L4M3 Chapter 1 Notes

1.1: Documentation (ITTs, RfQs, Specifications, KPIs etc)

1.2: Legal issues (offer, acceptance, intention, consideration, capacity, battle of the forms)

1.3: Types of contractual agreements (one-offs, frameworks, service contracts, lease) 

 

 

1.1: Documentation

Parts of a contract: definitions

• Schedule: An attachment to the contract that will be updated frequently e.g. annual price lists

• Annex: An attachment that’s relevant to the contract but won’t be updated regularly

• Appendix: An attachment that might be useful context but is independent of the contract.

 

Estimate versus tender

• Estimate: a best guess that has no legal standing. This should be avoided in contracts

• Tender/quotation: this is a proper offer for a price.

 

Quotation versus tender

• Quotation: this is used when price is the only variable

• The specification and T&Cs may have been fixed through a framework agreement
• It would tend to be an uncomplicated procurement

• Tender: a more comprehensive document. There would likely be multiple variables above price

• The response format will be given by the buyer
• The bids will be sealed
• Contract terms will be specified in the Invitation to Tender (ITT)

 

Request for Quotation (RFQ) vs Invitation to Tender (ITT)

• RFQ: for lower-value contracts
• There would be a ready-made template, and can be filled out at speed
• A supplier response in the form of a quote constitutes an offer
• This could be a weaker audit trail potentially

• ITT: for more complicated contracts
• There would be a more formalised template used
• ITTs take longer to develop, and to respond to
• A supplier response to the tender constitutes an offer

 

A ‘tender waiver’ is used to skip the selection process for speed. This is considered a last resort, and is bad practice for procurement.

 

Specifications

This is normally included as an annex or schedule.

There are three types of specification:

• Performance specification: tied to how the product performs, usually using KPIs

• Conformance specification: tied to whether the product conforms to a defined standard / level of quality

• Outcome-focused specification: end goal focused as opposed to specifically tied to item performance

Make sure that specifications are clearly defined and relevant.

Configuration control is important throughout the procurement process.

1. The final version should be appended to the contract as a schedule
2. There should be measures in place to monitor compliance

A performance management framework may be used.

1. May contain KPIs
2. May define targets
3. Defines the consequences based on the results (could be positive or negative)

 

A contractual terms document contains:

• Articles: A summary of the agreement and the abbreviations to be used

• Recitals: Offers context leading into the contract, setting the background

• Contract particulars: Sets some overarching guidelines that other sections may reference

• Terms & Conditions (T&Cs): Contains the detailed set of terms and conditions

• Schedules: supplement to the main contract document with important information that will be updated. There are different types of these: can refer to pricing, payments etc

 

Distinguish between formal and informal contracts: formal will have documented evidence and detail, informal could just be verbal with not much evidence.

 

Contract variations can be set out in the schedule or an appendix, governing how a variation order can be sent. In other words, this allows for changes to the contract.

 

1.2 Legal issues

 

For a contract, there needs to be:

1. Offer
2. Acceptance
3. Intention
4. Consideration
5. Capacity

The UK has a common law legal system, using case law. Other countries have civil law, only using statutes and regulations.

 

Offer

Needs to be unequivocal and demonstrate an intention to be legally bound by the offer terms.

Offer is not necessarily tied to acceptance; both are separate and need to be in place for a contract.

An RFQ/ITT doesn’t constitute an offer to buy, but a response to one does constitute an offer to sell.

 

Invitation to Negotiate (ITN): is the seller inviting the buyer to give a price or start negotiations.

1. This does not constitute an offer.
2. A buyer’s response to the ITN is an offer
3. Examples of ITNs are advertisements or catalogues

An offer can end in different ways: there might be a time period that it’s valid for, the offer could be removed, rejected or a counter-offer given etc.

 

Acceptance

Acceptance depends firstly on the offer being valid. It needs to be unconditional too.

·        By accepting an offer, you agree to the T&Cs attached

·        Acceptance can happen in any way, but needs to be communicated

Acceptance is the mechanism by which a contract is created.

Mailbox rule: if a letter accepting the offer is posted, the contract is valid from the date of posting rather than when it arrives

1. This is only for acceptance
2. This is only as long as there’s evidence of posting and both parties knew that this would be the method of communication
3. Doesn’t apply in civil law countries
4. The Vienna Convention rejects it

Consideration

Something of value given is consideration.

Consideration can’t be just providing something that a party is already providing; it needs to be new.

Sufficient versus adequate consideration:

• Adequate: needs to be seen as reasonable and fair. Authorities won’t intervene here

• Sufficient: there is monetary value attached to the deal, and it can’t be too vague. It also needs to meet the condition in (1)

Rights of third parties: Set out in the Contract Act (1999). 3rd parties can enforce a contract if:

• The contract specifies this right to do so

• The contract says that there will be a benefit to this 3rd party

It’s now common for contracts to say there’s no benefit to 3rd parties, in order to avoid this.

 

Collateral warranty: This is where a subcontractor guarantees that it’ll fulfil its obligations to a third party.

1. This is only valid if it is a deed (an agreement to transfer something, without need for consideration in return)
2. A subcontractor will give this to the original purchaser as a guarantee

 

Intention

A contract needs to have an intent to create legal relations. Commercial agreements are by default assumed to, but domestic agreements aren’t (these aren’t considered ‘deals’)

Capacity

Someone who is the following won’t have capacity to contract:

• Under the influence of drugs or alcohol

• Undergoing mental health issues

• Under-age

If someone without capacity goes into a contract, it isn’t legally binding. But it can be for the other party.

• Commercial entities assumed to have capacity.

There used to be something in the UK called Ultra vires (things that a party doesn’t have the authority to contract into).

• These have been removed, due to perverse incentives: an organisation may go into a contract knowing they can’t be held to it

 

Battle of the forms

This is essentially a series of forms issued by the purchaser and supplier containing terms that don’t reconcile.

• I.e. offer -> counter -> counter etc

• Each party will attempt to provide terms that maximise their own benefit

Usually, anything that is stated explicitly (known as express terms) in a contract overrides things that are implicit (implied terms) or previously agreed.

• The exception to this is when terms are implied by relying on statute / law.

‘Full agreement’ clause: anything discussed before the final agreement is ignored.

• Courts will use ‘normal rules of interpretation’ to uphold this

• This is basically where words have their everyday meanings, unless a specific definition is written in the contract

Hierarchy of clauses: anything in the contract clauses take precedence over attached documents, such as schedules etc.

 

Oral contracting

Oral contracts are enforceable.

The issue is, where terms haven’t been written down, they are difficult to prove.

• For example, what did they agree on regarding the specification, or warranties?

• Both parties might ‘remember’ terms that favour them

Vienna Convention

This is a voluntary treaty under the UN. Countries under it are known as ‘contracting states’.

• It sets out a framework for international contracts. It only applies to goods, and business-to-business agreements.

• It covers the forming of a contract (i.e. offer, acceptance), not enforcing them.

• Countries can exclude terms outlined in the Vienna Convention, and so can the contracting parties. 

• Generally, Incoterms are used instead of the Vienna Convention to govern when risk is passed.

 

Misrepresentations

This is basically an intentional or unintentional statement that incentivised a party to enter into the contract.

-        It needs to have been intended to be a fact and have contributed to a party signing the contract

There are 3 types of misrepresentation:

• Innocent: Where the party genuinely didn’t mean to mislead, and it was beyond their control

• Negligent: Where the party should have been more careful in making the statement

• Fraudulent: A clear lie

General note: ‘Force majeure’: a party isn’t held liable to the contract, because it is unable to fulfil the terms due to an external factor that’s unforeseen i.e. ‘acts of God’.

 

 

1.3 Types of agreements

One-off

It’s a solitary agreement. This could be for buying one thing, or a basket of goods. It can be for goods, services or works.

Simple one-offs

• These may not have a contract: could just be invoice-based

• This may leave a lack of an audit trail, creating a battle of the forms

Complex one-offs

• There are complex things that may only be bought once e.g. the construction of a new facility

• Good procurement processes need to be followed; for example, rigorous selection of suppliers through tenders

 

Why would you use a one-off purchase?

• For simple one-offs, these may just be irregular spot purchases that need to be used immediately

• For complex one-offs, these may only be required once (for example, a construction)

• There may alternatively be a lack of funding for a pipeline, and hence the company can only purchase as a one-off

 

Even though one-offs can sometimes be less rigorous, contracts may still need to cover:

• Detailed specifications

• Quality standards

• Insurance

• Warranties / guarantees

 

Benefits of one-off purchases	Risks of one-off purchases
Things can be bought quickly, especially for simple products without formality.	It is more difficult to demonstrate Value for Money (VfM) since a competition is unlikely to have been followed.
Companies can be opportunistic and do a spot-purchase when market prices are low.	It can allow for the proliferation of ‘tail spend’: low value spend outside of contracts that is hard to monitor and control.
For suppliers, if the demand for a one-off purchase is due to urgency, they can demand a higher price.	A less collaborative approach with suppliers.

 

Framework agreements and arrangements

These aren’t contracts in and of themselves: they enable contracts to be formed under them. They’re used for requirements that are long-term and ongoing.

A framework arrangement has no legal standing: it’s informal.

• An organisation may set up an internal approved list of suppliers

• This may limit workers in the organisation to only buy from this approved supplier list

• There is no guarantee that items will be bought under this

Benefits of framework arrangements	Disadvantages of framework arrangements
Suppliers are known: there would be trust and an understanding of quality.	The list needs to be kept up-to-date, which can demand a lot of resource time.
Purchases can be quick because suppliers have been checked.	There’s no guarantee of work for suppliers.

 

A framework agreement has legal standing, but is not a contract.

• It is an agreement under which contracts can be formed. It sets out the T&Cs, allowing for quicker contracting

• There may be some T&Cs that need to be determined when actually contracting

• The framework may set out an understanding for how price will be calculated

• For a supplier to get onto a framework agreement, they’ll need to go through a tendering process / negotiate

• Contracts issued from this are called call-offs

• A proper framework agreement is a ‘closed system’: people can’t join it after it is agreed

 

Things involved in the agreement would be:

• The mechanism by which call-offs are done e.g. competition or direct award

• How long the agreement will last for

• Specifications

• The main T&Cs

 

Types of framework agreements:

• One-to-one (one buyer and supplier)

• One-to-many (more than one supplier)

• Many-to-one (more than one purchaser)

• Many-to-many

 

Direct call-off

• The process for how a supplier is chosen for a direct call-off (i.e. no competition) needs to be defined in the framework

• There may have been rankings made when suppliers get onto a framework, and direct call-offs could be made on this basis

• It’s more likely that suppliers will be chosen based on past experience or performance, or used in rotation

 

Mini-competition

• This is a shortened version of a tender, within a framework agreement

• It might be price-only: other terms may have been locked into the framework

• This allows for more tailoring of price to the work needing to be done, and ensures a competitive element

 

Call-offs

Call-off / term contract is time-based rather than tied to the purchase of something.

• This could be used for stock procurements: things that will be bought regularly

• All terms are agreed at the start (price too)

• The call-off is the order put in place based on the contract

• There doesn’t need to be much information in the call-off: could just be the amount and where the items need to be collected from

• Suppliers are obligated to fulfil all orders placed under this type of contract

 

Benefits of term contracts	Risks of term contracts
Terms are locked down, allowing for more rapid and cost-effective contracting.	Terms being locked down could mean things become outdated.
The purchaser has a safe method of accessing the goods purchased without fail.	Terms being locked down, including price, could mean that market fluctuations aren’t taken into account.
This could facilitate greater trust and collaboration.

 

Services contracts (compared to goods and works)

Location

• Location could be more important for services, if the service provided is physical. It would be cheaper to contract locally, for example if it is a cleaning service

• Works are a type of services contract (e.g. construction services), so this would still apply

• For goods, location may not matter as much since they could be transported worldwide

Conflict of interest

• This could be a particular risk for services contracts. For example, providing consulting services to an audit client would be a conflict for audit firms

• Contract clauses need to clearly outline how to avoid these scenarios

 

Specialised workforce

• This could be a particular necessity for service contracts, where the people delivering the service make a big difference (there is higher differentiation of output). People might be chosen based on their reputation and past experience

• Goods, in contrast, may be produced to conformance standards and the workforce isn’t client-facing, so there is less differentiation provided by the workers

Regulations

• Regulations vary depending on type: the Vienna Convention only applies to goods

• For the public sector, there is a lower financial threshold for service contracts to fall under stricter regulations. This means these will have to be managed more carefully

 

Lease and hiring contracts

Generally, hire refers to short-term contracts and leasing is for longer-term contracts. These essentially mean the same thing in their effect.

• There is no transfer of ownership in this case: the item is just rented

• This doesn’t fall under the Vienna Convention

• You might take terms from a service contract for a contract for hire

The benefits / risks of leasing versus buying was discussed in L4M1. Things to bear in mind:

• There needs to be a lease versus buy decision, weighing up the pros and cons (such as lower upfront cost but higher total cost etc)

• What risks are apportioned between the two parties for management of the item leased?

• Is maintenance included in the contract?

• Who takes ownership at the end of the contract? E.g. hire purchase agreements allow for the lessee to take ownership after the lease ends

 

Hire purchase: The item is hired and at the end of the hire period, is transferred to the party.

• There may be a buy option, or it may be an automatic transfer

• Under hire purchase, it’s a contract for hire until the final payment (it’s then a purchase)