L4M3- Chapter 3- Key clauses in formal contracts Flashcards

Question

What are the ADV and DISADV of model form contract?

Answer 1

ADV Saves time and resource vs bespoke contracts Suppliers and buyers familiar and comfortable with the main terms Specific to sector/purchase type A measure of certainty in how courts will react to disputes Lower cost to produce and approve Can be easier to solve disputes DISADV Poorly trained staff may use contracts incorrectly Amendments can have ambiguity Become out of date if not reviewed regularly May be biased

Answer 2

Being legally responsible for something Will be legally responsible for paying compensation, for example, if there was an injury, loss or damage that occurred

Answer 3

A standard of liability in which a person is legally responsible for the consequences of an activity, even in the absence of fault or criminal intent of that person

Answer 4

A security or protection against loss, usually by way of financial recompense

Answer 5

An agreed sum of money which is payable by one party to another in the event that they breach a term in the contract Liquidated damages are an estimate of intangible or hard-to-define losses to one of the parties in a contract. These damages are to be paid out in the case of a breach of contract and are estimated and spelled out in advance in the contract.

Answer 6

Liquidated damages Exclusion of liability e.g. force majeure Negligence of the other party Indemnity Financial limit of indemnity Limiting scope of liability- e.g. indirect losses may be excluded (like the impact of goodwill as its hard to put a £ figure on) Transfer of liability/ transfer of risk- When does ownership move between parties

Answer 7

A fee paid to one party so that it will accept the risk and meet any costs that would normally fall to the person who has the legal liability for the item Effectively transferring risk from the person with legal liability to the insurer NOTE- the legal liability does not transfer, just the costs (normally up to an agreed limit)

Answer 8

Employers liability- requirement for any company that employs staff e.g. for compensation for injury suffered Public/products liability- AKA third party cover, covers anything that comes as a result of actions of a companies personnel Professional indemnity- losses that occur as a result of poor/negligent advice e.g. legal, accountancy etc Goods in transit cover- damage caused during delivery Works/building- cover for partially completed building works

Answer 9

Type of insurance (employers, public/product, professional, goods in transit, works Level of cover required (minimum cover needed, impacted by the cap you want to unlock, cost benefit analysis required) Aggregate clauses AKA 'each and every claim'- total number of claims on a policy in a given period which cannot be exceeded Scope of cover- what do you need covered- may not want to go to too much detail Auditability- having the right access to the cover

Answer 10

Aggregate- total claims under that policy over a given time period cannot be exceeded Each and every claim- means a financial limit applies to each claim no matter how often claims are made

Answer 11

To make certain that the offending party can meet the financial costs of its liability in the event of a claim Contract terms should also require that subcontractors are appropriately covered

Answer 12

A contract that sits below but is directly linked or governed by a higher contract. The lower contract will be to deliver part of the requirement of the higher contract Layers to a contract are often called tiers, so you have a direct contract with a tier 1 and then the tier 1 has a direct relationship with tier 2

Answer 13

To get control of the suppliers subcontracting Ensure there is the right supply chain e.g. financial stability Having agreed terms with a tier 1 supplier, you may want that to be reflected throughout the subcontracts e.g. ethical purchasing Liability- even if there is subcontracting the purchaser may want to ensure the contractor remains legally liable

Answer 14

Where the responsibility for delivery of the contract is passed to a third party

Answer 15

Novation is the replacement of one of the parties in an agreement between two parties, with the consent of all three parties involved. To novate is to replace an old obligation with a new one. The new party will have both the burdens and the benefits

Answer 16

Contractual obligation refers to the responsibilities and duties that the parties involved in a contract have legally agreed to fulfil

Answer 17

Do you want subcontracting at all? e.g. security or defence contracts How much control of selection of subcontractors do you want? What influence over subcontractors do you want? e.g. do you want to ensure financial terms or insurance Ensure the main contractor retains liability Beware of the impact on price- more restrictions on subcontractors may influence price

Answer 18

A commitment from the seller (or OEM) that should a product not met stated quality in a specified period then it will be repaired, replaced or refunded T&Cs will apply A guarantee can outlive a contract e.g it may last 2 years for white goods, but the contract may be to install the washing machine The more complex the product, the more likely a guarantee will be required

Answer 19

Do you need a guarantee? how likely is it that the product will fail and what is the impact of failure? How long does a guarantee need to be? extended guarantees may be available but would come at additional cost What needs to be included in the guarantee? depends on what type of equipment it is, how complex and how easy/cheap it is to replace

Answer 20

An agreed sum of money which is payable by one party to another in the event that they breach a term in the contract Predetermined before the breach occurs Often used in respect to late delivery Designed to be compensation NOT a penalty

Answer 21

Legal term for financial payments to compensate for a loss of some kind They are paid when it is not possible to place the injured party in the position it was in prior to the injury or loss occurring

Answer 22

Which breaches of contract should result in liquidated damages?- only appropriate when there is no other suitable remedy e.g late delivery not quality issues as these can be solved in other ways Estimating the sum- needs to be a genuine estimate Define the degree of lateness- does it accumulate with the later it gets? Process for claiming damages- use Romalpa clause (request to supplier), will it be paid directly or deducted from payments on the contract

Answer 23

used by a seller of goods who does not wish to transfer ownership thereof to the buyer until the latter has paid for those goods or, very often, for all of the goods that have been delivered to the buyer.

Answer 24

Unusual option in liquidated damages where a purchaser is allowed to deduct debts owed under one contract from payments due on a different contract

Answer 25

Ensure their reputation is maintained amongst investors and customers

Answer 26

The right of workers to associate freely and bargain collectively (inc trade unions) End of forced and compulsory labour (slavery) End of child labour End of unfair discrimination based on ethnicity, nationality, religion, gender, gender identity, sexual orientation or disability Many countries have enhanced standard e.g. minimum wage (in the UK)

Answer 27

Ensuring that the products being sourced are obtained in a responsible and sustainable way, the workers are safe and treated fairly and the environment/social impacts are considered

Answer 28

Labour standards- application of laws, requirements for compliance, do you need to go beyond minimum requirements Environmental impacts- What are the issues that might be in place (e.g. waste, energy consumption, pollution) and apply express clauses Social impacts- what are the impacts? is there safeguarding for vulnerable kids/ adults then create express clauses for legal standards, quality or design Fraud, bribery, corruption- ensure a fair and transparent process, must explicitly state that fraud bribery and corruption are unacceptable in connection to the contract Subcontracting- any conditions imposed on the direct contractor to be applied to subcontractors Upstream impacts- think not just about what the supplier is doing for you but where the supplier is getting its inputs or obtaining energy, materials etc

Answer 29

Metals and minerals sourced from areas where their mining is used to finance armed conflict and linked to human rights abuses

Answer 30

Ethics- Labour conditions, ILO, anti bribery/corruption- EXAMPLE education on child labour Consumer driven- changing demands, willingness to pay premiums, reputation, EXAMPLE- trading labels (Fairtrade) Influential stakeholders- stakeholder pressures, international agreements EXAMPLE- waste reduction Legislation- government policies, proposed regulation, funding agreements EXAMPLE- use of local/SME firms Economic pressures- Incentives, savings, efficiencies EXAMPLE- waste reduction

Answer 31

The output of a contract that benefits society at large rather than the purchaser or end user

Answer 32

Often ESG is not visible at the surface or in the performance of goods/services (especially if they relate to methods of production) Monitoring could be done through audits or site inspections Should ensure that the costs of delivering ESG are not disproportionate to the gains

Answer 33

Use international standards Do not create criteria that conflict with other areas of the spec Include an order of precedence Include if it is a minimum standard, mandatory or an aspiration/target

Answer 34

The Public Services (social value) Act 2012 It requires people who commission public services to think about how they can also secure wider social, economic and environmental benefits.

Answer 35

Pricing schedule Fixed pricing arrangements Cost plus Cost reimbursable price arrangements

Answer 36

The cost price of an item or service plus an agreed margin

Answer 37

Price is the amount expressed in units of currency to be paid by the purchaser to the supplier to obtain the goods or services The cost is the total sum of amounts paid by the supplier in order to produce the good/service

Answer 38

- Call off contracts may have different prices based on what is called off, how much you order and how may orders there are - If the total amount is known it may actually be paid in stages - Price may need to be broken down into elements so that changes to the contract cna be accurately prices e.g. day rate of staff - Price may be broken down for accounting purposes e.g. amounts based on usage by geography for an international business - Changes in scope during the contract may require variations

Answer 39

An appendix to the contract setting out what prices are When applied to professional or consultancy services it is called a fee schedule

Answer 40

A list of prices associated with the products or services being provided (may differ by volume) Used in a lump sum contract (where a single price is given for the whole contract)

Answer 41

Linear - order 1 for £2 or 100 for £200, the unit price does not change with volume Non linear- different pricing depending on quantity ordered

Answer 42

This is a set of prices that have been agreed and are fixed in the contract for a period of time

Answer 43

Prices which have stability but can move under predetermined mechanisms

Answer 44

ADV Budget/income certainty Changes in the suppliers cost base not fed through to the purchase, if prices drop the supplier benefits, if they rise the buyer benefits DISADV Time to specify what is included/excluded in price Price does not change if prices drop May be some assumptions in what items will be purchased, leading to disputes Potential for quality/deliverable issues if price is too low

Answer 45

Fixed = remain the same irrespective of volume of activity Variable = Costs that change in proportion to the output of the business

Answer 46

Profit margin- profit as a percentage of total sales Mark up- profit as a percentage of total costs E.g. if costs are £100 and sales are £500. Profit is £400 Mark up = 400/100 = 400% Profit margin = 400/500 = 80%

Answer 47

this is cost, plus an agreed profit mark up Cost + (cost x % mark up) = price e.g. cost £70 and mark up is 5% 70+(70*0.5) = 73.50

Answer 48

Costs are not static, and if you produce more then costs go down so defining what cost is can be difficult Need to understand the fixed vs variable Need to understand how much control the supplier has over their costs If a supplier knows their costs are covered they may not be incentivised to find ways to lower cost

Answer 49

ADV Knowledge of value for money (supplier gets a fixed % and not excessive profits) Risk of supplier collapse is reduced DISADV Need accurate data sharing on what the real cost is No room for negotiation if the suppliers cost changes Supplier has no incentive to manage costs (as margin % is guaranteed) All of the risk is with the purchaser

Answer 50

ADV All costs are covered Can forward plan Easy to justify price increases DISADV Profit is limited Cannot leverage the market to charge a higher price Cannot refuse price reductions No incentive for the supplier to reduce costs

Answer 51

Linking of a payment (e.g. salary, price, or other due payment) to an index and the adjustment of the payment in line with the movement of the index

Answer 52

A way of showing percentage change in prices over a given period, based on a starting year which is taken to be 100%

Answer 53

Retail price index (RPI)- It tends to track higher than the CPI because it includes costs associated with home ownership. It includes VAT and other taxes and mortgage payments Consumer price index (CPI)

Answer 54

CPI tends to track lower because of the 'basket of goods' it includes so a purchaser would prefer this because it means if you are using a price index you price will rise by less HOWEVER- there may be more appropriate indexes to use than a generic inflation measurement (e.g looking at a group of specific commodities

Answer 55

ADV Gives budget certainty to the buyer Gives income certainty to the supplier DISADV Inflexible No shared benefit if the costs do change in either direction May lead to claims and disputes Supplier may quote higher initial prices to cover expected costs/risks TO BE USED in short term contracts with good specification with no variations

Answer 56

ADV Certainty of relationship for both buyer and supplier DISADV Normally linked to broad indices Prices can go up No incentive for the supplier to try and reduce costs Not a recommended process

Answer 57

ADV Clear on when adjustments will be considered States the calculation Legal and contractual certainty Contract specific indices can be used Supplier may give a lower quote knowing that some of the cost of increase is covered DISADV Relies on good market knowledge Failure to capture a key influence could lead to disputes Need to be sure that an indices change will actually affect the supplier Reduces the incentive for the supplier to control costs

Answer 58

An incentive is an extra payment to encourage better performance At ORL this may be an over rider

Answer 59

Expected cost of making a product or delivering a service

Answer 60

In a cost plus incentive contract, the fee or profit element which will be paid if actual costs equal target costs

Answer 61

Within a cost plus incentive contract it is the proportion of the cost/benefit allocated to the purchaser and supplier

Answer 62

Target fee + ((target cost- actual cost)* supplier share) The supplier share section will be larger if a project is running under budget (ie it incentivises them to hit or beat budget as they get a bigger target fee)

Answer 63

Sharing ratios Incentivise speed of delivery Contract extensions Accelerated payment terms

Answer 64

Documentation required e.g. valid invoice required VAT and other taxes- e.g. VAT, sales tax, insurance premium tac- normally contracts are quoted excluding tax Payment period Disputed invoices and pay-less notices- What happens when a contract is not accurate/correct Retentions- held payment in case of defects, contract must set this out and how it would eventually be released Remedies for late payment- Normally this is interest on top of the payment actually due

Answer 65

A formal notice under a contract stating that an invoice will only be paid in part and giving the reasons why the lower amount it being paid happens when only part of the amount owed is being disputed (or liquidated damages being deducted from an invoice)

Answer 66

A sum of money withheld from payment for a fixed period of time to be used to cover any costs associated with remedying defects that are not corrected by the supplier

Answer 67

Ensuring the products being sourced are obtained in a responsible and a sustainable way Workers involved are safe and treated fairly Environmental and social impacts taken into consideration

Answer 68

Cost plus is the open book approach- costs are known plus a % profit Cost reimbursement is where there is a known mark up on core activities e.g. a consultants day rate being £1000 but then expenses sit separately e.g. their lunch, travel and hotels are separate lines