As readers of this blog through my website I've always had the page where you could submit a question about contracts to me and if I had the knowledge I would respond to it with a post. I haven't had many questions but want to provide the ability to expand the knowledge base from other people who can also help in responding to contracts questions. As such I would like to invite all of you to a LinkedIN contracts group I established called "contracts questions and answers" It is intended to be a non-promotional, non-self-serving, group where individual can ask questions and get the best answers. Comments that either aren't correct or that add no value will be blocked.
To be part of this you must join LinkedIN and then using the search function at the right top of the LinkedIn page and "groups" search criteria type in the group name Contracts Questions and Answers and then request to join. If there are great questions and answers that I haven't addressed in the blog I will still summarize them here.
The second thing is this is my 500th post and today I reached 50,000 page views. I want to thank everyone that has visited the site and read the posts. I've had fun writing it and I hope that all of you now know more about the knowledge you need to negotiate or manage contracts.
John C. "Jack" Tracy
Friday, June 22, 2012
Assignment strategies that can help the Buyer
When I managed construction contracting for fast track programs and we would make advance purchase of long lead-time items prior to the prime contract being bid or negotiated. In those agreements we would include two requirements. One would be that the supplier would agreed in advance that the contract could be assigned to the prime contractor that we selected and second that we would be a third party beneficiary to that contract once it was assigned. Then in our bid documents and contract we would identify the specific contracts that would be assigned and include the requirement that the prime contractor would assume those assigned contracts. Whether we sought a novation of those agreement would normally be dependent upon the value of those advance purchases and whether the supplier had concerns over payment by the prime contractor.
This approach allowed us to shorten the schedule for competing the work as the activity could be done in parallel rather than serially waiting for the design to be completed and bid. It also eliminated the potential of there being a problem where those advance suppliers and the prime contractor were pointing fingers at each other with our company being in the middle of the dispute. Once the contract was assign, the total responsibility for performance rested solely with the prime contractor. If there was a problem it needed to be worked out between the prime contractor and those suppliers. This also places the responsibility for coordinating all of the work on the prime contractor and it eliminates the potential for claims from either party that would occur if they remained our contractors. So while the prime contractor may charge additional cost to assume that responsibility, you avoid those claims.
The reason why we wanted to be a third party beneficiary to those advance contracts was because some of those advance contracts had obligations that extended beyond the period of the construction such as warranty obligations and we wanted to be able to directly enforce those directly with the suppliers.
In situations where there was not an assignment and novation, meaning we could still be liable to pay those suppliers if the contractor prime didn’t, we could protect against that risk by payment bonds, requiring a waiver and release of liens from those supplier as a condition for future payments or we could issue dual party payee checks that were written in the Prime Contractor and suppliers name so the supplier couldn’t cash it, they could only endorse it for the supplier to then endorse and deposit. The check couldn’t list both parties or use “or” as the prime contractor could potential deposit those. The “and” requires both signatures for deposit or cashing.
While this approach works well in construction there are clearly a number of other areas where it could be used as a tool to fast track work and not leave yourself with a problems where what you purchased isn’t working and you have both sides pointing fingers at each other as to the reason for it not working with you standing in the middle.
This approach allowed us to shorten the schedule for competing the work as the activity could be done in parallel rather than serially waiting for the design to be completed and bid. It also eliminated the potential of there being a problem where those advance suppliers and the prime contractor were pointing fingers at each other with our company being in the middle of the dispute. Once the contract was assign, the total responsibility for performance rested solely with the prime contractor. If there was a problem it needed to be worked out between the prime contractor and those suppliers. This also places the responsibility for coordinating all of the work on the prime contractor and it eliminates the potential for claims from either party that would occur if they remained our contractors. So while the prime contractor may charge additional cost to assume that responsibility, you avoid those claims.
The reason why we wanted to be a third party beneficiary to those advance contracts was because some of those advance contracts had obligations that extended beyond the period of the construction such as warranty obligations and we wanted to be able to directly enforce those directly with the suppliers.
In situations where there was not an assignment and novation, meaning we could still be liable to pay those suppliers if the contractor prime didn’t, we could protect against that risk by payment bonds, requiring a waiver and release of liens from those supplier as a condition for future payments or we could issue dual party payee checks that were written in the Prime Contractor and suppliers name so the supplier couldn’t cash it, they could only endorse it for the supplier to then endorse and deposit. The check couldn’t list both parties or use “or” as the prime contractor could potential deposit those. The “and” requires both signatures for deposit or cashing.
While this approach works well in construction there are clearly a number of other areas where it could be used as a tool to fast track work and not leave yourself with a problems where what you purchased isn’t working and you have both sides pointing fingers at each other as to the reason for it not working with you standing in the middle.
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