MIM 524 Global Sourcing Class five. Contracts, Contract Terms and International Terms This is...
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Transcript of MIM 524 Global Sourcing Class five. Contracts, Contract Terms and International Terms This is...
Contracts, Contract Terms and International Terms
This is intended to be a holistic overview of contracts and the legal aspects of global business.
Agenda
• Agency Law• Contract Formation• Legal Issues in Purchasing• UCC vs. CISG• Contract Term Considerations• Current Events/Review Next Class
Agency Law
• Agency– Definition: One who is legally empowered to
act for another– An agent has the legal authority to bind his or
her principal to a contract.• Principal
– Definition: Can be an individual person or a legal entity such as a corporation.
• “Agency” is a fiduciary relationship – which means the Agent must put the Principals interest ahead of their own.
Agency Authority
• Apparent Authority– Anyone that a 3rd party could “reasonably”
assume has the authority to bind a company• Real Authority
– Individuals such as Corporate Officers that a company has authorized to act on their behalf.
– Other specifically delegates organizations (procurement, real estate, etc.) or individuals that have accountability by the nature of their roles.
What is a Contract?• A promise or a set of promises, that the
law will enforce, or at least recognize in some way.
• If you have a contract, you may be entitled to legal remedies if that contract is not fulfilled.
• You need ALL 3 Basic elements to have a contract– Offer– Acceptance– Consideration
Contract/Procurement Law Essential Contracting Principles
• Contract Formation– Written vs. oral contract– Electronic contracts
• Terms and Conditions– Battle of the forms– What terms apply?
• Contracts for Services– Applicable law(s)– Legal differences
Contract FormationWritten vs. oral contract
State laws generally require “writing” IF:Sale of goods over $500.(changing to $5,000);Promise to pay debt of another;Sale of land or interest therein;Contracts not performed within one year;
UCC also requires “signature” for contract formation (UCC 2-201)
Elements of an “offer”
• An offer is more than an inquiry, it must show the intent to be bound.– Remember the RFI/RFP/RPQ differences?
• “This is a request for quote and not an offer to purchase.”
• A promise or commitment• Using words or conduct that indicates intent to
contract• Which is communicated to a 3rd party• Creates a power of acceptance
Elements of Acceptance
• Words or conduct that indicate intent to be legally bound
• Communicated to the other party• Offers may define the form of acceptance which gives
it control– If it doesn’t specify, then UCC Uniform Commercial
Code will fill in. More on UCC later.• Special kind of acceptance: Unilateral Contract
– Is formed when an offer invites acceptance by performance
– Acceptance by performance is a legally valid acceptance
A contract can be any of the below…
• An exchange in writing such as a purchase order and the associated acknowledgement
• Oral promise• Combination of oral promises and writings• Formal signed agreement in writing• Promise by one party and performance by
another• NDA – Non disclosure agreements• LOI/MOU – Letter of Intent/Memorandum of
Understanding
Legal Issues – Contracts
Oral Modifications of contractsWritten agreement says one thing but the parties do
something else and don’t amend the agreement in writing?
Called Course of DealingsModification terms are not enough to protect against
Course of DealingsOral Contracts
Oral promise is just as enforceable as written promisesIf you have offer, acceptance and consideration, you have a
contract – no requirement for “in writing”Contract will be incomplete and/or ambiguous
What is the Uniform Commercial Code? (UCC) Standard contract terms that provide a
contract structure for contracts for acquisition of goods. Key provisions for Definitions and Remedies Protection tends to favor the Buyer
Covers all aspects of goods contracting Offer, Acceptance, Consideration Right of Inspection & Rejection Buyer and Seller Remedies Contracting management Warranties
May also serve as a “gap filler” for incomplete contracts.
Not to be utilized for Service Contracts. Valid in 49 of the 50 United States
All except Louisiana
Whose Terms Prevail?Buyer’s P.O. Contains:
“Acceptance of order. This order is buyer’s offer to seller. Seller’s acceptance is expressly limited to the terms of the order and buyer hereby objects to any additional or different terms in seller’s acceptance. Seller accepts this order as written by executing and returning to buyer the acceptance or acknowledgement copy of the order, or by beginning performance.”
Seller’s Acknowledgement Contains:“Seller’s acceptance of this order is expressly made conditional on buyer’s assent to the additional (or different) terms incorporated herein by seller.”
UCC – Uniform Commercial CodeBattle of the forms (2-207)
Conflicting terms are thrown out Difference, non-conflicting terms Materially altering terms – added if does not materially
alterFirm Offers (2-205)If method of acceptance is not called out in the offer
then UCC applies (2-206) An order requesting prompt shipment may be accepted
either by a promise to ship, OR by prompt shipment of goods.
Silence can not constitute acceptance
Contract Issues
MistakesBilateralUnilateral
ExcusesWaiverPreventionImpossibility
Force-MajeureParties can be excuses from liability for
unforeseen events outside of their control (IE: Natural Disaster, etc.)
Acceptance of Goods
Right of Inspection (2-513) Acceptance of Goods (2-606)
Notification to seller that goods are confirming, or writing to accept in spite of non-conformity
Buyer fails to inspect in reasonable time
Revocation of Acceptance (2-608) Supplier fails to cure defects Discovery of latent defects Must occur within reasonable time after discovery
Rejection of Goods
Improper Delivery (2-601) Reject the whole Accept the whole Accept part, reject rest
Rejection (2-602, 3, 4) Reject and notify supplier in reasonable time Hold rejected goods with reasonable care for seller’s disposition CAN NOT just rework and back charge without seller’s
concurrence Follow reasonable seller’s instructions for disposition After reasonable time, may sell and recover expensed,
returning balance to seller
Buyer’s Remedies for Breach of Contract Contract Assignment (2-210) Incidental and Consequential Damages (2-715)
CONSEQUENTIAL DAMAGES - Those damages or those losses which arise not from the immediate act of the party, but in consequence of such act
INCIDENTAL DAMAGES – Those damages for commercially reasonable expenses incurred as a result of the other party's breach, such as costs of inspecting and returning goods that do not conform to contract specifications.
Cost to “cover” (2-712) Cost for Buyer to find alternate method to fill needs
Liquidated Damages (2-718) LIQUIDATED DAMAGES - When the parties to a contract agree to the
payment of a certain sum as a fixed and agreed upon satisfaction for not doing certain things particularly mentioned in the agreement, the sum is called liquidated damages
Deduction of Damages From Price (2-717) Notify supplier of intention to do so Must be deduction from same contract
Suppliers Remedies for Breach of ContractIf Buyer
Wrongfully rejectsWrongfully revokes acceptanceFails to PayRepudiates Agreement
In General (2-703)Withhold DeliveryStop DeliveryResell and Recover DamagesRecover Damages for Non-AcceptanceCancel
Incidental Damages (2-710)Reasonable charges/expensesTransportationCare and CustodyReturn costs
Warranties – 2 types….
Express Warranties (2-313)Written or spoken
Implied WarrantiesTitle (2-312)Merchantability (2-314)Fitness for Particular
Purpose (2-315)
Warranties – Exclusions and Modifications
Exclusions or Modifications (2-316)Conspicuous WritingAs Is, Where Is, With All FaultsIf inspection Should Disclose Defects OR if
Inspection Is Declined, NO IMPLIED WARRANTY
Warranties can be modified by Course of Dealings
Remedies can be limited by contract
UCC is for domestic contracting, what about Global contracting…UN Convention on Contracts for International Sale of Goods
(CISG)Similar Objectives to UCCSimilar to UCC in Function
5 Significant DifferencesAcceptance of Offer: Mirror image or no contractContract Price: No Contract without firm priceRevocation of Offer: May be revoked at any time prior to
acceptanceFormation of Contract: At time of Receipt of AcceptanceOral Contracts: Valid and Enforceable
CISG may be Preferable to another country’s laws
What are They?UCC: Uniform Commercial Code – United States
CISG: United Nations Convention on Contracts for the International Sale of Goods - International
Generally:UCC
Transactions in goods, where U.S. law applies.
CISG
Commercial transactions in goods between parties in signatory nations, and can displace the UCC in an international context.
When Do They Apply?UCC
Automatic application if “sale of goods” when U.S. law applies (any state) except Louisiana.
CISG
Sale of goods between parties in “contracting states.”
If only one party is in a contracting jurisdiction, CISG will not apply, unless both contracting parties agree.
Contracting States
Argentina, Australia, Austria, Belarus, Belgium, Bosnia, Herzegovina, Bulgaria, Burundi, Canada, Chile, China, Kirghizstan, Croatia, Cuba, The Czech Republic, Denmark, Ecuador, Egypt, Switzerland, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guinea, Iraq, Italy, Yugoslavia, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, Norway, New Zealand, Holland, Peru, Poland, Romania, Russia, Singapore, Slovakia, Slovenia, Spain, Syria, Sweden, USA, Ukraine, Uganda, Uruguay, Uzbekistan, Venezuela, Zambia
Is the CISG “Law”?
• Only if you agree to it! Parties can opt out of these provisions through contractual language.
– Clearly specify an alternate choice of law to avoid CISG.
– Both parties must agree to the choice of law.
Goods
Sale of goods ONLY!
DOES NOT apply to service contracts; however, may apply to contract for mixed goods and services.
Warranties
Both provide similar coverage, including:
Warranty of merchantability (goods are fit for their ordinary purpose(s)); and
Warranty of fitness for a particular purpose (goods match any purpose made known to the Seller, where Buyer relied on Seller’s skill and judgment in choosing goods.).
International Contract TermsPayment
Currency SelectionOn AccountLetter of Credit
Revocable/IrrevocableConfirmedStandby
Buyer Sets ConditionsSupplier Guaranteed Payment Upon
Meeting ConditionsINCO Terms
Negotiate prior to signing contract
Commonly Used INCO TermsEx Work – Departure from
factory all carriage paid by the buyer
FCA – Free CarrierFAS – Free alongside shipFOB – Free on BoardCIF – Cost insurance and
freightDDU/DDP – Delivered duty
unpaid/Delivered duty paid
Supplier Contract Types
Blanket OrdersWay to attack the small purchase orderLow volume, low value goods
Supplier Managed Inventory AgreementsBreadman Agreements – focus on
continuity of supplyFrequency of useRelatively low value
Systems Contract Custom catalogPO’s
Annual ContractsMulti-year ContractsEvergreen Contracts
Detrimental Reliance
A unilateral contract which arises from a promise (made verbally or by conduct) which induces a supplier to rely on our promise, to their detriment.
Need All elements to exist: Promise, commitment or inducement Reasonable expect the supplier to rely upon (or act
upon) Supplier does rely in a definite and substantial way Reliance was reasonable Supplier suffered measurable damage or injustice
which can be avoided by enforcing the promiseNeed to avoid accidentally entering into binding contracts
Tips to avoid Detrimental Reliance
Do not promise to order based on forecastsBe careful dealing with small, new and start up
type companies that may be financially unstable
Keep suppliers informed of latest demand trends.Reduce the surprises and help mitigate the
potential impactAvoid micromanaging the supplier
Hold them accountable to the result – let them figure out how to achieve those results.
Conclusions
Legal ConsiderationsIntent is to STAY OUT OF TROUBLEClear, Concise CommunicationFrequent CommunicationCareful Record KeepingUnderstand Rights and Obligations
Under the LawContract ConsiderationsInternational Considerations
Things to Consider – Contract Terms Effective Date:
When does the contract officially start? Expiration Date
When does the contract officially end? Who is the Buyer?
Affiliates, Joint Ventures, Partners, other assignees?
Who is the Seller? Be clear to avoid confusion on who is really doing
the work…. Definitions – Need to be very clear
Avoid Slang, Acronyms, Anyone should understand
Things to Consider – Contract Terms Attachments – supplemental information to the contract terms might include: Product Description State of Work (SOW) Schedule Pricing Quality Requirements Certificate of Originality Software Licenses Other?
Always be sure these attachments are the appropriate revised/update and do not contain conflicting information
Things to Consider – Contract Terms Term of Agreement – Length of Contract
Decide best length for specific contracts Time and effort to renegotiate is high
Difficult negotiation with critical supplier Consider a longer term contract
Highly dynamic environment/changing quickly Consider a shorter term contract
Evergreen is a contract that does not expire Make sure your terms allow for Delivery AFTER a
contract Expires……
Things to Consider – Contract Terms Pricing
Be clear on what is and is not included in the price Taxes, surcharges, Freight, etc.
Determine how price is set Fixed Price Adjustable Price based on some indicator
Payment Terms/Acceptable Invoice 2%10/Net 45, Net 60, etc. Clock starts ticking upon receipt of accurate
Invoice Payment is not acceptance (Able to inspect, etc.)
Things to Consider – Contract Terms
Term for Convenience Do not make this Mutual – not really a contract Limit supplier claims to Custom product only No liability for standard products Retain right to audit claims
Contingencies – Force Majeure Require immediate notification of issues Retain right to terminate without penalty
Inspection/Acceptance/Warranty Reserve the right to inspect product Determine appropriate length of warranty and what is
included in it What is suppliers obligation if product is rejected?
Things to Consider – Contract Terms
Delivery/Release/Scheduling Retain flexibility to reschedule, cancel, push out, pull in or
increase size of order Do not commit to a locked forecast UNLESS there is benefit
for Buyer Require reasonable notice if deliveries are
delayed/impacted Buyer is only liable for “released” product
Typically a release comes from a Purchase Order issued under the terms of a contract.
Supplier should be responsible for returned freight on non conforming product
Product Specification/Errata Be clear on the product you are buying/specs Seller should have “track and trace” capabilities Appropriate Change Control and Errata Notification
Things to Consider – Contract Terms
Packaging and Shipment Special packaging should be called out in SOW Protection/Markings Specific Logistics Mode and Environment
Moisture Control Limited Vibration Clean Room Protocol
INCO Terms Who is responsible for cost of freight from Point A to
Point B When does Title and Risk Transfer Who is responsible for Customs and Duties
Custom Clearance Need to conform to laws Ability to obtain documents from Seller
Things to Consider – Contract Terms
Confidentiality How will the supplier protect your Intellectual Property? Who has authorization to see the documents? How is 3rd party value add managed?
IP Indemnification The #1 most negotiated contract term Necessary to protect Buyer from Supplier or others
infringement on patents or IP Limit liability for the Buyer Puts due diligence on supplier to ensure there are no issues
Insurance Specifically important for suppliers who do work on the
Buyers site (service providers) Determine how much coverage the Buyer should have
Things to Consider – Contract Terms
Modifications/Mergers/Remedies This is the one and only final document Changes require written approval from both Buyer & Seller Each Breach is Separate and Actionable
Retention and Audit What is a reasonable time for Buyer to retain
documentation? Reserve the right to audit anything related to this contract
and necessary supporting areas Assignment
Determine if, when and who the Buyer might assign this contract to
It is usually not a good idea to allow assignment
Things to Consider – Contract Terms
Specific Performance Right to compel supplier to deliver (schedule and volume)
and pricing as negotiated Notices
Who to contact for all official communications This is more important in large corporations vs the smaller
company Large companies typically designate their legal department
verses the Buyer (Buyer’s rotate positions) Survival Clauses
Which clauses will last beyond the expiration of the contract
Typical Clauses that would come into play here: Confidentiality IP Indemnification Warranty
Tips & Tricks on a Good Contract Read the contract – top to bottom Make sure there are no conflicting or ambigious
terms Write the contract so anyone can understand – don’t
over use the legalese…. Ensure all attachments and supporting documents
are correct/up to date Review the agreement with internal stakeholders
What is expected of the Seller? What is expected of the Buyer? What happens if either do not perform? Point of Escalation/Communication
Next ClassManaging Supplier Relations and
PerformanceTQRDCEB Reading DiscussionGuest Speaker – Tom Alessi – Mentor
GraphicsE-procurement Tools/ExamplesCurrent Events