PREPARING THE

CONTRACTS
SCM LEC NO. 1
(Slides 20)

AIM
Understand the buyers & sellers main obligations under a
contract.
Know when to use what type of contract
Be aware of key terms & conditions
Prepare your own contract
Identify what makes a good contrcat.

Describe the major issues relating to preparing a contract in

the area of international purchasing and supply.
Outline some problems frequently encountered in such contracts.

Contd..

AIM
Describe the main features of the worlds three principal legal
systems.
Identify the specific points to take into account with regard to
international contracting.
Outline the main links between the nature of the contract and the
type of supplier-buyer relationship to be developed.
Describe the main issues to consider regarding contracting in the
digital age.

What is a
Contract
To be valid
a contract must fulfil the following requirements:
An offer
An acceptance
The contractual capacity of the parties
A consideration on something of value
A legally binding relationship

Sellers obligations
Deliver the goods
Deliver the related documents
Transfer the title of ownership
Assure conformity
Act in good faith & fairly
Offer civil liability

Buyers obligations
Accept the goods or services
Pay the agreed price
Act in good faith & fairly
Accept civil liability

This lecture will cover

The Context for Preparing the Contract

Spot and Regular Trading Contracts

Call-Off and Fixed Contracts

Partnership & Joint Ventures Contracts

Transfer of Risk and Incoterms

Methods of Payment

Contract Default & How to Avoid it

Applicable Law & Settlement of Disputes

Major issues in preparing the

contract relate to:
What you want to obtain
What you want to avoid

The options you have to protect yourself if

things go wrong

What you want to include or exclude in the

contract
Which clauses to use

What you want to obtain

type of purchase (recurring needs or
not, number of suppliers)

What you want to avoid

inventory levels, stockouts, changes of suppliers

The options you have to protect

yourself if things go wrong
short contracts, performance and completion bonds, dispute resolution
clauses...

ITC

What to include or exclude in the

contract
Trends towards outsourcing and new types of
influence the type of contract

relationships will

In a global environment not all terms have the same meaning...

Increased use of the Internet

Which clauses to use

Develop your own Clause Book

ITC

Frequent problems

ITC

Applicable law
Bidding strategy
Change of ownership/management
Changed circumstances
Currency fluctuations & foreign exchange
Delays
Delivery
Different business cultures
Dominance
Lack of specificity
Languages

Different legal systems

The Common Law countries:
Commonwealth countries in the Caribbean,
Africa, Asia and the Pacific
North America (except Quebec in Canada and
the state of Louisiana in the USA)
Australia, New Zealand, Israel
The wording of the contract determines:

ITC

the contractual obligations

whether there was a breach or not
who is liable
the relief to be granted

Different legal systems

The Civil Law countries:
Europe except United Kingdom .
Francophone and lusophone Africa
Latin America, Quebec and State of Louisiana
Northern Africa, Middle East, Turkey, Iran,
Afghanistan
China, Japan and Korea

Background laws and codes of obligations as well as documents other than

the contract itself play an important role

ITC

Different legal systems

The Muslim Law countries:
Nothern Africa, Middle East, Iran,
Afghanistan...
The role of Sharia and non Sharia law varies from country to
country
In many cases, Civil or Common law traditions have an influence as
well

ITC

Consequences of different
systems

The parties have to consciously select

which law should apply - if not

Neither party may have a full

understanding of what is intended in the
contract
Risk for misinterpretations

What makes a good

contract?
Know
what you want, what you want to avoid &
your options if things go wrong
Know your supplier
Aim at win-win
Dont accept unrealistic promises
Avoid ambiguous drafting
Keep technology in mind
Keep intellectual & industrial property in mind
Have a clear dispute resolution clause
Have a clear termination clause
Keep culture in mind

Supply strategy and the

contract
The
supplier-buyer relationship continuum
Spot
purchas
e

Regular
trading

Trust based only on the

contract
No personal relationship

Call-off
contract
s

Fixed
contract
s

Partner
-ship

Trust based on the contract

and on suppliers
competence

Price orientated

Limited personal
relationship

Short term

Price and service orientated

Supplier performance
measured on the basis of Medium term
non-compliance
Supplier performance
measured on the basis of
non-compliance and
through supplier evaluation

Joint
ventur
es

Internal
provisio
n

Trust based on goodwill

and co-operation
Strong personal
relationship
Total cost of ownership
orientated
Long term
Buyers and suppliers
measure each others
performance
and jointly develop
remedial actions

Some key contractual

issues

Supplier solvency:
payment after delivery

if weak, use guarantees or make

If many uncertainties:
reduce risks

Complexity:

use milestone linked payments to

seek legal advice if needed

When needs are difficult to define:

consulting contracts in man days

After ending:

use

state clearly what will happen (e.g., with

updates, reconfiguring of equipment,future additions, ...

Contracting in an online
environment:
Prepare a draft online but store a
paper version
Signatures: print and sign or
digital signature
Have a general framework
agreement on paper on how to
contract online
ITC

The contract and the Private

Law
Contract (Fish)
+ Private Law (Water)
__________________
= The total Agreement

THANK YOU