*_Written by Catherine Hurst, independent commercial consultant and trainer; formerly Commercial Manager at BAe Systems._ and the expert presenter at Falconbury's Effective Contract Management course.*   *Falconbury* and *Catherine* can also run this programme as an In-house course, tailored to your specific needs or 'off-the-shelf'. To find out more on how we can help train your team, call our In-house team on *+44 (0)20 7729 6677* or e-mail us at info@falconbury.co.uk or use our contact form.
 

What’s the purpose of an express term contract?

Often, in small to medium sized companies, those responsible for writing proposals, do so in isolation of all others within their organisation. The majority of their efforts go on the technical specification and pricing, with little thought given to the commercial terms. If they are considered, it is often as a ‘bolt on’ reference to the company’s generic ‘standard terms and conditions’. Is this sufficient? If no express contractual terms and conditions are quoted, the offer is based on statute (Sale of Goods Act etc.). How good a protection is this?

For sure, allowing just statute to apply enables quick turnaround of proposals and placement of orders, but is it creating problems for the future for your organisation?

A contract, of any kind, based on statute or express terms and conditions, is merely parties:

• Defining what promises are being made (the Supplier promising to provide goods / services; the Buyer to make payment).
• Agreeing that if said promises are broken, what the liability on the breaching party will be.

Statute has been written as a ‘one size fits all’ solution. Is that generic approach suitable for your company?
What are the two most common commercial risks which are overlooked at the time of bidding, but have the greatest impact on a company’s profitability if they materialise?

1. The first is, disputes over whether a promise has been met. The measurement criteria in statute is ‘satisfactory quality’, ‘fit for purpose’. Often respective contracting parties have a different interpretation of what these mean for them. Was that meal of ‘satisfactory quality’, ‘fit for purpose’? If, in the Buyer’s opinion, it tasted disgusting and did not fill them up, they would say no, but the Supplier may disagree! However, if the Supplier wants to be paid, they will often accommodate the definition of the Buyer, which will result in extra expenditure. That extra effort / expenditure, ultimately erodes the Supplier’s anticipated profit margin. The Suppliers’ other option is to dispute the Buyers definition. This course of action ultimately leads the parties to court. Is this desirable?
2. The second risky oversight when bidding, is to only think about what will be the cost to deliver the promises being made, not what the Supplier’s liability is, if, one or more of those promises are broken, or not delivered in accordance with the definition of ‘satisfactory quality’, ‘fit for purpose’! In statute that liability is ‘unlimited consequential damages’ – the Supplier is liable to compensate the Buyer for whatever losses the Buyer can prove are a consequence of that breach, that broken promise. HOW BIG A LIABILITY IS THIS? When bidding, did the Supplier consider what the probability was of not being able to keep their promises, especially if those promises were a bit vague, ambiguous, open ended? In statute that compensation is ALWAYS monetary. In being a ‘one size fits all’, that is the only generic solution that can be offered. However, would the Supplier rather not offer a practical remedy, solution, rather than just money? Buyers might actually prefer a practical solution to move their project forward, rather than money. Also, for the Supplier to fully understand their exposure to commercial risk, when bidding, would it not be preferable to have an insight into the extent any potential losses the Buyer might incur due to a breach by the Supplier?

This is where we introduce project specific express terms and conditions into any offer being submitted. Their purpose is, firstly, to bring clarity. To agreed a clear definition of the promises being made and the measurement mechanism which determines if they have been achieved. This removes all vague, ambiguous, subjective elements of statute. Secondly, to bring a capping of the ultimate liability, if worse case happens, and the Supplier isn’t able to satisfy their contractual obligations / promises. It may also introduce the agreement of remedies / practical solutions being applied before any monetary compensation becomes due. The benefits of this being all round, for the Supplier, who gets to keep their reputation by not letting their Buyer down, and hopefully having a remedy which costs less than any monetary compensation would be, and for the Buyer, as they get a solution. No Buyer enters a contract to end up only with monetary compensation, they enter it for the end result, the goods/services.

Can all of this be achieved with company ‘standard express terms and conditions’. No, as like statute, standard terms and conditions, even industry standards, are still a ‘one size fits all’ approach. Each contract is unique and therefore needs an element of project specific express terms in respect of definition of promises and solutions/ remedies, if those promises are broken.

So, does this inspire all sales people, bid managers etc. to involve their commercial/legal teams when writing proposals? Is that sufficient? Will their commercial/legal teams have all the answers? *NO.* A larger net is required which captures the input from all departments, but especially the delivery team and procurement team, if an element of the work is to be bought in. Every organisation, who wants to ensure they are identifying, mitigating and/or managing their commercial risk needs to ensure it is a joined up approach, a team effort, and that everyone in the organisation is involved in the process. But how do we get people involved? Everyone is busy, working to their fully capacity, due to lack of time, having to prioritise their work load. How can we get them to appreciate the added value of having a good express term contract? If they cross their fingers, hopefully the Buyer will be on the same wave length and have the same interpretation of the contractual promises and, hopefully everything will go to plan and no risks will materialise, and if some do materialise, they’ll worry about that when it happens.... are you comfortable with your organisation having this approach?

If you’re not, let Falconbury help. Our commercial training courses bring awareness of these commercial risks, plus strategies of how to identify and manage them. The courses are delivered in a way to bring the subject to life and make it easily understandable to all. Don’t let your company sit in the dark, not realising what potential commercial risks it is exposing itself to.

To find out more call us on +44 (0)20 7729 6677 or email us at info@falconbury.co.uk or use our contact form to enquire about our In-house training services or our public programme.