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Building robust supplier contracts

Blog Post

Written by John Berry on 25th May 2021.0

6 min read

PrintingSome time ago we wrote that every single person associated with a firm should be, directly or indirectly, under a contract with the firm. Our position on that hasn’t changed. But we’ve now developed a huge number of supplier contracts for our clients. So it’s worth looking at some of the issues. Specifically, it’s worth looking at how supplier contracts should be developed to be suitably robust.

A supplier is any entity or person that supplies goods or services to the firm. People call suppliers all sorts: sub-contractors, consultants, associates, freelancers – or even suppliers. Basically, a supplier contract covers any entity that’s not a customer or client, and any person who’s not an employee. Essentially it’s anyone providing a good or service to the firm.

The essence of the contract is, “The entity (supplier) agrees to supply the firm with goods or services so specified in return for payment of the price and under the terms and conditions set out here”.

This simple phrase highlights the key attributes of the contract.

First of all, the detail of the goods or services must be specified. There must be some criteria under which the supplier can claim, and the firm can accept, that the supplier has performed. If the supplier has performed, it must get paid.

Specification is generally the first stumbling block when it comes to payment – often the supplier will claim performance against the specification. And the firm will claim that the specification has not been met. And so, they head to court or invoke some other dispute resolution mechanism.

Typically, the firm’s specification will involve doing something or supplying something with a defined function or fit or to a standard. The specification will likely include a quality measure. And typically, there will be a time performance measure too. So as an example, “the supplier will translate a document from French to English within 24 hours of receipt of the document”. The specification might continue that the translation will be done, “with zero errors”.

On the face of it, all’s well with such a definition. We know what’s to be done, when by and to what standard.

But translation is an opinion-based activity. “Zero errors” is an absurd concept in language. One person’s idea of perfect French is different from someone else’s. This is particularly true when it’s not general conversation but a special subject matter. For example, French for mobile phone is, “le mobile” – but in certain applications it’s, “le portatif”. Subject-matter driven differences can be significant.

Drafting clauses to define the specification that in turn sets out what’s to be done is not simple.

For goods and services like translation where there’s a matter of opinion, clauses must be included setting out what happens in a dispute – when the supplier claims compliance with the specification and the firm refutes that. An example dispute resolution might be the agreement to resort to a third-party adjudicator.

Some lawyers will also recommend inclusion of a statement that time (or compliance with specification, or quality) is ‘of the essence’. This means simply that if there’s any breach of delivery timescale, specification or quality, the firm can cancel the contract. We counsel that whilst this might be interesting, it’s not very useful. Firms need suppliers to perform, not be dismissed.

Secondly, the parties must understand the way in which the contract is to be used. A contract is one thing, but often supply is not just momentary. Often supply continues over time. In the example of translation, the contract will be expected to cover many translations over many months and even years.

There are two ways that ongoing supply might be dealth with. The first is to add a Schedule as an annex to the contract. The Schedule can then be used to define the various actions to be taken and deliverables to be made. The idea is that the Schedule can be revised and re-agreed between the parties without the contract needing to be revised and re-signed. The contract becomes generic, and the Schedule changes as needed.

The second way is more flexible. The contract can cite the use of Purchase Orders (POs) for work. The POs can be raised by the firm’s Project Manager(s) every time the firm needs the supplier to act within the scope and conditions of the contract.

Like the Schedule, a PO can cover specification, deadlines and price. Generally, the firm triggers the PO process by asking the supplier for a quotation for the work. On receipt of the price, the firm’s Project Manager raises a PO. And this repeats again and again.

Typically, firms don’t think through how a contract is to be used. That’s strange, considering that this is what a supplier contract is for.

However it’s done, all supplier contracts must set out the deliverables – the goods and/or services to be provided to the specification. Without a definition of deliverables to a specification, performance can’t be determined. And all supplier contracts need an integral method that sets out how the parties will undertake their obligations – like quotations, purchase orders, acknowledgements of the POs, delivery notes, invoicing and payment.

There are then a number of other key clauses:

• The names and addresses of the parties.
• Remedy in the case of disagreement (and who pays the adjudicator).
• Requirement on the supplier to use its skill and care.
• Provision of information in order to allow work to proceed.
• That the supplier is (or is not) an exclusive supplier.
• That the supplier shall not sub-contract the work.
• Confidentiality of information supplied.
• Invoicing and payment arrangements.
• How the parties terminate – or otherwise get out of the contract.
• Post-termination consequences and obligations.
• Who owns the deliverables and when, as they move from supplier to firm?
• Requirement that the deliverables shall be original work.
• What happens if another party has rights to parts of the deliverables?
• Ownership of interim work in developing the deliverables.
• Ownership of intellectual property in the deliverables and interim work.
• Management of copyright and patents.
• Transfer of intellectual property to the firm.
• Requirement to maintain information security and privacy.
• Ownership of tools.
• Liability for any claim against the firm and requirement for insurance.
• Limit of liabilities.
• Precedence of documents such as the contract, schedule and purchase orders.
• Requirement to appoint a Project Manager.
• A Force Majeure or ‘act of God’ get out clause.
• Choice of law – usually English law for English firms.
• Acceptance of the courts or arbitrators in the event of unreconcilable dispute.
• And then somewhere for both parties to sign and date.

So, in summary, the two key areas to be covered by appropriate clauses or schedules are:

• the specification (and with that the delivery expectations) such that performance can be determined; and
• the way the contract is to be used, covering the mechanism by which work is triggered and payment made by the firm.

These two are the areas in which TimelessTime focusses. The rest of the clauses follow quite naturally once these are set.