MIM 524 Global Sourcing Class five. Contracts, Contract Terms and International Terms This is...

MIM 524Global Sourcing

Class five

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.

SimilaritiesUCC and CISG

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

Contract Terms – Things to Consider When Negotiating

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?


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


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


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


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


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

Current Events

Next ClassManaging Supplier Relations and

PerformanceTQRDCEB Reading DiscussionGuest Speaker – Tom Alessi – Mentor

GraphicsE-procurement Tools/ExamplesCurrent Events

Questions?

MIM 524 Global Sourcing Class five. Contracts, Contract Terms and International Terms This is...

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