A little knowledge can be a dangerous thing!
The legalities of Procurement!
First tip, if you have a Legal Department, use them. It is a complicated profession and an area of great risk for the Procurement Professional. Remember how we feel when an internal function bypasses Procurement and does a shocking job, which we then have to try and recover later!
That said however, in our profession a reasonable level of Commercial and Contractual knowledge is essential as your career progresses. To emphasise this, in this piece I will take you through a sample of some key clauses, illustrated with personal disasters!
Ideally and certainly, if you have a choice, your Country’s Law. This seems simple and obvious but it can be an easily missed, a costly oversight.
When once in a dispute with an Indian Supplier over a contract without a Jurisdiction clause a Legal member of my senior team asked me, “How competent are you with English Commercial Law?”, to which I replied, “I’m quite competent but no expert.” He followed up with, “Ok, what do you know about Indian Commercial Law?”, to which I replied, “Nothing”, to which he said, “My point precisely, close the door on your way out!”
In conclusion I had to exit the Indian Supplier due to this dispute. The irony of this story is I moved the product to a different Indian Supplier with a very effective Jurisdiction Clause placed in the contract.
Title and Property
In most circumstances this area will be more important to the Supplier than the Buyer and if so, this can be a major negotiation lever for the Buyer. The principle here is “when does Title and Property pass from the Seller to the Buyer”? The buyer will push for upon receipt of the goods, the seller will want Title and Property to only pass to the Buyer after receipt of full payment. Why is this relevant? Ask the small suppliers of Carillion who were unable to recover unpaid for products on Carillion sites due to this clause not being in their favour.
When is the best time to agree an Exit Strategy? Four years into a five year deal when you are aiming to leave a contract, that’s not going to be received very well!
The best time to enter into an Exit Strategy is at the Contract Creation stage, when the Supplier is keen to reach an agreement. Contract additions such as Transition Clauses, Termination and Dispute Resolution, e.g. Arbitration Clauses should all be considered in advance, inserted and agreed during initial contract negotiations.
Incentives and Sanctions
Clauses of this nature are relationship builders or breakers, trust and integrity are critical here.
I once heard a Procurement Professional say to me, “Gainshare and Painshare are easy to deal with, we take the Gain and they take the Pain”, not quite in the spirit of things I would suggest. Similarly, ‘Service Credits’, in theory a great clause to include relating to ensuring contract adherence, but again I remember a conversation with a Supplier who had concluded that, “It costs less to pay the monthly service credit penalty than it does to fulfil the service correctly, therefore we just pay the monthly fine”, again not in the spirit of the agreement. Both of these instances will lead to an injured party and effectively a deterioration in the relationship, completely against what they set out to achieve, so be careful with these types of clauses.
Other Commercial Clauses
Clauses of the nature of Retrospective Rebate, Payment Terms, Marketing Contribution, Cost Down etc. are all clauses that can commercially make the procurement person a superstar and one for the future but again this has to be balanced against maintaining and developing positive supplier relationships, they need to benefit too!
On the subject of Contract Terms and Conditions I could go on and on and continue to quote numerous other legal disasters from my past. The key is to learn from errors and ideally only make them once and…..if you have a Legal team, use them!
This article was written by Gary Tinsley FCIPS, BA (Hons), DTLLS, Co Founder of SR Strategic Sourcing Ltd.
If you would like to improve your Contractual and Legal skills further, we would welcome you to join us on any of our Legal Awareness courses for the Procurement Professional. For further details please contact us or click through to the following pages