contract amendments. One of the problems is there really is no common set of terms that are defined and are accepted around the world. Probably the closest there is to that is INCOTERMS, which are delivery terms that are published by the International Chamber of Commerce. Even then to be safe and to make sure that definition applies, when you use one of the defined INCOTERM delivery terms in your agreement, it is best to also point to the specific INCOTERM. As INCOTERMS are updated periodically when you refer to it in the agreement, you should also specify which revision of INCOTERMS you want to apply. For example: “All deliveries shall be Ex-Works Supplier’s dock in Taipei, Taiwan as that term is defined in INCOTERMS 2010.”

As to the original question about the difference between variations and contract amendments, “variations” is usually a clause found in contracts that follow the UK contracting approach. In the U.S. and other locations we would refer to the same thing as “Changes”. For both variations and changes there are multiple types of changes that can occur. For example, in some industries such as construction, an owner may want the right to make unilateral changes to the scope, drawings or specifications. This right is to avoid delays in construction where a decision may need to be made immediately to avoid having work performed that may need to be demolished. In those situations the owner has the right to make the change, but needs to compensate the contractor for the cost of the change and have the schedule changed for any impact the change caused. These are called “change orders” or “variation orders” to reflect that the change was ordered by the owner. They do not allow the Owner to unilaterally change the terms of the agreement, only the scope and the drawings and specifications.

There are also situations where all changes require mutual agreement of the parties. In that situation while the parties may call it a variation or change order, it is really amendment to the agreement. Variations or change orders that are mutually agreed may change the scope, drawings, specifications or terms of the agreement.

I once had an individual from the U.K, tell me that we are separated by a common language. In many situations we attach different meanings to the same words or phrases. We also use different terms to describe the same situation. Since there are no standard definitions that exist, the contract drafter needs to specifically define what each important term means in your agreement. That eliminates potential disputes as both of you have agreed on a common definition for use of that term in conjunction with the contract. You can create definitions by 1) Defining terms in a definitions section (or definitions exhibit when the number of definitions is very large), or 2) specifically definition a term at the first point where the term is used in the agreement, and 3) by incorporating by reference a definition from a source such as INCOTERMS that makes the definition clear to both parties.