Procurement Contracts are Vital

If you’re a Procurement Pro who does not understand Contracts you’re at a disadvantage in all that you’re doing. When I talk about not understanding contracts I’m talking about not understanding contractual terms and the impact of specific terms on the procurements you’ve undertaken.

Think about it, if you’re procuring a new component that you need for your Programme, who owns the Intellectual Property Rights in that new component. You may have gone out to the market with a Procurement Requirement and asked for Suppliers to come back to you with options as to how they can fulfill your requirements. When evaluating the suppliers’ responses you might have found the perfect component that a supplier is going to make bespoke for you.

However, did you state in your procurement Request For Proposal that you wanted to own the Intellectual Property Rights of the Component? Were you silent on this? This is where a poor understanding of contractual terms and the lack of understanding of what you’re procurement come to the surface. For all you know, the Intellectual Property Rights might be owned by multiple suppliers and you’re going to have to pay long term for these. You may need to go on to develop the component in 5 years but you will not be able to, as the Intellectual Property Rights will not be yours.

This is why you need to understand the terms, issue RFPs that contain Contract Terms that ensure you get the results from the Procurement that you need to undertake the work. Too often, Contracts are the last thing on a Procurement Pros mind but it deserves equal attention to preparing the RFP. It should be in the RFP. Your Supply Chain needs to understand the Contract Terms you expect them to sign up to and they need to be able to factor in risk elements and ensure they can comply with them as part of the response.

Procurement Teams run into so many issues when they consider Contract Terms as the last step when everything has already been agreed. The Contractual Agreement may not reflect the positions you’ve negotiated and unless you understand your Contracts, how are you going to know this?

The liabilities of each party are often a key element for your Procurement activities with the Supplier keen to minimise their liabilities to the Buyer, and of course, the Buyer would like to maximise the liabilities of the Supplier.

WHAT IS A CONTRACT?

In English Law (and many other jurisdictions), a Contract consists of five elements for it to be enforceable as a valid contract between the parties.

Offer
Acceptance
Consideration
Capacity
Intention to be Bound

What you need to know as a Procurement Pro is that you go out to the market and a Supplier makes an offer (Number 1) to you, whether it be for goods or services. You review the offer and accept (Number 2) or you negotiate the Contract (which technically means you reject the first offer and make a counter-offer to which the Supplier may then Accept which flips the offer - acceptance element).

Consideration is the exchange of value (not money which is often what non-legal people think it is). However, to keep this simple, it is usually the exchange of the Buyer's finances for goods or services by the Supplier.

Capacity isn’t about whether or not the Supplier can fulfil the order. That is a question you should be asking your Suppliers especially in a Competitive Tender/Request for Proposal. Capacity in this sense means the ability to enter into a contract. For example, does the signatory from the Business have the authority to enter into the contract.

Intention to be Bound is kinda what it sounds like. It’s focussed on the intention of the Parties to the contract and whether they truly intend to have all of the terms bind them that are set out in each of the clauses in the contract document. This is usually recognised by the signature of each party on a written contract. Intention to be Bound can be problematic when we look at oral contracts and contracts that are created through conduct and I do hope you are not finding yourself in this position if you are a Procurement Pro.

CONTRACT TERMS TO BE MINDFUL OF

The following list of Contract Terms focuses on some of my key terms that you should be aware of when conducting your Procurement activities.

Liabilities
Indemnities
Payments
Choice of Law/Jurisdiction
Confidentiality
Data Protection
Intellectual Property Rights

Liabilities

A Liability is an obligation on one party to the contract who will be responsible to the other party should some breach of contract occur. However, it isn’t as simple as this as Liabilities can arise in Contract Law, Law of Torts, and through a variety of liabilities. Additionally, the Contract terms may specify a specific breach of contract.

Indemnities

An Indemnity in the most basic form is one party compensating the other party for losses, damages, or injury that occurs due to their actions. It can also ensure that the other party is not liable for a particular loss. You see this a lot in Software Contracts where one party absolves the other of a breach of third-party intellectual property or the party that uses the software absolves the seller of any losses caused by the data/use of the software.

You need to know what indemnities the supplier provides to you but also, the indemnities that are provided by you to the seller.

Payments

You need to completely understand what the payment terms of all that you procure are. Are the payments in arrears? Are they 30 days from the invoice date or receipt of the invoice? Can you get a refund for early termination?

You should have covered this off in your initial engagement with the Supplier so ensure your teams are checking the contracts or that the Commercial Contract Manager/Legal is all over this.

Choice of Law/Jurisdiction

I had a professor at the University of Southampton whilst studying for my Masters in Law, who, in our, Commercial Litigation Class used to say one thing time and time again and it has stuck with me.

“Make sure your Choice of Law is that of England and that the jurisdiction is irrevocably England”.

You can apply this to whatever Jurisdiction your company resides in. Choice of Law has a profound impact on the interpretation of any contractual clauses and you want to ensure your “home” courts are the chosen venue should you need to progress any disputes to litigation.

Confidentiality

Typically, having worked in the secretive world of Defence and now at a market-leading software company, I’ve always had it drilled into me that ensuring we’ve got the right provisions to protect the information that we share with our partners is vital. And it is - whether it’s an NDA or a robust but fair confidentiality clause in the Contract document.

Data Protection

I’m going to keep this fairly light. Within Europe/EU we have an exceptionally strong Data Protection Regulation namely GDPR. It requires careful management, robust clauses, Data Processing Agreements, and Data Protection Impact Assessments among other things.

Make sure you have a Data expert looking over this.

Intellectual Property Rights

This is about ownership and rights of use. You need to ensure that you detail who owns what and what each party can do with any new “rights” generated as a result of the procurement you undertake. This might be new software, new components, know-how, new processes, etc. It is vast and wide and extremely important that you get this right from the outset, even at the RFI stage if you are looking to take one on.

Summary

Understanding your Procurement Contracts is critical to the success of those relationships in the long term. If you have a poorly constructed Contract, you’re going to struggle extracting value from it. This is truly an essential skill that is needed by a Procurement Professional.

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Why Procurement Pros need to understand Contracts