Wednesday, July 18, 2012

Drafting the Contract

Everyone has their own approach to drafting an agreement. Most companies have a variety of standard templates that they use for various types of purchases. Most templates are written for average risk purchases from average risk suppliers. The key is making sure that the template meets the needs of the specific contract you need to write. To do that I go through the following process.

I start with the internal customer requirements. Does the template meet those requirements? If it doesn’t prepare any changes or additions so it provides what is needed.

My second step is to determine the potential costs or risks of the item being purchased. Does the template include terms and controls necessary to manage those costs and risk? If it doesn’t prepare any changes or additions needed.

Third, having pre-qualified the Supplier I will consider if there are any specific risks associated with the supplier that need to be managed by the contract. If there are, I will check the template to ensure the template manages them. If it doesn’t add to or change the template.

I check to see if “administrative” type provisions for the purchase have been included that describe how all the different processes the parties will use and whether those are applicable for this agreement:
o What is required for invoicing;
o How payments will be made;
o How Return Materials Authorization processes will be managed;
o How warranty returns are managed; who receives notices; etc.

I look to see if all the specific business provisions that change from purchase to purchase are included and work for the specific agreement.
o Pricing.
o Delivery.
o Logistics.
o Changes.
o Other factors such as the Supply Chain or the total cost and life cycle cost factors of the relationship.

I then review the performance provisions that define what is required and what happens if the requirements are not met to make sure they are included and meet the needs of the specific purchase. Performance provisions are requirements such as:
o Specifications;
o Drawings;
o Quality requirements,
o Performance improvement requirements,
o Certain warranty provisions,
o Delivery performance,
o Required costs reductions, etc.
I check to ensure there are tools included in the contract or other tools are incorporated into the contract.

Every contract should also identify how certain promises that are made will be backed up to make sure they are addressed. For example:
o If a supplier provides and indemnity against third party claims, that should usually be backed up with a requirement for the supplier to provide the necessary insurance coverage to stand behind the commitment.
o For smaller supplier it might mean a parent guarantee.
o For some work it could be bonds or financial guarantees provided by a third party

Most contracts have a number of key elements and I check to ensure that they are included and work:
A title
An introductory paragraph that identifies the parties
Recitals that describe the intent of the parties entering the contract
Definitions of terms
Key conditions for the contract
Representations, Guarantees, Product or Service warranties
Events of Default and Remedies for default
Legal Boilerplate terms such as applicable law and jurisdiction, waiver of rights, survival, limitations of liability, assignment rights, amendments, other warranties and indemnities, severability of of terms. force majeure, freedom of action, license grants.
Signature blocks
Exhibits and attachments

I will review the key purchase terms to ensure they are included and work: warranties, indemnities, guarantees project scope, key assumptions. supplier responsibilities, buyer responsibilities, confidentiality, deliverable materials, deliverables. buyer deliverables, acceptance criteria, test criteria, completion criteria, materials and equipment loaned, rates, charges, or fee schedule, changes. escalation procedure, project management requirements. payment, proprietary rights, security requirements. use of facilities, travel, training, documentation, maintenance and support, risk management terms. performance management tools.
I will check to ensure it defines what constitutes a material breach, the cure period allowed and the remedies for breach.

I make sure the agreement has appropriate rights to terminate the agreement for cause and without cause.

I will review the remedies to ensure they are appropriate for the purchase.

In all checking I will look at:
1. Whether the language is using the “active voice” to make commitments clear.
2. That I use defined terms from the Agreement.
3. That other documents made part of the agreement are compatibility with the Agreement
4. Whether the language use the right “standard of commitment” for each commitment.
5. I will check any “Incorporation by Reference” of any documents.
6. For each major commitment I will check to make sure that it answers the five questions.
1. Who is responsible to perform the action?
2. What is their responsibility?
3. Where must it be done?
4. When must it be done?
5. How must it be done?

I will check the document:
Did I avoid ambiguity?. Was I consistent? Did I avoid being redundant?. Did I use carve outs when appropriate? Did i define things to make the meaning clear? Are the time requirements clear? Did I use “and” or “or” correctly. If I used applicable, did I define what I mean by applicable? When I used cost or expense did I use them right? If I included a list did I make it clear whether they are examples of what it required and that more may be required or whether the list is intended to be inclusive? Did I manage the use of the word mutual? If I am relying on a representation made by the supplier, did I include that? Are all the numbers and formula accurate?

I will ask someone else to proof read it.

If you were forced to use the Supplier’s standard agreement, I would go through the same process for checking. I would read their document in conjunction with my template to help identify what’s missing that needs to be added.