L4-M3 Commercial Contracting presentation

Leading global excellence in procurement and supply
CIPS Level 4 Diploma in Procurement
and Supply
[L4-M3] Commercial Contracting

Context in Purchasing and Supply
Contents
Chapter 1
• Legal issues in relation to commercial contracts
Chapter 2
• Specification and key performance indicators
Chapter 3
• Key clauses that are included in formal contracts

[L4-M3] Chapter 1
Legal issues in relation to commercial contracts
Understand legal issues in the formation
of contracts
Learning
Outcome

Chapter 1 Legal issues in relation to commercial contracts
1.1 Analyze the documentation that can comprise a commercial agreement
for the supply of goods and services
• Invitation to tender or request for quotation
• Specification
• KPI and performance management frameworks
• Contractual terms
• Pricing and other schedules
• Contract variations
1.2 Analyze the legal issues that relate to the creation of commercial
agreements with customers and suppliers
• Invitation to treat or invitation to negotiate
• Rules relating to offer and acceptance, consideration, intention to create legal
relations and capacity to contract
• The battle of forms and precedence of contract terms
• Risks presented by contracting suppliers terms or through oral contracts
• The Vienna Convention on the international Sales of Goods
• Misrepresentations made pre-contract award

[L4-M3] 1.1 Documents comprising an agreement
Invitation to tender (ITT) or request for quotation (RFQ)
• Legally, there is no difference between the two
• Quotation - informal, normally used in the following situations:
• When price is the only variable
• Low-value and low-risk purchases
• Specification and other terms and conditions are fixed
• Where suppliers are established to be capable to supply
• Where a framework or other agreements locking down the contract
terms with price as the only variable
• Tender - formal, detail and useful in the following situations:
• Where are more than one variable
• High-value/high risk complex projects
• Suppliers are pre-qualified to ensure their suitability
1.1

RFQ - the main features
Features Advantages Disadvantages Controls
Degree of
formality
• Reduces
administrative costs
• frees up resources
to work on strategic
tasks
• Managing a small
pool of supplier
• Lack transparency
• Lack an audit trail
• Limited market
engagement
• Missing out other
competent suppliers
• Set max purchase value limits
• Centralize receipt of quotes
• Apply ST&C on all RFQ
• Monitor spend
• Train procurement staff
Speed • Short turnaround
time
• Easy
implementation
• May used in wrong
circumstances
• Fast quotes leads to
missing out other
approaches
• Contact terms ignored
• Supplier vetting ignored
• Aggregate spend
• Use framework agreement
• Quotes only from pre-qualified
suppliers
Relation to
contract
documents
• No cross-referencing to
contract
• Quotes often on supplier
terms and conditions
• Apply ST&C in all RFQ
• Cross reference information
in RFQ to the order
1.1

ITT - main features
Features Advantages Disadvantages Controls
Formality • Full audit trail
• Provide
transparency reduces
risk of fraud
• Provide wider
market engagement
• Needs detail
documentation
• Create admin burdens
• Regulated by law - risks
of challenge by suppliers
• Costly
• Ensure clear processes
• ensure processes aligned to
the legal requirements
• Conduct random audit
• Train staff
Lack to
Speed
• Drives forward
planning culture
• Self-created urgency
drives poor practice
• Lack understanding in
the use of tenders
• Weak documentation
• Ensure a forward plan
• Authorisation process for
urgency
• Standardise documentation
• Train staff
Relation to
contract
documents
• Clear response
schedules can be
incorporated into
contract
• Incorporating tender
response schedule can
create inconsistencies
• Quotes often on
suppliers’
terms and conditions
• Design tender return and
contract documents to
ensure ease and clarity of use
1.1

The generic procurement cycle
1.1

The tender process
Preparation
tender
documents
Pre-qualification
Participant
Invitation to
tender
Q & A
further
information
Evaluate
tender
returns
Post-tender
negotiation
Contract
award
1.1

Audit trail
• Audit trail is a record of what had happened or what was done,
when and by whom
• It will lead to understand and provides a clear view over how the
operating processes and policies are being complied with
• It is along this trail auditors work to determine if there are issues
• Audits retrace the exact activities and the happenings of an
operating process, such as tender
• Audits assist in the following:
• Identify bad practices (fraud, collusion, corruptions etc)
• Identify procedural or operational errors
• Identify procedural weaknesses
1.1

Specification
• Specification are statement of requirements to be fulfilled in
supply of products or services
• The role of specification
• Define requirements
• Communicate the requirement
• Provide a means to evaluate quality or conformance
• The importance of specification
• It is the heart of the contract (to fulfil the specification)
• Specification is part of an offer to buy (formation of contract)
• Removes doubts / misunderstanding (ensure fit for purpose)
1.1

Two types of specification
• Conformance specifications
• Specification prescribed by the buyer
• Supplier produces goods against buyer’s specification
• When issue arises (fit for use), buyer is contractually liable
• Performance specification
• Buyer describes the functions of the product (output) and its
expected performance
• Supplier produces product satisfying these requirements with its
know-how, technology and processes
• When issue arises (fit for use), the supplier is contractually liable
1.1

Performance and conformance specification - comparison
Performance specification Conformance specification
• Focus on outputs
• Sets out result to be achieved
• Supplier produces using its own
technology and knowhow
• When issue arises, supplier is legally
liable
• Focus on inputs
• Buyer proves specific methods, processes,
material properties, brand etc
• Supplier produces strictly according to the
specification prescribed by the buyer
• When issue arises, buyer is legally liable
1.1

Using specification - advantages
• The process of drawing up specifications is a useful discipline
• If items are to be purchased from more than one source, the
use of conformance specifications will ensure uniformity
• Specifications provide criteria for measuring quality and
acceptability of purchases
• Specifications provide evidence to what the buyer required -
useful in the event of dispute
• Clear specification enables suppliers to quote accurately
1.1

The use of specification - disadvantages (risks)
• Detailed specification is costly and time consuming
• Costs of quality assurance will be higher for complex
specifications as compared with simple specification
• Specifications can be too firmly embedded (inflexibility)
• Specifications can create temptation to over-specify or to
customize - adding cost and increasing stock variation and
proliferation
1.1

Designing specification - considerations
Understand Stakeholders’ needs
- Identify the stakeholders
- What influence they have?
- Determine their needs
- Consider suppliers’ perspective
Perspective
Define acceptable quality or performance
- Define targets and KPI
- Compliance/remedy processes are clear
- Clarify warranties/defects liability period
Performance
May impact made in the point of delivery
- Operating and storage conditions
- Availability of resources (utilities, etc)
- Safety considerations
- Cultural issues
Service
conditions
- Standard level against its costs
- Will higher investment equals to higher
benefits?
Relevance
Refrain from using old specifications
- What changed since it was first written?
- What might change during contract
Improve and
innovation
Decide on the followings
- Any remote biz units and value limits
- Will scope change during contract
- Any test, buy-off or training need”
- Any internal inputs required?
Scope
Conformance or performance specification
- Interfacing or compatibility of systems?
- Interoperation ability of supplier products
Type
Specification must be clear/unambiguous
- Use plain language
- Are cost of delivery assessable?
- IS delivery performance measureable?
Clarity
What to be achieved?
- Current / future needs?
- Make or buy?
Purpose
Standards to be met
- Low, policies and regulations?
- National/international quality standards?
- Corporate social responsibility (CSR)?
- Data protection and security?
Regulatory
compliance
and quality
1.1

Drafting specification - need to ensure
• Clear and unambiguous as to what is required
• Concise
• Comprehensive
• Compliant with all relevant standards, and health, safety and
environmental laws and regulations
• Up-to-date
• Expressed in terms which can be understood by all key
stakeholders
• Value-analysed and justified
1.1

Procurement contribution to specification
• Supply market awareness
• Supplier contacts
• Awareness of commercial aspects of purchases
• Familiar with legal aspects of purchases
• Purchasing disciplines
1.1

Performance measurement
• Defined performance criteria (KPI or SLA)
• Compared to previous performance or performance standard
to identify performance gap or improvement trends
• Compared to other organisations or standard benchmarks for
continuous improvement
1.1

Criteria Performance indicator
Quality Management systems and processes are clear and documented
Cost control Consumable purchasing rates are benchmarked for value for money
Timeliness Service is delivered within the agreed periods of availability
Quantity Stocks maintained to appropriate levels to ensure continuity of service
Compliance Corporate policies and procedures are adhered to
KPI on procurement function
1.1

Success factors Sample KPI
Price • Purchase price (and/or price compared with other suppliers)
• Value or percentage cost reductions
Quality and
compliance
• Reject, error or wastage rates (or service failures)
• Number of customer complaints
• Adhere to quality standards (ISO9000), environmental and ethical
standards and policies
Delivery • Frequency of late, incorrect or incomplete delivery
• Percentage of on time in full – OTIF – deliveries
Service/relationship • Competence, congeniality and co-operation of account managers
• Promptness in dealing with enquiries and problems
• Adherence to agreements on after-sales service
Financial stability • Ability to meet financial commitments and claims
• Ability to maintain quality and delivery
Innovation capability • Number of innovations proposed or implemented
• Investment in R&D
• Willing to collaborate in cross-organisational innovation teams
Technology leverage
and compatibility
• Proportion of transactions carried out electronically
• Number of technology breakdowns
Overall performance • Benchmarking against other suppliers
• Commitment to continuous improvement (e.g. number of
suggestions proposed and implemented)
KPI on supplier performance
1.1

Performance measurement (KPI) - importance
• Well defined KPIs provide a clear view of the supplier’s
performance against its contractual obligations
• KPI is an indicator of the level of performance of the supplier
which may spur the contract managers into action to seek
improvement avoiding the of contract failure
• KPIs should be an intrinsic part the specification and,
subsequently, the contract
1.1

KPI measure - benefits
• Improved communication on performance and related issues
• Motivates supplier to achieve or out-perform
• Support collaborative buyer-supplier relations
• Facilitates year-on-year performance comparison
• Focus on key results areas (critical success factors)
• Clearly defined shared goals
• Reduced misunderstanding and conflict
1.1

Quantitative and qualitative measures - characteristics
Quantitative measures Qualitative measures
Easier to establish KPI KPI likely to be subjective
Easier to monitor over time Monitoring over time is subjective
Focus on efficiency Focus on effectiveness
Suitable for purchase of products Particularly suitable for purchase of services
Examples - prices, delivery
performance, financial
performance, reject rates
Examples - management capability, staff issues,
technological development, willingness to
collaborate closely
1.1

Developing Key performance indicator
1.1

SMART performance measures
• Specific
• Measurable
• Attainable
• Relevant
• Time-bounded
• Stretching
• Sustainable
• Agreed
• Rewarded
• Reviewed
Additions
1.1

Formal contract
• Contracts or agreement which is normally ‘evidenced in writing’
and is intended to be legally binding
• A formal contract is formed under the following circumstances:
• All the terms are set out in detail
• Parties to the contract have agreed the terms and want to be able to
enforce the agreement, with the power of law if necessary
• The evidence of this is that parties to the contract have written down
these terms, and signed, or signed and sealed, the document
1.1

The use of standard contract/terms, model contract
• Contract format comes from various sources
• Standard form of agreement may be provided by the buyer,
seller or from professional bodies, e.g. CIPS
Either the
Purchasing
or Supplier
Organisation
Professional
Bodies Such
as the CIPS
Trade Associations or
Groups of Similar
Suppliers Establish
Standard Terms for
Their Industry
Sources of contract terms
- Express terms (negotiated)
- Standard T/C
- Standard form
1.1

Model form contract
• CIPS published a range of model form contracts and clauses
• The Freight Transport Association developed a model form of
conditions of carriage, for carriage of goods by road in the UK
• The Chartered Institute of Building developed a model form
contract for commissioning of facilities management services
• The Joint Contracts Tribunal (JCT) published Standard Form of
Building Contract
• The Institute of Civil Engineers (ICE), the Association of
Consulting Engineers and the Federation of Civil Engineering
Contractors issue standard forms for civil engineering
1.1

Use of model form contract - advantages and disadvantages
Advantages Disadvantages
Helps reduce time and costs of
contract development
Terms may not be as advantageous to a
powerful buyer as if contract was negotiated
Avoids ‘reinventing the wheel’ Terms may not include special clauses
Industry model forms are widely
accepted
Legal advice is still required if significant
amendments or variations are to be made
Designed to be fair to both parties Costs of training buyers to use model forms
1.1

Use of standard form - advantages and disadvantages
ADVANTAGES DISADVANTAGES
All risk area addressed and unlikely to be
missed out
Using an incorrect standard template
Standard terms prompt drafters to consider
about relevance to current contract
Can lead to complacency in the part of the
drafter
The legality of the terms are fully tested in
courts – less misunderstanding and
misinterpretation
Failure to vet drafted contract thoroughly
Standard list of schedules already included
In the standard contract
Contract references to law and standards may
have become obsolete and not updated
Focuses thought on the precise needs of
procurement
Definitions in schedules may differ from those
in the standard contract
Avoids the risks of using standard forms Language may be inconsistent with legal
interpretation
Potential to omit obvious areas of risk
Potential to identify risk and remedy but not
consider wider consequences
1.1

Key sections of the contractual terms document
• Common format
• The Article – These comprise the very basic agreement: summary.
Party A entering into a contract with Party B to provide……..
• The Recitals – These provide the context of procurement. It can be a
simple statement of the facts that the purchaser wants to acquire X
and the supplier has agreed to provide this.
• The Contract Particulars – Some forms of contract, particular industry
standard form will have particulars section. These set out specific
variable such as required date of completion and any specific
insurance requirements
• Terms and Conditions
• The schedules – These are project specific details as designed by
purchaser
1.1

The
agreement
Names and signatures of the parties to the contract
Definitions Definition of names and terms
General
terms
• General agreements clause
• Changes, alterations and variations clause
• How and by what method notice relating to contract is to be sent
Commercial
provisions
Rights and obligations of the supplier and of the purchaser. Standard terms
of purchase, for example, might include:
• Passing of title/ownership - Time of performance
• Inspection/testing - Delivery/packing
• Assignment - Liability for damage or loss in transit
• Rejection - Payment terms
Secondary
commercial
provisions
• Confidentiality and intellectual property protection (where relevant)
• Indemnity, Guarantee clause
• Termination, Arbitration
Standard
clauses
These may include:
• Waiver, Force majeure, Law and jurisdiction
General contract structure
1.1

How contract terms are established
• Finalizing contract terms
Procurement designs
contract (CFT, including
legal)
Draft contract discussed
with potential or pre-
qualifed suppliers
Contract terms refined
Quotes/tender received
based on stated terms
or terms amended post-
negotiation
Draft contract released
via RFQ, ITT or
invitation to negotiate
Final negotiated offer
accepted including
confirmation of agreed
terms
Formal contract
document being ratified
and ‘signed off’
1.1

Contract schedules
• Contract schedule is an appendix to the main contract.
• Schedules are used to incorporate terms (usually complex in
nature) without having to amend the verbiage of the main body
• It allows for the standard terms and conditions in the main body,
which then cross-refer to the details in the schedules attached
• Benefits:
• Simplifies contract drafting - faster turnaround the cost effective
• It allows direct incorporation of tender returns - reduces risks of
misinterpretation or misunderstanding

Common types of schedule
• Specification
• Contractual or operational matters
• Performance management framework
• Site lists, maps and plans
• Health and safety
• Method or process statements
• Supply chain
• Alliancing agreement - a contractual mechanism requiring
subcontractors to work with main contactors
• Core list or exclusion list – example Schedule of Rates and any
excluded items
• Supplier’s staff
• Code of conduct
1.1

Contract variation
• Changes in the external factors, (unforeseeable or beyond the
control of either one or both parties to the contact but not amounting
to Force Majeure , may alter the relevance of certain contractual
terms (prominently with long term contract)
• Examples - technology progression, inflation, currency fluctuation,
obsolete KPI, change in regulatory etc
• To avoid a non-performing contract, there is a need to incorporate a
change mechanism within the contract which may include:
• Who can request a change
• Who can authorize a change
• Who can accept a change
• The implication for the contract if the change order is being rejected.
1.1

[L4-M3] 1.2 Legal issues in commercial agreements
Contract
• An agreement, enforceable by law, between two or more parties
to do, or to abstain from doing, some act or acts
• Can be in written form or oral
• Use of contract
• To define obligations of both buyer and seller
• To apportion liabilities between buyer and seller
• Agree on the contractual terms prior to execution (price, quantity,
completion, specification payment, place of delivery and
completion date, liabilities etc) - no restriction to agreements
• To state the applicable Law (international trading)
1.2

Legally binding agreements - elements
• Agreement (offer and acceptance)
• Consideration
• Intention to create legal relations
• Contractual capacity - lead to contract invalidity
• No restriction on correct form except for conveyance of deeds,
bill of exchange, share transfer, hire purchase
Invalid contract
• No legal capacity - minors
• Vitiating factors - mistake, misrepresentation, duress and
undue influence and illegality
Critical – contract is non
binding if anyone of the
four is not in existent
1.2

An offer
• An offer is a full statement of what the offeror is will to provide and
the terms by which they are willing to provide
• An offer indicates a willingness to enter into legal obligation
• Can be made orally, in writing or implied by way of conduct of the
accepting party
Not an offer (invitation to treat or invitation to negotiate)
• Advertisement/provision of information.– Harvey v. Facey Will you
sell us Bumper Hall Pen. Telegraph lowest price. The reply was,
“lowest price GBP 900. It was held that this was an answer and not
an offer.
• Price list, catalogue
• Display of goods (even with price tag) - Fisher v. Bell,
Pharmaceutical Society of Great Britain v. Boots Cash Chemists
• A memorandum of intent or understanding
• A “puff” or a Boast - An exception Carlill v.. Carbolic Smoke Ball
1.2

Communicating an offer
• An offer can only exist if it is communicated to the other party
• A party cannot make a choice (accept/reject) if it is not aware of
the offer
When an offer terminates or end
• Withdrawn or revoked
• Lapsed - exceeded the expiry date or, if expiry is not expressed,
an offer will lapse after a ‘reasonable’ period of time.
• Death – either party
• Rejected
• Failure of conditionality
• Unconditionally accepted
1.2

Acceptance of an offer
• Acceptance can only occur while the offer is open
• Valid acceptance can be by oral, written, or by way of conduct
• Silence is not acceptance
• The accepting party is responsible to ensure acceptance is
properly and clearly communicated to the offering party
• Acceptance must be an unconditional - accepting all the terms
and condition of the offer (with no variation)
• Acceptance cannot be made by someone with diminished
capacity
• When a letter accepting an offer has been posted and
effective from the date of posting, even if it never arrives
(mailbox rule)
1.2

Consideration
• An exchange or a promise of return (e.g. trading) is known as
consideration
• It must have a value (sufficient but not adequate)
• Implied consideration – a promise to pay is expressed after the provision
of goods or services provided there is an implication that such a promise is
forthcoming
• A promise to perform over and above an existing obligation – Glasbrook
Bros v. Glamorgan County Council. Payment to police over an above their
normal duties to protect property.
Consideration or Not
• Past consideration - something which has already been done or given
cannot act as consideration. For example someone paints your house
fence by mistake and you agree to pay. If you default in paying then the
other party has no claim.
• A promise to perform an existing obligation – obligation must be performed
whether are not goods or services are delivered. D&C Builders v. Rees
• A promise given to a third party (privity of contract) – not normally a
consideration
1.2

Consideration – sufficiency and adequacy
• Sufficiency
• It must be present or future consideration (not past)
• It must be something which the provider is not already obliged to
perform or provide – Stilk v. Myrick (1809)
• It must be provided from one party to the contract to the other
• It must have monetary value
• It must be more than a vague promise
• Adequacy
• Relates to whether or not the payment is reasonable or fair
• In commercial contracts, the law will not intervene in this area if
there is a reasonable balance of power between the parties
1.2

The rights of third parties
• Concern about inability of beneficiaries to enforce contract that
they are not party to.
• The Contract (Rights of Third Parties) Act 1999 gives third
parties the right to enforce a contract if the contract has either of
the following
• Gives them the right to do so
• States that it is intended to confer a benefit on them
Collateral warranty
• Is an agreement under which a subcontractor guarantees to a
third party that it will fulfil its obligations under a contract
• It is only legally binding if executed as a deed and it does not
require consideration
1.2

Third-party relationship without collateral warranty (example)
Company A
(building company)
Third party C
(purchaser of the
building)
Company B
(structural engineer)
promise
consideration
Contract between A and B states:
• B (structural engineer) promises to
design the foundations and structural
elements of the factory in accordance
with all law, regulations etc. A (building
company) provides consideration by
way of fees
• C (the eventual owner) benefits from
the work of B but cannot enforce any
terms of the contract between C and A
• If there is an issue with the design, C can claim
against A, but C cannot claim against B
• While C could claim against A which in turn
claim against B.
• But what if A went bankrupt and been wound
up? Under the Contract (Rights of Third Parties)
Act, C can claim against B if the contract listed it
as being able to do so
1.2

Third-party relationship without collateral warranty (example)
Company A
(building company)
Third party C
(purchaser of the
building)
Company B
(structural engineer)
promise
consideration
• If a deed of collateral warranty exists, C can
claim against B as such deed creates a direct
legal relationship designed for that purpose.
• Note - deed does not require consideration
Deed
1.2

Intention to create legal relations
• Parties to the contract understand the agreement is to be
legally enforceable
• To decide if parties having intention to enter into legal
relationship, the Court uses two presumptions. The burden of
overturning the presumption lies with the person seeking to
adduce such evidence
• Balfour v. Balfour (1919)
• Simpkins v. Pays (1955)
• Rose and Frank V JR Crompton and Bros Ltd (1925)
1.2

Capacity to contract (legal capacity or legal competency)
• The Law assumes parties to the contract are legally competent
to enter into a contract
• The following do not have capacity to contract
• Infants or minors (underage)
• People suffering from mental health issues
• People under the influence of drugs
• If a person without capacity enters into a contract, it will not be
legally binding on them. It may, however, be binding on the
other party (protect those who may not be capable to make
informed assessment of the agreement)
1.2

Battle of the forms
• Every party has its own standard contract terms and
conditions (ST&C)
• Each will attempt to impose their ST&C onto the other for
contractual advantage
• Often both buyers and suppliers have their ST&C on the
back of the their standard documents (e.g. PO, DO, quotes,
invoices etc) which create confusion over whose ST&C will
the transaction will be based on
• When a party makes an offer on its ST&C and the other
accepts it on his own ST&C, it is a counter offer
• Proper management of contract and other related
documents could minimize the ‘battle of the forms’
1.2

Battle of the forms - documents and legality (example)
Buyer issues RFQ with a set of
terms
Seller quotes with its own ST&C
(printed on back of the document
Buyer places PO with its own ST&C attached.
This is not an acceptance but it become a counter offer
Seller fulfils order and delivers with no attached ST&C.
This an acceptance of the counter offer
Seller fulfils order with DO stating seller’s ST&C.
This become an a counter offer
EITHER
OR
Buyer accepts the delivery and pays for the goods.
This is an acceptance of the counter offer
Buyer’s term
Seller’s term
Buyer’s term
Seller’s term
Buyer’s term
Seller’s term
1.2

Battle of the forms - documents and legality (example)
Document Status Applicable ST&C
Catalogue/price list Invite to treat Seller’s
Purchase order Offer Buyer’s
Seller delivers (delivery order) Counter offer Seller’s
Delivery note Counter offer Seller’s
Buyer receives/endorse DO Acceptance Seller’s
1.2

Battle of the forms - avoidance
• Documents with pre-printed T&C should be not used (applies
to both buyer and supplier)
• Send acknowledgement to all enquiries
• Send acknowledgement to all purchase orders
• Negotiate the contracts, agreeing specific terms and
conditions
• Check revised terms may be reflected in supplier documents
• Ensure suppliers reference the contract, SLA or PO on all
relevant documents (especially on the delivery note or
invoice)
1.2

Informal or oral contract - risks
• Negotiating parties may have different perceptions and
understanding or to be able to recall what was agreed upon
• Committing to inappropriate or disadvantageous terms
• ‘Mistake’ in contract - lack of genuine agreement
• Contract being voided due to mistake or ambiguity
• Lead to misunderstandings resulting in contractual disputes
• Lack of written terms against which compliance and performance
can be measured
• Lack transparency and audit trail for award decisions
•
1.2

Contracting on supplier’s or disadvantageous terms - risks
• Ending up with full liability on risk and costs
• Cost uncertainty (supplier should manage its cost/risks)
• Poor quality goods - wastage and failure costs
• Disadvantageous payment term
• Lack contractual tools to motivate and manage supplier
performance (absence of remedies)
1.2

Contract for International Sales of Goods (The Vienna Convention)
• The Vienna Convention is a voluntary treaty under the auspices
of the UN Commission on International Trade Law (UNCITRAL)
• Its objective is to set up a framework for international business
transactions based on a uniform approach and tries to get
around the problems created by differences in local law
• The Vienna Convention is only applicable in specific situations
• Applies to goods (not services or works) but does include goods to
be manufactured to the specification of the buyer
• Applies to private commercial (B2B) transactions, not to public
sector contracts or sales to consumers
• Applies where the parties to the contract have their place of
business in different countries (or Contracting States)
1.2

The Vienna Convention (CISG)
• CISG covers matters such as:
• When does an offer or acceptance become effective in an
international trade transaction?
• When do title, property and risk in the goods sold pass from the
overseas seller to the UK buyer?
• What are the rights of a party when goods do not conform to the
contract?
1.2

• CISG does not apply to the following:
• Distribution agreements - since these concern with organization or
transportation of goods and not the transfer of ownership
• Goods bartered for other goods or services - anything where
payment is not in monetary form
• Framework agreements - not a contract but a pre-agreeing of
terms of a contract should one be created
• Franchise agreement
• Sale of ships or aircraft
• Sales of electricity
• Sales carried by way of auction
1.2

• The convention is applicable to formation of contract which
include:
• Offer and acceptance
• Consideration
• CISG does not cover validity or enforceability of the contract
which are matters determined by the respective national laws
• Capacity
• Illegality, mistake, duress or fraud
• Damages and penalty
• Validity of assignments or settlement
• Retentions or deposits
• Liability for death or personal injuries caused by goods
• Capacity CISG does not require contract or amendment to be in
writing
The need to state the
‘country law ‘ in contract
If contract rely on CISG,
need to explicitly express
otherwise
1.2

CISG - rules related to sale of goods
• Seller’s duty is to deliver the goods, provide documents relating
to them and transfer ownership to the buyer
• Quality, quantity and specification of the goods must be in
accordance with the contract - suitably packaged, fit for purpose
and free of any 3rd party claim
• Buyer’s duty is to take all reasonable steps to take delivery of
the goods, examine them, advise of any non-conformity within a
reasonable time and to make payment
• Although CISG has provisions for when risk passes from seller
to buyer, this is excluded in favor of the use of INCOTERMS
• Remedies for breach of contract will depend on the facts and the
nature of breach
• Avoidance of liability of breach (equivalent to Force Majeure)
• Refund the price of goods must include interest from the date of
original payment
1.2

Misrepresentation
• Misrepresentation is a false statement of fact made by on of the
contracting parties before, or at the time of, entering into the
contract which led or encouraged the other party to the contract
• Necessary conditions for misrepresentation
• There must be a statement made. Silence is not normally
considered misrepresentation. Example – party makes a true
statement and then the circumstances change, causing it to
become false, there is a duty to update the original statement.
• The statement must be related to fact
• The statement must be false
• The statement must be made by the contracting party
• The statement must induce the contract
1.2

Types of misrepresentation
• Fraudulent misrepresentation
• Is where the person who made the statement does so knowing it to
be false, or
• Is reckless in using the information without taking any effort to
establish if it is true or not. Information which is inaccurate but was
honestly believed to be true will not be fraudulent
• Negligent misrepresentation
• Occurs where the person who made the statement has a duty of
care but fails to take such reasonable care as to the accuracy of
the statements
• Innocent misrepresentation
• Is where the misleading statement is neither fraudulent nor
negligent as it is genuinely and reasonably held to be true by the
person who is making it
1.2

Misrepresentation - remedies
• Remedies
• Rescission of contract - an equitable remedy putting both parties in
their pre-contractual position
• Damages
• Fraudulent and negligent -court may award both remedies
• Innocent - court can only award one remedy or the other
• Exercising rescission of contract - difficulties
• Where the innocent party wish to continue with the contract
• Where the claim has not been brought within a reasonable time
• Where restitution is impossible as goods have been consumed
• Where there has been intervention of innocent third party ( eg. If
the goods have been sold on )
1.2

[L4-M3] 1.3 Types of commercial agreements
On-off purchases
• Used for Low value new purchase (goods)
• Contracting of one-off service or works
• Procure high-value, long lifecycle asset (capital)
• Normally used in a competitive market (many suppliers)
1.3

On-off purchases - key points
• Commits buyer and supplier to all terms relevant to supply of a
specified requirement, in a specific case
• Only commits buyer and supplier to purchase and supply of the
specified requirement, in a specific case
• Buyer is free to change supplier for the next purchase
1.3

Nature of the contract
• Complexity of the contract will reflect the complexity of the
purchase
• Regardless of it complexity or simplicity, the following areas may
need to be covered:
• Warrantees and guarantees
• Insurance requirements
• Specification requirements
• Quality standards
• Built-in change process or mechanism
• Contract extension
• Data security protocols
And more ……….
[L4-M3] 1.3 Types of commercial agreements 1.3

One-off contract - benefits
• For the buyers
• Speed and ease of implementation - particularly with low-value buy
• Able to capitalize on falling market prices or promotions
• On complex one-off (projects), it enables the narrowing down the
terms into one deliverable simplifying the contract covering only
the risks associated with that purchase
• For the seller
• Seller would like able to set its own price (less competition and
little volume leverage)
• If buyers use on-off regularly, total spend may be significant
One’s benefit is risk to the other

One-off contract - risks / disadvantages
• For the buyers
• Difficult to demonstrate value for money as the price is tied with
the ‘on-the-day’ pricing
• No effort put in to develop relationship with supplier
• The use of one-off may be viewed as a ‘by-pass’ certain
procurement processes and policies
• For the seller
• Low-value (ad-hoc) purchases makes production planning difficult
• Failure to perform on a one-off order may lose a potential client
One’s benefit is risk to the other

Framework agreement
• It is an ‘umbrella’ agreement between one or more organizations
that recognize that they have not come to a final agreement on
all matters or terms relevant to the business relationship, but
have come to agree on enough matters or terms to move
forward with the business, with further details to be agreed upon
in near the future
• The framework is not itself a contract (not legally binding)
• Advantages
• Parties need not re-negotiate and agree on the terms already in the
framework agreement over again for the next orders
• Future orders need not go through a full tender process
• Framework agreements may include pricing (not necessarily the
final price but a formula), quality and estimated quantities
1.3

Types of framework agreements
• When demand arises, buyer has three options:
One Buyer
One Buyer One Buyer
Many suppliers
One supplier
1.3

Framework agreements - when demand arises
• When demand arises, buyer has three options:
• Issue call-off orders against the framework
• Run a further mini-competition (competitive tender) between the
multiple suppliers included in the framework
• Purchase from elsewhere (using appropriate contract tender and
award procedures)

Frame work agreement - mini competition
• A mini-competition is a tender process within a framework
agreement
• While all eligible suppliers should be invited, the buyer is not
obliged to do so
• Suppliers will bid on variables which have not been finalized in
the framework (e.g. price, delivery lead-time etc)
• Objectives of mini-competition
• To select the most competitive supplier
• To refine contract-specific terms
• To maintain competition among the framework suppliers

Frame work agreement – advantages and disadvantages
• For the buyer
• Reduces cost of sourcing and
tendering
• Limiting the number of participating
suppliers may lead to missing out others
• Build trust and cooperation through
working together regularly
• Can be resource- intensive
• Can include new-found competent
suppliers into the framework
• Resources needed to appraise new
suppliers
• Having a long list of participating supplier
may result in losing control
1.3

Frame work agreement – advantages and disadvantages
• For the supplier
• Higher chance of winning tender with
a low number of suppliers bidding
• No assess if not in the framework
participating supplier list
• Potential higher turnover of orders • Can be resource- intensive to sustain
• Build trust and cooperation through
working together regularly
• Diluting the chance of winning bids or
work if the participating list is long
• Suppliers can target potential
customers with the constraints of the
tender process and timescale
1.3

Call-off contract
• Contract set up where there is a commitment to purchase the
contracted quantity over the period of the call-off
• Operates the same way as ‘standing offer’
• Buyer is committed to purchase the contracted quantity over the
call-off contract period (quantity may vary over the period)
• Supplier is committed to fulfill any order placed during the call-off
contract period

Using call-off - benefits and risks
• To the buyer
Benefits (advantages) Risks (disadvantages)
- Assured of supply in the duration of
the contract
• May be locked with a higher rate in the event
when market price falls
- All terms, including price, are fixed
enables ease of budgeting and its
management
• Risks of tying down specification in a way that
prevents innovation (technology advancement,
new 1nnovative products)
- Productivity improvement
- Firmed schedule of rates enables
e-procure2pay systems (productivity
and visibility of spend)
- Opportunities to improve relationship
1.3

Using call-off - benefits and risks to buyer
• To the supplier
Benefits (advantages) Risks (disadvantages)
- Certainty of demand enables ease
of resource planning (capacity,
production, cash-flow etc)
• Being locked with a price in the event where costs
of material and other resources are on the
increase (inflation, currency fluctuation and so on)
- The longer the duration of the
contract, the greater the
opportunities to improve
relationship with the buyer
• Long term contract may hamper technology,
equipment and processes upgrading due to the
need to continue to serve the customer basing on
an older and potential obsolete specification
1.3

Service contract
• Service are actions individuals or organizations perform which
confer a benefit but do not result in the ‘ownership’ of anything
• Goods are intangible (can be touched physical, can be stored or
can be moved) while services or works are intangible
• Works includes projects such as construction, alteration, repair,
maintenance or demolition of buildings, installation of fittings etc
Differences between goods, service and works - implications
• In general, there are no significant differences contracting goods,
service or works in relation to the develop of contract - methods,
legal requirement and other areas. However, there a few
difference which need to be considered
Next page

Differences between goods, service and works - implications
Service contract Points to consider (or think about)
Regulated procurement
(public and 3rd sectors)
• Financial threshold at which full regulated procedures apply for services
• Also applicable to goods but at lower threshold
International trade • WTO has similar requirements for trade in services and goods but they
are not identical (e.g. the rules on equal treatment of suppliers is different
between services and goods to signatories of GATT
• Vienna Convention relates to goods and there is no service equivalent
Key personnel • For service contract, suppliers are selected based on skills and
experience of the individuals or the team. When they cease to work for
the supply, delivering the contract will be a major concern. Contract
should make allowance for this by including terms allowing contract
termination if the replacements do not meet the expected quality
Local knowledge • While giving preference to local service providers preference looks to be
an unethical practice, there is no doubt that there are competent suppliers
in the area which will be more effective to the buyer, Instead stipulating
the supplier from a certain locality, there may be good reasons to devise
terms to ensure that they must be familiar with local legislation, regulation
etc
Data sharing • Service entail data sharing. Data sharing protocol in the contract must
reflect this
Insurance • Specific consideration should be given to the type of service being
provided to establish profession indemnity or 0the insurance is required
Code of conduct • Service contracts require supplier to interact with buyer’s stakeholders
which may impact the perception of the buy’s organization. Code of
conduct should be included as a contract schedule
1.3

Slide 8
Hiring and leasing
• Closely related contractual approaches but they are different
types of agreements and used in different circumstances
• Ownership of an asset remains with another organization
(the bailor)
• The customer organization (the bailee) has possession and
use of the asset in exchange for payment
1.3

Slide 8
Contract of hire
• Hiring a method of renting an asset or item, from a company, for
use from time to time
• A contract of hire of goods arises where the owner of goods
merely allows the hirer to have possession of the goods for a
specified period
• Not a contract of sale of goods (no intent to transfer ownership)
• Hirer takes possession of the item for a stated period of time
and at an agreed rate per period
• Owner takes back possession of item after expiry of the contract
period
1.3

Contract of hire purchase
• A hire purchase agreement exists where the asset or an item is
hired for a period of time but at the end of that period the
intention is that there will be a transfer of ownership
• The transfer may be automatic on payment of the final
installment, or it may be an option which the hirer has to exercise
by paying a further consideration
• Legally, it is a contract for hire for the full duration till the final
payment or the option payment is made. Only at that point does
it become a purchase contract

Slide 8
Contract of lease
• Leasing is a long-term finance-based arrangement
• Leasing company (lessor) contracts the customer (lessee) to
buy an asset (from a third party) and hire it to the customer
• The lessor (finance company) buys and own the asset and
lessee pays regular installments over a pre-determined period
to have possession and use
• Lessee will have the right to secure outright ownership from the
lessor once sufficient payment have been made under the
agreement
• Until the transfer of ownership, the lessor purchased the asset
but retain ownership as collateral
1.3

Slide 8
Lease-buy decision
• Advantages of outright purchase
• Total cost is low, compared to rental
• User has total control over the use of the asset
• Asset may have residual re-sale value at the end of use
• Capital allowances may be set against tax and grants
• Disadvantages of outright purchase
• High initial expenditure ties up capital
• User bears all costs and risks of maintenance, operation and
• Risk of technological obsolescence
• Wasteful, if equipment is needed only for a short period
1.3

[L4-M3] Chapter 2
Specifications and key performance indicators
Understand the fundamentals of
specifications and key performance
indicators included in contractual
arrangements with suppliers
Learning
Outcome

Chapter 2 Specifications and key performance indicators
2.1 Analyze contents of specifications for procurement
• Drafting specifications and developing market dialogue
• The use of standard specification versus increasing range of product
• Typical sections of a specification
• Standardization of requirement s versus increasing range of products
• Include social and environmental criteria in specifications
• The role of information assurance in developing specifications
2.2 Appraise examples of key performance indicators in contractual
agreements
• Define contractual performance measures or key performance indicators
• The use of service level agreements
• Typical KPI measures to assess quality performance, timeliness, cost
management, resources and delivery

[L4-M3] 2.1 Contents of specifications for procurement
Role of procurement in specification
• Define and communicate requirements
• Minimize risks and cost
• Provide a means to measure performance or conformance
• Support standardization, consistency and sustainability
2.1

Scoping the specification - useful questions
• Who is responsible for the first draft of the specification
• Is there an existing specification? If so, can it be used and what
are its identified shortcomings?
• If no existing specification, what are the broad objectives to be
achieved?
• Is there a defined minimum quality standard? What is it and are
there quality aspirations above that standard?
• Are there any technical constraints
• Are there any environmental and /or social requirements?
• Who are the stakeholders need to be consulted?
2.1

The 10-points guide to specification design
1. What are you trying to achieve
2. Any preference for conformance or performance specification
3. Varying perspective of different stakeholders
4. Relevance and avoiding inclusion of anything not needed
5. The limits and constraints of the scope of the procurement
6. Performance standards to be achieved
7. Improvement sought
8. Ensuring that there is no ambiguity
9. Compliance with regulations and standards
10. The expected operating environment
2.1

Using past pre-written specification
Blank page is not a good starting point for
discussion
Time may be wasted discussing irrelevant aspects
Most of the elements may have been covered –
act as a prompt to decide omit or include
Relevant elements to the organisation may be
completely missed out
Using more than one sample specifications
provides ideas and options regarding different
solutions
Combining aspects from different sample
specifications can create inconsistency and ambiguity,
especially the use of terminology
Using more than one sample specification may
help to understand available quality variation
The specifications may define higher quality then what
needed currently or higher cost than can afford
Cross-referenced to legislation, international
standards or codes of practice act as prompts to
check what need to comply with
Conversely, the specifications may define a lower
quality than the current requirement
The sample specifications may suggest ways
which innovation can be promoted during the life
of the contract
The sample specification references to legislation,
international standards or codes of practice may have
been outdated or obsolete
The sample specification may be drafted to align
with a standard form of contract ensuring
consistency of format and terminology
Changing the specification to align to a difference
form of contract may create inconsistencies
2.1

Drafting specification - shortcuts
• The use of brand names
• The use of recognized standards
• The use of samples
2.1

Market dialogue with suppliers - objectives
• To understand the happenings on the supply side of the market
• How the industries or sectors are developing
• Gain an insight into product development road maps
• To seek potential supply opportunities
• Access knowledge relating to supply-side risks
• Build on relationship with strategic or potential strategic suppliers
Suppliers are willing dialogue partners as they
are also interested in the happenings but on
the demand side of the market
2.1

Market dialogue with suppliers - various approaches
• General networking
• One-to-one or face-to face meetings
• Group visits to supplier or vice-versa
• Meet the buyer event
• Formal negotiation
• Trade show
2.1

Market dialogue with suppliers – need to consider
• What you wish to achieve from the dialogue
• What you are willing to divulge about your own plans in order to
get the information you want
• Any conflict of interest that might exist and how you protect
against them
• Any intellectual property issues and how you protect them
• Whether the conversation is procurement-led or a
technical/operations-led conversation
2.1

Managing market dialogue with suppliers
• Preparation and more preparation
• Ensure objectives are clearly defined
• Arm with a list of questions which will be useful in extracting the
relevant information from the other side
• The discussion should be documented (minutes of meeting)
• Respect commercial confidentiality - may require a MOU or a
non-disclosure agreement
2.1

Approaches to dialogue - advantages and disadvantages
Features Advantages Disadvantages
General networking
(e.g. via social
media)
• establishes personal connection,
useful as a starting point
•Unlikely to deliver very specific
information
•Risk of creating a ‘too close’
relationship raising suspicion of conflict
of interest
One-on-one
meetings
•Like to deliver the following
•Supplier specific product
development information
•An insider view on risks to the
supply chain
•Direct input into specification
development
•Supplier may favour its own product or
service
•Supplier may be silent or understand
statement features where it is behind
its competitors
•A tendency the outcomes of such
meeting is not shared across the
organization
Group visit (buyer to
supplier, or supplier
to buyer)
•Allows people from both sides to
meet and understand the
challenges from the other side of
the fence
•May involve personnel not accustomed
to such engagement and unskilled in
managing the information (how much
to disclose or not disclose
2.1

Approaches to dialogue - advantages and disadvantages
Features Advantages Disadvantages
Meet the buyer
events
Useful for supplier to understand
buyer’s requirements
could help inform the supply
market as to the product/service
development being sought by the
buyers
•Often held too late to influence
specification development.
•Traditionally focus more on process
•Holding such events outside of the
planning of specific procurement
exercises could be more useful
Formal negotiations
or competitive
dialogues on a
contract-specific
basis
•Useful for refining a drat
specification or schedule or
requirements into full agreed and
joint developed contract
specification
•Time consuming and can be resource
intensive
•Usually only permits a limited number
of participants
2.1

Managing market dialogue
• All meeting and discussions should be documented equivalent to
a minutes of meeting covering topics such as:
• Participants present
• The areas and topics discussed
• The insights gained
• Follow up action (re-visit proposed specifications, timeline etc
• Respect confidentiality - may need memo of understand or NDA
2.1

The use of standard specifications
• Company-specific standards
• Association or trade body standards
• National standards
• International standards (e.g. ISO)
Common ISO standards
• Business management
• Product specifications
ISO 9001 Quality management systems
ISO 27001 Information security management
ISO 5001 Environmental management
ISO 90-1 Light gauge metal containers
ISO 3630-1 Dentistry
ISO 18890:2018 Clothing
2.1

Using standards in specifications – benefits and risks
Benefits Risks
Specifications are shorter - need not repeat
details
Supplier understand the specifications
more quickly
Where international standards are used to
remove a barrier to trade, the cross-border
suppliers do not need to understand local
or national rules
Use of the most up to date international
standard should ensure all recent
influences have been considered
In-house staff (procurement/operations) may not
fully familiar with which standard to apply, so
simplification opportunities are missed
Staff may not fully understand the implication of
standards that they quote - creating conflicts by
drafting precise requirements that do not agree
with the standard
Staff may not fully understand either the quoted
standard or their own operating environment, as
a result, adding cost without value
Insufficient thought given to what needs to
happened when the standard is updated
2.1

Typical sections of a specification
• A precise title
• Version control / issue reference
• List of contents
• Forward (or background)
• Scope
• Definitions
• Consultation requirements
• Reference to other documents, standards etc
• Substantive requirements
2.1

Standardization - advantages
• Clarity of specification - both parties are clear as to what required
• Economy of scale - lower production costs producing standard goods
• Reliability - the continuous production of standard goods enables flaws in
materials and processes to be eliminated, leading to more reliable products
• Service enhancement - in both production and delivery of services,
personnel involved become familiar with the standard product and more
adept at delivering or producing it
• Time-saving (buyer) – using standards reduces the amount of time
buyers need to write specifications
• Accuracy of quotation – fewer errors from supplier owing to their
familiarity with the standard
• Supply base - opportunity for buyer to reduce number of supplier
• Inventory reduction – narrower range of products
• Reduce supply risk – easier to switch suppliers
2.1

Increasing the range of product - advantages
• Breadth - more products on offer
• Innovation - relying on standards curtail creativity and innovations
• Production differentiation - maintaining competitive edge even when
customers looses interest in some of its product
• Cultural difference - increase range of product allow access to
different markets. Difference in local customs and tastes may need to
influence the product itself
• Economic factors - customers’ affordability varies globally. Simpler
version of the product aims at less effluent market
• Flexibility - having a wider range of product enable response to
changes in the market
2.1

Increase use of social and environmental criteria
• Innovation -
Include social / environmental criteria Examples of criteria
Ethics
Labour conditions (modern slavery, child labour
etc)
Bribery and corruption
Compliance with international labour standards
Support programs aimed at reducing
child labour and getting workers to understand
their rights
Consumer-led
Changing demands / pay premium prices
Brand reputation
Boycotts and protests on injury, damage,
to property, the environment or people
Organic production
Ethical trading labels (fair trade)
Environmental labelling
Avoidance of certain inputs, ability to trace raw
materials
Stakeholder pressures
International agreements
government policies
Water reduction
Waste separation and recycling
Energy use/carbon footprint measures
Proposed regulations
Internal policies and marketing strategies
Funding agreements66
Water conservation
Community initiatives /use local and SME
Training and employment initiatives
Economic incentives
Cost savings
Process efficiencies
Skills and talent shortage
Waste reduction
Energy and water use reduction
Training and apprenticeships
2.1

Incorporating the criteria into specification
• Social and environmental criteria should be written into the
specification in the same way as any other aspect of the
requirements
• Use international standards where these exist
• Ensure inclusion does not create a conflict with the other aspects
of the specifications
• Include an order of precedence for standards if there are conflicts
• Be clear whether the requirement is a minimum standard, a
mandatory one or an aspiration or target. This is important in
determining whether failure to meet the standard would constitute
a fundamental breach of contract
2.1

Imposing social and environmental criteria
• Compliance to the social and environmental requirements will
increase product cost
• Impact on price of goods and services
• When there is additional cost associated with the social and
environment criteris, suppliers have three ways of covering this:
• Treat it as a general business lost an increase the overhead s
element of price
• Increasing the price of goods or service
• Absorbing the cost and reducing the profit margin
2.1

The role of IA in developing specification
• Information assurance (IA) is a term given to the processes and
methods used to protect information systems, data bases,
computer systems and networks etc
• The five key elements or ‘pillars’ of IA:
• Integrity
• Availability
• Authentication
• Confidentiality
• Non-repudiation
2.1

[L4-M3] 2.2 Key performance indicator in contracts
What is performance measurement
• Assess, evaluate and compare supplier’s current
performance against
• Defined performance criteria
• Previous performance
• Performance of other comparable organisations (e.g. other
suppliers) or standard benchmarks
2.2

Criteria Performance indicator
Quality Management systems and processes are clear and documented
Cost management Consumable purchasing rates are benchmarked for value for money
Timeliness Service is delivered within the agreed periods of availability
Quantity Stocks maintained to appropriate levels to ensure continuity of service
Compliance Corporate policies and procedures are adhered to
KPI - statement of performance
[L4-M3] 2.2 Key performance indicator in contracts 2.2

Performance measurement - benefits
• Enable identification of best performing supplier
• Assist in determining relationship with supplier
• Ensure contract is being performed
• Identify performance issues for corrective actions
• To motivate supplier to maintain or continuously improve

Quantitative measures Qualitative measures
Easier to establish KPI KPI likely to be subjective
Easier to monitor over time Monitoring over time is subjective
Focus on efficiency Focus on effectiveness
Suitable for purchase of products Particularly suitable for purchase of services
Examples - prices, delivery
performance, financial
performance, reject rates
Examples - management capability, staff issues,
technological development, willingness to
collaborate closely
Quantitative and qualitative measures: characteristics

SMART performance measures
• Specific
• Measurable
• Attainable
• Relevant
• Time-bounded
• Stretching
• Sustainable
• Agreed
• Rewarded
• Reviewed
Additions

[L4-M3] 2.2 Key performance indicator in contracts
SUCCESS FACTOR SAMPLE KPI
Cost management • Value or percentage of cost reductions obtained
• Number of cost reduction initiatives proposed or implemented
• Percentage range of acceptable cost variance from budgeted
costs
Quality performance,
conformance or
compliance
• Percentage or volume of rejects and returns, errors or scrapped
items delivered
• Number of customer complaints and/or returns
• Certification under quality management standards (eg ISO
9000) and/or environmental management standards (eg ISO
14001)
Timeliness/
delivery
• Frequency or percentage of late, incorrect or incomplete
deliveries
• Percentage of on time in full – OTIF – deliveries
• Range of acceptable schedule variance (deadline +/– x hours or
days)
Service • Promptness in dealing with enquiries and problems
Resources • Minimum number of staff or resources of specified grades to be
allocated to the project (eg for service provision or outsourcing)
Common KPI for supplier performance
2.2

The 5-steps of developing KPI
Step 1 Decide
What matters
What to be measured
Step 2 How
How to measure
Step 3 Who
Who is measuring
Step 4 How often
What time period will it
be measured
Step 5 The score
How to convert the
measure into score

Service level agreement (SLA)
• An agreement between the provider and the user of a service
that details what performance and quality will be provided and it
is legally enforceable if it is referred to in a contract

SLA - benefits
• Clear identification of customers or providers (specific services)
• Focus solely on services involved and to be achieved
• Identify and focus on the necessary and value-adding service
• Customers are clear on what services they receive, what they are
entitled to expect, and what additional services or levels of service
a provider can offer
• Customers are clear on what the service or level of service costs,
enabling them to carry out realistic cost-benefit evaluation
• Support ongoing monitoring and periodic review
• Support problem solving and improve on planning
• Fosters better understanding and trust between the parties which
may lead enhancement of their commercial relationship

Core elements of SLA
• Service definition
• Quality definition
• Details of KPI
• KPI management response
• Operational performance
• Operational performance response
• Constraints or mitigating factors

General content of SLA
• Types and description of services
• Standards or levels of service expected from the provider
• Other expectations of the provider
• The allocation of responsibility for activities, risks and costs
• How services and service levels monitored, reviewed and
measured, and addressed
• How complaints and disputes will be managed
• When and how the agreement will be reviewed and revised

[L4-M3] Chapter 3
Key clauses that are included in formal contracts
Understand key clauses or terms that are
included in formal contracts for purchase
and supply
Learning
Outcome

Chapter 3 Key clauses that are included in formal contracts
3.1 Contractual terms for contracts with external organizations
• The use of express terms
• The use of standard terms of business by both purchaser and suppliers
• The use of model form contracts
3.2 Contractual terms incorporated into contracts
• Key terms in contracts
• Terms that apply to labour standards and ethical sourcing
3.3 Pricing arrangements in commercial agreements
• Cost and price
• the use of pricing schedules
• The use of fixed pricing arrangements
• Cost-plus and cost-reimbursable pricing arrangements
• The use of indexation and price adjustment formulae
• The use of incentivized contract
• Payment terms

[L4-M3] 3.1 Contract terms for contract with external parties
Contract terms
• Statements made by parties to the contract as to what they
understand their rights and obligations to be under contract
• ‘Express terms’ - terms clearly stated and agreed upon in the
contract between the parties
• Each express term can be identified under two categories
• Condition - an important or vital term (heart of the contract). If
breached, injured party entitles to discharge contract and claim
damages
• Warranty – essential but less critical to business. If breached, injured
parties entitles to damages only. Contract cannot be terminated
• ‘Implied terms’ - terms assumed to exist by virtue of common
law and statutory and, therefore, form part of the contract
regardless if they are incorporated not in the contract
3.1

Implied terms
• Terms not expressed in contract but are automatically
implied into contract by law (common law, statue or custom)
• Does not require parties to the contract to agreed upon
Terms may be implied into a contract by virtue of
• The nature of the contract
• The need for business efficacy (to make the contract
workable)
• Statute law (legislation or Acts of Parliament)
• Custom of the trade, such that both parties could
reasonably be supposed to have had the customary term
as their unstated intention
3.1

The use of express terms
• Set out the obligations of the buyer and seller
• Set out the rights of the buyer if the supplier defaults
• Set out the rights of the seller if the buyer defaults
• State how the parties will deal with the circumstances beyond
the control of either party
• Where possible either confirm or override any potential any
implied terms
[L4-M3] 3.1 Contract terms for contract with external parties 3.1

Contract schedule
• Addendum (appendix/annex) - used for additional document,
not included in the main contract but referred to within it
• May contain additional terms - specification, changes, etc
• Two types of addendum
• Contract schedule - provides additional or further details and
information (price schedule, NDA)
• Contract exhibits - containing examples of any standard forms,
evidences or model referred to in the contract
3.1

Using standard terms
• Often termed as standard terms and conditions (ST&C) which
cover all transactions except for those that are subject to a
specific set of ST&C
• Standard terms aim to be a short form of contractual agreement
and are generally used for low-value and repeated orders.
• For high-value or complex order, a full contract would normally
be used
• Both the buyer and seller has their own ST&C and will attempt
to impose onto each other
[L4-M3] 3.1 Contract terms for contract with external parties 3.1

Using standard terms - advantages and disadvantages
Advantages disadvantages
Time saved in negotiating
individually with many buyers (for
suppliers)
Risk that they do not become incorporated into a
contract – legal uncertainties and potential ‘battle
of the forms’
Reduce administrative cost – need
not produce a fresh contract for
every transaction
Do not allow for contract-specific risks
Consistency of approach – all
transactions on the same terms and
staff understand the risks and act
accordingly
Can become out-dated
Can create conflict if attached to PO that are also
used as call-off orders under term contract
3.1

What should be included in standard terms
• Definitions
• Formation of the contract
• Order of precedence
• Price
• Invoicing and payment
• Specification
• Obligation to comply
with the law
• Delivery and risk
• Warranties and liability
• Intellectual property and similar
rights
• Termination
• Confidentiality and use of data
• Ethics and CSR
• Law and jurisdiction
3.1

Standard contract
• Contract format comes from various sources
• Standard form of agreement may be provided by the buyer,
seller or from professional bodies, eg CIPS
Either the
Purchasing
or Supplier
Organisation
Professional
Bodies Such
as the CIPS
Trade Associations or
Groups of Similar
Suppliers Establish
Standard Terms for
Their Industry
3.1

Helps reduce time and costs of contract
Development (including legal costs)
Terms may not be as advantageous to a
powerful buyer as if contract was negotiated
Avoids ‘reinventing the wheel’ – but can be
adapted to suit particular circumstances
Terms may not include special clauses or
requirements to cover the buyer’s position
Industry model forms are widely accepted,
Reducing negotiation time and costs
Legal advice is still required if significant
amendments or variations are to be made
Designed to be fair to both parties Costs of training buyers to use model forms
Standard contract - advantages and disadvantages
3.1

[L4-M3] 3.2 Contract terms incorporated into contracts
Interpreting key terms
• Type of clause and what they are designed to achieve
• Legal and operational effects or implications of the clause
for both parties
• Whether the clauses express buyer’s requirements (and
best interests) clearly
3.2

Time of performance
• Express time of performance (date of shipment, transfer or
delivery) - normally treated as ‘condition’
• Implied in relation to sales by description (S13 SGA 1979)
• Common to express ‘time of the essence of the contract’ -
buyer can insist upon the delivery date specified (can also be
waived by buyer)
• When contract does not specify, performance must be within
a ‘reasonable’ time
3.2

Price
• This term is used to stop price increase or include additional
‘extra’ not in the original quotation
• Examples
• A fixed price clause for the duration of contract
• Price adjustment clause - how new prices or changes
determined and jointly agreed
• Dispute resolution clauses - describe how dispute on price will
be resolved
3.2

Passing of title/property
• If goods accidentally damaged, allocation of risk will depend
on who owns the goods at the time of accident
• If goods damaged through negligence or fault of a third
party, the owner has stronger rights to claim for loss than a
‘possessor’
• If buyer fails to pay in full for goods, or becomes insolvent,
unpaid seller can sue the buyer for the price of goods, if title
in the goods has passed to the buyer
• Sale of goods - only a person who owns goods is entitled to
sell them (s 12 SGA 1979)
3.2

Liquidated damage
Breach of contract: breach of condition or warranty.
The purchase of damage is to put the injured party into the position it would
have been if the contracted had been performed properly. They are
compensatory and not punitive.
• Buyer assesses in advance the consequence of supplier defaulting against
a particular term of the contract
• When expressed in monetary terms, these are liquidated damages
• To be valid (enforceable), liquidated damage must be a genuine pre-
estimate of probable loss
• If the court consider the LD not a genuine pre-estimate of loss, it will be
deemed a penalty, which is not enforceable in law
• When will be a LD clause be regarded as Penalty.
• It does not appear to be a genuine effort to estimate the probable
loss, the sum stipulated appears to be unreasonably large
Understanding Contract Terms
Interpreting Key Terms
134

Force Majeure
The general rule is that a party who fails to perform his contractual
obligation is in breach and liable for damages – whatever the
excuse for non-performance (Cutter V Powell, 1795). Doctrine of
frustration was introduced as a result of judgment in Cutter case
• To release parties from liability in circumstances where their failure
to perform results from circumstances which were unforeseeable
and outside of their control
• A force majeure term should (CIPS)
• State events that will constitute force majeure
• Oblige either party to notify the other if force majeure occurred
• State that a party will not be considered in default of its contract
obligations, as long as it can show that full performance was prevented
by force majeure events
• Provide for contract to be suspended for up to 30 days if performance
prevented by force majeure in this period
• Provide for termination of the contract, by mutual consent, if the force
majeure event exceed 30 days
135

Breach of contract
• When a party fails to perform an obligation under the
contract
• Examples of ‘actual breach’
• Is in breach of a condition term
• Improperly repudiates (ends) the contract
• Prevents completion of the contract on his own side or by the other
party, during performance
• Anticipatory breach
• When, before the time fixed to perform an obligation, a party
expressly or by implication repudiates the obligations imposed on him
by the contract: ie shows an intention not to perform.
136

The doctrine of frustration of contract
• Designed to reduce the severity of the general rule by allowing
genuinely good excuses for non-performance
• Destruction of contract subject matter (Taylor v Caldwell)
• Non-occurrence of event on which the contract was based (Krell
v Henry, coronation procession of Edward VII)
• Incapacity to provide personal performance – example frustration
of an employment contract by reason of death of employee.
Robinson v Davison (pianist became too ill to perform)
• Extensive interruption - makes further execution of the contract
impracticable or different from originally agreed.
137

Remedies for breach of contract
• Damages
• Financial compensation for losses
• Specific performance
• Defendant to carry out the obligations of contract if damage is
deemed to be inadequate
• Injunction
• Court orders a party to do something (mandatory injunction) or not to
do something (prohibitive injunction) to avoid breach of contract
• Quantum meruit
• Remedy for partially performed contract
• Providing party entitles to be paid a reasonable amount for it
138

Exclusion
• Totally exclude one party from liability which would
otherwise arise from some breach of contract
• Restrict or limit liability its in some way
• Seek to offer some form of guarantee in place of normal
liability for breach
Exclusion clause – to be valid
• Clause must be incorporated into contract (L’Estrange v
Graucob)
• Clause cannot be introduced into a contract after it has
been made (Olley v Marlborough Court, 1949), Thornton v
Shoe Lane Parking, 1971
• Clause must be clear and precise
• Clause must pass the ‘statutory test’ of compliance with
UFCTA
139

In case of negligence
• Person in business cannot exclude or restrict liability for death or
personal injury resulting from negligence (any clause purporting this
is unenforceable)
• Person in business cannot exclude or restrict liability for negligence
(other than death or personal injury), unless the exclusion is
‘reasonable’
• The strength of proving ‘reasonableness’
• The strength of bargaining position of parties
• Whether buyer received inducement to agree to the term
• Whether buyer knew of the existence of the extent of the term
• Whether reasonable to expect, when contract was made, that it would
be practical for buyer to comply with conditions attached to the term
(seller’s liability excluded if buyer did not comply with condition)
• Whether goods manufactured specifically for buyer
140

Indemnity
• An indemnity clause is designed to secure an undertaking from the
other party that it will accept liability for any loss arising from events
in the performance of the contract and will make good the loss to the
injured party or parties.
• Indemnity clause might include costs or re-imbursement of
rectification costs or legal claim incurred as a result of breach, loss
or damage to the buyers property as a result of negligent or
defective work, business losses incurred by a suppliers poor
professional advice, or injury to buyers staff, customers or third party
caused by negligence of the other party’s personnel
141

Guarantees
• A typical contract for sale of goods and provision of service usually
contains some kind of guarantee(or warranty clause)
• Supplier will guarantee to make goods free from defects
• Another context of guarantee is used in the formation of contracts, in
which one party agrees to guarantee (stand a surety) the liability of
another foe debt, default or other problems. Such a contract must be
evidenced in writing and signed by guarantor or some other person
authorized to sign it on his behalf.
• Example loan finance
• I commercial contracts, a contract of guarantee may arise where a
contractor carries out works for a subsidiary company in a group and
may want the parent company to act as guarantor for the subsidiary in
case failure of payment.
142

Insurances
• Employer’s liability insurance – its purpose is to protect employees who
may sustain injury, illness or incapacity as a consequence of their
employment (Legal requirement in the UK)
• Public liability insurance – its purpose is to protect the supplier and in
turn buyer for claims made by third party for personal injury or damage
or loss of property,
• Professional indemnity insurance – It is designed to cover claims
brought about where failing of a supplier has resulted in economic loss
to the buyer.
• Product liability insurance – covers claims made as a result of injury or
damage to or loss of property from goods supplier, repaired or tested
by the supplier.
143

Breach of contract
• When a party fails to perform an contractual obligation
• Examples of ‘actual breach’
• Breaching a condition term
• Improperly repudiates (ends) the contract
• Prevents completion of the contract on his own side or by
the other party, during performance
• Anticipatory breach
• When, before the time fixed to perform an obligation, a
party expressly or by implication repudiates the obligations
imposed on him by the contract: ie shows an intention not
to perform.
3.2

Terms on contract termination
• Duration clause - with fixed expiry date
• Termination clause - either party terminates contract upon
written notice to the other (liquidation)
• Break provision - a stringent clause giving the buyers the right
to cancel the contract regardless any breach has occurred
(construed as ‘unreasonable’ under UFCTA)
• Transition clause - ensure smooth transition to new supplier
3.2

Ethical sourcing and supply
• Promote fair, open and transparent competition in sourcing
• Use of sourcing policies to promote positive socio-economic goals
• The specification and sourcing of ethically produced inputs
• The selection, management and development of suppliers in such
a way as to promote ethical trading, environmental responsibility
and labour standards at all tiers of the supply chain
• A commitment to support the improvement of working terms and
conditions across the supply chain
• Commit to support sustainable profit-taking by suppliers
• Adhere to ethical frameworks/codes of conduct of relevant bodies
• Commit to comply with all relevant laws and regulations for
consumer, supplier and worker protection
3.2

Health and safety
• Compliance to the Health and Safety at Work Act and other
related regulation
• Expressed terms pertaining to the followings
• Supplier’s responsibility for compliance
• Supplier to ensure staff working at the premises of buyer (or
buyer’s customer) comply with the health and safety
requirements
• Supplier to indemnify buyer against any liability, costs, losses
or expenses sustained by the buyer if the supplier fails to
comply with the legislation
3.2

[L4-M3] 3.3 Types of pricing arrangement in contract
Costs within business
• Fixed costs
• Costs that are unlikely to change regardless the number of
products being produced
• Often it is called ‘sunken cost’
• Variable costs
• Costs that relates directly to the products or service.
• Such costs changes according to the quantity of product
produced
Fixed costs Variable costs
Salaries of management
personnel
Raw materials
Insurance Salaries of workers paid by the hours
Rental of facilities Haulage costs
3.3

Total cost of product/service
• Fixed costs remain unchanged as output increases
• Variable costs increase as output increases
• Total cost = fixed cost + variable cost
Total cost
Variable cost
Fixed cost
Output
Cost
Q1 Q2
Q0
Cost to produce
Q0
Cost to produce
Q2
Cost to produce
Q1
3.3

Direct / indirect costs
• Direct costs
• Costs incurred that can be attributed directly to the product
• Examples - costs of raw materials, parts/components, semi-
finished goods etc
• Indirect costs
• Costs incurred for use to support the production of goods
which do not form part of the final product
• Examples – costs of maintenance and repair operations
(MRO), operating expenses (OPEX), stationeries,
telecommunication, cleaning agents etc
3.3

L4-M3 Commercial Contracting presentation

L4-M3 Commercial Contracting presentation

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