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Commercial Contract law and language
Businesses and public sector organisations want to work with buyers and suppliers with as little dispute as possible. A key requirement is clarity of terms used in discussions and documents relating to trading relationship and contractual agreements. Ultimately there needs to be sufficient clarity to enable a Judge to enforce their agreement – the worst case scenario! If you are interested in disputes over meaning and application of common commercial contract usages please visit the free government website www.hmcourts-service.gov.uk. Here is a good example from a case between Vogon International v Serious Fraud Office [2004] EWCA Civ. In summary:

  • The two parties agreed a contract to set and populate an MS Exchange database (whatever one of those is!) at £1,500 per database

  • Vogon interpreted the word ‘database’ to mean a .pst file and so raised an invoice of £314,000

  • The SFO interpreted ‘database' to mean each complete MS Exchange database and requested an invoice of £22,500

  • Regretfully the two parties went to court (by the way would ever take the SFO to court?)

  • Subsequently the Court of Appeal agreed with SFO.

  • So, because Vogon and SFO failed to clarify a shared interpretation of one word – database – they went to court incurring all those costs and aggravation.

  • Not recommended!


The following meanings and effects of typical words may be helpful in clarifying matters and more importantly raise the awareness to clarify terms trading relationships and contractual agreements:

Estimate


This is a price submitted by the seller but who may word it as subject to confirmation. The buyer needs to establish if it is a price capable of acceptance and whether it is ‘firm’ or ‘fixed.’ The danger of placing a contract on this basis is that the seller requires an uplift when s/he is in possession of further information.

Quotation


It must be established if the quotation is an offer to sell or an invitation to treat. Often the supplier will couch it in terms of ‘This quotation is not an offer.’ The buyer must read the quotation for any qualifying comments that seek to place risk with the buyer.

E&OE


This means Errors and Omissions Excepted. This is a significant qualification and should not be accepted by the buyer. To accept the statement is leaving the door open to the seller to change any aspect of the quotation.
Agreement in Principle
This is another qualifying comment. It means that it is not formally accepted, thus leaving the door open to the seller to withdraw the agreement in principle if something arises in discussions or negotiations that impact on the provisional agreement.

Reasonable Price


There is no such thing as a reasonable price! The price will be set according to many things including the market conditions, seller’s pricing strategy, risk profile of the contract, liabilities, etc. This term is best avoided by the buyer – although strongly recommended to be promoted the seller!

At a Price to be Agreed


This should not be accepted by the buyer. It leaves the buyer vulnerable to any price submitted by the seller. On the occasions when a price cannot be agreed prior to signing a contract an Instruction to Proceed may be placed with a financial cap attached to it, thus giving the buyer an opportunity to, later fix the price on a rational basis.

Without Prejudice


This is a phrase used to enable parties to negotiate settlement of a claim without implying any admission of liability. Letters and other documents headed ‘without prejudice’ cannot be adduced as evidence in any court action without the consent of both parties.

Letter of Intent


When properly written this does not create legal relationships, it merely gives comfort to the other party that they may win a contract. In the USA they are called ‘comfort letters.’ For it to be a letter of intent it must not instruct the seller to take any actions, otherwise it becomes an Instruction to Proceed which does create legal relationships.

Subject to Contract


The use of these words is not a valid acceptance of a contract. An acceptance made subject to any variation is treated as a counter offer. The buyer must know the rules of offer and acceptance.

Subject to Negotiation


This is a further qualification and cannot be treated as acceptance. Until the negotiations are complete and the outcomes documented and agreed by both sides there is not an offer that can be accepted by the buyer.

Food for thought? For support and guidance around trading relationships and contractual agreements, including tendering activities and ‘disputes’ please contact us.
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Supplier financial failure
We predict a large number of financial failures this year. The VAT increase will impact on consumer spending and also business in general. The MoD reductions in expenditure and Government attacks on expenditure will slow business down and threaten the margins achieved by manufacturing and service companies. Some will fail! You may consider what is done in your organisation to check the financial health of your strategic suppliers.

You may reflect on the fact that the above comments are pessimistic. We believe they are realistic. We will see. Please share your thought with us.
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Positioning procurement
We continue to conduct reviews of procurement and guide organisations as they seek to position procurement in the organisation. Despite the fact that we are in 2011, procurement remains a reactive, transactional operation in too many organisations. The fact remains that many functional specialists are in no doubt that they can carry out buying, despite no training. We could write a book about the problems that this creates. A recent example relates to a failure to investigate the supply chain. The engineer thought that the product was 100% made in the UK but has now discovered that it was largely made in China. There was a very significant fault that needed a quality investigation. When the quality documentation was sought, it was provided, but printed in Chinese and with sections omitted. The documents were headed ‘Draft’. So, now there is a dispute and you may wish to guess who has been asked to sort out this mess. Yes, it is procurement. The contract is being interrogated to find clauses dealing with sub-contracting, inspection, quality audits, material default and jurisdiction. Watch this space!
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Winning contracts
We have been heavily involved in supporting a wide range of organisations when they were submitting responses to PQQs and Invitations to Tender. These organisations included architects, design consultants, waste management specialists, festive lighting, facilities management, building and construction services, security and training specialists. It is truly a fascinating experience. Generally, these organisations find the procurement processes a bewildering and complex process. The challenge provided by the public sector is daunting. Our profession does not help itself too much, particularly when they refuse to have meetings, conduct supplier open days, provide feedback on unsuccessful tenders and generally conduct themselves as adversarial foes! The word partnering is not in the vocabulary of many purchasers. In regard to the public sector, we are experiencing far more appeals, influenced by the Remedies Directive. This will continue because the legal profession has worked out that they can increase income by engaging in appeals.
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A year fraught with issues
We send our Season’s Greetings to all our readers and sincerely hope that 2011 will deliver for you everything you wish for. It promises to be a year fraught with issues directly affecting the procurement profession. We are happy to share some of our thoughts with you. The thoughts are influenced by events that impacted on our services over the past year.

 

 

Next Steps

So, what can we do for you?  We can probably help you achieve your objectives – through our consultancy, training and coaching services – let’s start a conversation.

If you can spend a few minutes on the phone with me, I can assess the potential ROI of working with us.

If this is interesting to you, please email me and I’ll set something up.

Or call me on 01744 20698

Thanks

Steve


 

 

Why people with procurement and proposals issues want to work with the people at Brian Farrington.


There are three themes that clients tell us over and over again.

First, they tell us they believe they are making a smarter investment working with Brian Farrington — bringing a thorough understanding of their procurement and proposals issues and a proven track record of enabling excellent returns on their investment.

Second, our clients are confident that they are working with ‘straight-talkers’ that bring experience, expertise and stay focused on client success; not on our next income target (no army of junior consultants that we need to ‘utilize’).

Finally, people - people, just like you - tell us they actually like working with us. They find us easy to work with and collaborative in solving issues that inevitably arise in procurement and proposals.

 

 


About Brian Farrington Ltd


Brian Farrington Ltd is one of the world’s longest established procurement and supply chain consultancy and executive training specialists. 33 of the current FTSE100 have retained our services, as well as leading organisations in the UK, North America, southern Africa and Asia.

Established in 1978, we have proven expertise and experience in strategic procurement, sustainability and risk management.

Brian Farrington Ltd solutions and services are formed through consultancy, training & development, coaching, interim resource and recruitment.

Our four core areas of strategic procurement, sustainability and risk management capability are:

  • Strategic review and commercial governance

  • Performance delivery and transition

  • Major project support including managing contractual risk

  • Learning & development in support of organisational aims.


For more information go to www.brianfarrington.com services
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