L4M3 Commercial Contracting Questions and Answers

SFO issued an RFQ with defined terms and condition and detailed specification. This RFQ can be considered as an invitation to treat. Vogon's quotation is an answer to the purchaser's RFQ and is an offer to SFO. The contract come to life at the time Vogon received the notification from SFO senior management.

The strike may be a force majeur event, depending on the contract particular clauses and jurisdiction. In common law countries, force majeur is applicable as an exclusion of liability only if the contract allows it. In many civil law countries, force majeur is an implied term. But in every jurisdiction, force majeur is only a reason for excluding liability for non-performance of a contract. In other words, the non-performance party is not liable for any breach if force majeur event occurs but the event does not exclude the breach.

LO 1, AC 1.2

Service level agreement often sets out the minimum quality standards of the services provided, remedies if that standards are not met, consequences if the targets are exceeded. Penalty clauses and service credits are remedies that are often used in conjunction with service level agreement to ensure the performance and to compensate the purchaser if targets are not met.

A Collateral Warranty is a contract under which a consultant, a building contractor or a sub- contractor warrants to a third party that is has fulfilled its obligations under its professional appointment, building contract or sub-contract. The purpose of a Collateral Warranty is to give a third party, who is not a party to the original contract, rights to enforce that original contract.

In this case, IBM is the subcontractor, then purchaser can use collateral warranty deed to bind them.

Gainshare is an incentive for cost control

Liquidated damage is common type of disincentive for late completion

Service credit is a remedy for not achieving targets set out in an SLA

Fixed bonus payment is an incentive for early completion

Advantages and Disadvantages of using model form contracts.

Model form contracts save a lot of time and money. They are written by industry experts and the buyers and suppliers both understand what is included in the contract.

They are mainly used in Construction and term maintenance contacts. Typical ones are JCT and NEC.

Without the use of model form contracts the buyer and supplier will take a long time to write the terms, negotiate and finalise the contract.

This is time and money wasted.

However, model form contracts require buyers and suppliers to have training so you understand them.

Finally, if you are a buyer in a powerful position you cannot exploit that with a model form contract as these are written for mutual benefit.

Audit trail is a chronological record the sequence of events connected to a given transaction, such as a purchase of raw materials, payroll disbursements, or a detailed financial statement. The record includes all the source documents connected to the transaction, providing context and clarity in the event a review is required. The more comprehensive the documentation, the more effective the audit trail is when used to create financial reports, verify information, and ensure compliance while eliminating fraud.

In the scenario, the procurement team gets the quotation from phone calls and emails which have weak audit trails and lack of transparency. One solution may be increasing the use of e-procurement system.

A standard is a document that sets out requirements for a specific item, material, component, system or service, or describes in detail a particular method or procedure. Standards are established by consensus and approved by recognized standardization bodies.

There are several different types of standards. Some of the most commonly-used standards set out the requirements that a particular kind of product, service or process must fulfil, in order to establish that it is ‘fit for purpose’. Other types of standard relate to methods of testing, terminology and definitions, information requirements, or the compatibility of connections.

Standards provide individuals, businesses and all kinds of organizations with a common basis for mutual understanding. They are especially useful for communication, measurement, commerce and manufacturing.

Standards make trade easier by ensuring compatibility and interoperability of components, products and services. They bring benefits to businesses and consumers in terms of reducing costs, enhancing performance and improving safety.

Standards are voluntary, which means that businesses and other organizations are not legally obliged to apply them. However, in certain cases standards may facilitate compliance with legal requirements, such as those contained in European directives and regulations.

Standards can be made by a company, a standard organisation (such as ISO or BSI) or regulatory bodies.

KPIs are used to monitor supplier's performance. They can be qualitative or quantitative. Of course, service providers can be monitored by quantitative KPIs regarding the outcome achieved (such as uptime in IT contracts), timeliness of deliveries (such as in construction contracts)...

- Strict liability, sometimes called absolute liability, is the legal responsibility for damages, or injury, even if the person found strictly liable was not at fault or negligent. Strict liability has been applied to certain activities in tort, such as holding an employer absolutely liable for the torts of her employees, but today it is most commonly associated with defectively manufactured products. In addition, for reasons of public policy, certain activities may be conducted only if the person conducting them is willing to insure others against the harm that results from the risks the activities create.

- Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle.

- Non-current liabilities, also called long-term liabilities or long-term debts, are long-term financial obligations listed on a company’s balance sheet

- Contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event.

A revocation of offer is the withdrawal of a previous offer to engage in some sort of legally binding contract. The previous offer had to have been such that it would have immediately become legally binding if the other party had formally agreed to it.

A core ruling defining revocation of offers was established by Payne v. Cave. This case established that neither party is bound to an agreement until an offer has been made by one and formally accepted by the other.

If an offer has been made, the offering party has a right to withdraw it up to formal acceptance by the offeree. Revocation basically serves as formal, legally verifiable notice that a withdrawal was made, and it's valid so long as it is communicated to the offeree before they accept.

The case of Byrne v. Van Tienhoven supports this by establishing that the withdrawal of an offer by telegram is only valid if the telegram is received before the offer is accepted. The case of Dickinson v. Dodds further establishes that the party making the offer can communicate the revocation through a third party.

Quantum meruit means "the amount he deserves" or "as much as he has earned". In most cases it denotes a claim for a reasonable sum in respect of services or goods supplied to the defendant.

An action in quantum meruit is available to recover money for services or goods supplied to a defendant in circumstances where the claimant is not recompensed by performing his obligations or supplying the goods. The claimant must usually show that the defendant expressly or impliedly requested or freely accepted the services or goods in question. Depending on the facts, the claimant might find it difficult to prove how much the claimant is entitled to receive under the principle of quantum meruit.

A claim for quantum meruit cannot arise if the parties have a contract to pay an agreed sum. In such circumstances, the parties' relationship is governed by the law of contract. However, a claim for quantum meruit may arise where the parties:

- Have not agreed a contract, or there is a so-called quasi-contract. For example, the parties may have agreed some of the contractual terms, but may have failed to reach an agreement on an essential term, such as price.

- Have not fixed a price for the services or goods supplied.

- Have an agreement to pay a reasonable sum for the services or goods supplied.

- Have agreed a scope of work under the original contract and the work carried out falls outside that scope.

This scenario is in fact based on a famous case law: Dunlop Pneumatic Tyre Company v New Garage & Motor co [1915] AC 79. In this case law, the House of Lords identified the clause as liquidated damages, and therefore enforceable.

However, if this case had happened in 2015 or afterwards, there would be some legal issues:

- The price agreement is prohibited by Competition Act 1998

- If the agreement is allowed by Competition Act, as in the case Cavendish Square Holding BV (Appellant) v Talal El Makdessi (Respondent), the clause can also be identified as a penalty and it is still enforceable.

Lead time is the amount of time that passes from the start of a process until its conclusion. In procurement, lead time can be understood as the amount of time that passes from placing an order until the delivery.

In the scenario, the contract requires the supplier to make a delivery within 3 days since the order. This contract can only be amended with written consent from both parties. Therefore, there is no ground for shortening the lead time to 1 day because the new lead time is only the request of buyer. Then the supplier still makes delivery within agreed lead time.

LO 1, AC 1.1

Service level agreement often sets out the minimum quality standards of the services provided, remedies if that standards are not met, consequences if the targets are exceeded. Penalty clauses and service credits are remedies that are often used in conjunction with service level agreement to ensure the performance and to compensate the purchaser if targets are not met.

Without further explanation, a schedule may be deemed to form an integral part of the obligations of either or both parties. Obviously, the scope or binding nature of such schedule depends on the way it is referred to in the obligatory language of the main agreement. Accordingly, merely attaching the general terms and conditions of sale without explaining to which part of the sale they apply or which provisions apply does not subject a sale pursuant to the body text of the agreement to those general terms and conditions.

Subcontracting is the practice of assigning, or outsourcing, part of the obligations and tasks under a contract to another party known as a subcontractor.

When a party takes on a contractual obligation, they are legally required to perform the obligation.

That same contracting party is still entitled to subcontract out the work to another service provider, unless the contract:

- is a contract for personal services, such an employment contract

- contains an express term preventing subcontracting out the work, or an implied term

Subcontracting clauses are written to control whether the contractor is entitled to subcontract, and how purchaser shall control that subcontracting process.

There are a number of ways for an offer to be terminated. They are events that may occur after an offer has been made which bring it to an end so that it can no longer be accepted. An offer is terminated in the following circumstances:

1. Revocation

2. Rejection

3. Lapse of time

4. Conditional Offer (or Failure of Conditionality)

5. Operation of law

6. Death

7. Acceptance

8. Illegality

Social and environmental criteria are increasingly encouraged in public sector contracting. In the UK, The Public Services (Social Value) Act 2012 encourages public organising to apply social and environmental criteria in contract.

The changes are made to the prime contract. They are also signed and approved by both parties. These changes are known as amendment (variation) to the contract. A contract amendment allows the parties to make a mutually agreed-upon change to an existing contract. An amendment can add to an existing contract, delete from it, or change parts of it. The original contract remains in place, only with some terms altered by way of the amendment.

There are 3 types of KPI measure:

- Binary KPIs

- Quantitative KPIs (or numerical)

- Qualitative KPIs

User satisfaction is subjective, therefore, using qualitative assessment is the best answer.

If a service level agreement is used as a schedule to a contract, it will generally have the following contents:

- Service definitions. If the service information is provided by the specification, SLA should only refer to the specification to avoid any inconsistencies.

- Details on how to measure KPIs, who will measure KPIs

- Minimum requirements or targets

- Remedies if the minimum requirements are not met

Since SLA often lists out the KPI targets, consequences for not meeting the KPI targets and remedies to situation of poor performance, it is a part of performance management.

Product Liability Insurance is a form of general liability insurance meant to protect a business from financial and legal consequences as a result of bodily injury or property damage due to the use of the business’s sold goods or products. Situations that are typically covered by Product Liability Insurance may include:

- A customer harms herself because of the faulty packaging on one of your products

- A drapery set that a customer purchased from your business was highly flammable and caught on fire, eventually damaging her entire kitchen

- A customer with a severe allergy finds trace amounts of tree nuts in your homemade gourmet muffins

- A homemade house cleaner that you sell damaged one of your customer’s entire hardwood floor

- A customer becomes sick with food poisoning after eating old shellfish at your restaurant, goes to the hospital, and incurs medical costs caused by your contaminated food products

- A customer’s pet becomes ill from ingesting some lining in a pet toy product that you sell

In the scenario above, the supermarket is purchasing and reselling house cleaner, which can be covered by product liability insurance.

Public liability insurance is a type of business insurance that covers the cost of claims made by the public that happen in connection with the business activities.

Professional indemnity (PI) insurance is a commercial policy designed to protect business owners, freelancers and the self-employed if clients claim a service is inadequate.

Standard terms and conditions are set of terms that is prepared by an organisation. These terms can become the governing terms in low-value, low-risk transactions (or Routine items according to Kraljic's portfolio model). They can be a reference when negotiating for more important contract.

Developing and using generic specifications is as import in the sustainable procurement process as it is in the traditional procurement process. During this stage, human/labour rights and environmental performance criteria should be translated into specifications that meet specific requirements of the specified outcome, desired by the procurement action.

The specification stage is key to all types of contract. Building in environmental and social considerations at this early stage, provides a clear indication to suppliers that sustainability is important to the UN organization. Consider available alternatives which are less environmentally and socially damaging. Consider all the phases of a product’s life cycle (e.g. production, transportation, maintenance, disposal, etc) when determining its cost and environmental impact. Assess the overall environmental and social integrity of suppliers by looking at their policies and practices.

Specifications which are output-based rather than input-based can increase supplier innovation, reduce waste and minimise harmful social and environmental impacts.

The difference between cost and price is profit. According to Michael E. Porter, the profitability of an industry is shaped by five forces:

1. Competition in the industry

2. Potential of new entrants into the industry

3. Power of suppliers

4. Power of customers

5. Threat of substitute products

The QUESTION NO: only mentions external factor, then business strategy is not accepted.