Writing Contracts

Definition

A contract is a legally binding agreement between two or more parties whereby one of them promises to do some act in return for the other party doing some act. An agreement, enforceable at law, entered into freely between a willing procuring entity and a willing supplier.  This can take the form of a written document, a verbal agreement or implied by conduct.

Legal Background

In order for a contract to be created there are 6 principal steps in the process:

These key elements must be present to form a legally binding contract. Additionally, the subject of the contract must itself be legal i.e. not for an illegal product or commodity e.g. illegal drugs.

Rationale

A well written contract provides a firm basis for a successful commercial relationship between procuring entity and supplier. It sets out the obligations and responsibilities of each party and provides the framework upon which all contractual activities are based.

A good quality contract encourages good management processes and provides the basic structure upon which the contract management system operates. Frequently, this legal document is only referred to when normal management techniques are seen to have failed.

Composition of the contract document

To develop a formal contract requires a significant investment in time by both parties to ensure that the contract fairly reflects all the obligations and responsibilities of both parties and fulfils the overall objective of the procurement activity.

Each contract will be different depending on the nature of the goods, works or services to be provided; for example, the contract associated with the provision of medical supplies will differ markedly from a service level agreement covering the provision of IT services.

The two principal elements of a contract are:

                        Specifications - technical aspects

                        Terms & conditions of contract - commercial/legal aspects

There are two types of terms within contracts:

• Express terms
• Implied terms

Express terms are terms negotiated between the two parties and created within the contract, rather than being automatically included. These terms are spelled out in the contract. Examples of express terms include:

• price/price adjustment
• quality standards
• delivery schedules
• quantity
• acceptance procedure
• termination clause
• applicable laws for international contracts
• arbitration process

An express term in a contract cannot override a term imposed by law.

Implied terms do not need to be spelled out in the contract because they are always present in a contract and are set by national legislation and regulation.

It is essential that the terms and conditions of a contract fully reflect the scope of work and the obligations and liabilities of each party.[1]

Conditions and warranties

Contracts have primary and secondary terms:

• Primary terms are those relating to the goods and services being supplied;
• Secondary terms are those that relate to payment, damages and failure to perform;

Conditions are primary terms of fundamental importance to the contract (core terms). If a condition is infringed, the injured party may have access to two remedies:

• termination of the contract; and/or
• a claim for damages (losses incurred). 

Warranties are secondary terms and of less importance to the contract. If a warranty is infringed, it only provides the injured party with one remedy:

• a claim for damages (losses incurred).

Drafting the contract

It is unusual for contracts to be drafted from scratch; there are usually model forms of contract, for the different types of procurement, that have been developed by a procurement organisation or procurement regime that can be used as the basis for negotiations. These standard form draft contracts have been legally approved and are normally issued to potential bidders with the tender documents. The use of such contract forms facilitates development of the final version and is time and cost effective.

Issuing the draft contract with the invitation to tender package, ensures that all potential bidders are aware of the terms and conditions which they will be expected to sign up to and demonstrates equality and fairness in this part of the tender process.

The importance of the pre-contract stage is often underestimated but it is vital to invest time and effort at this point in order to clarify the respective roles and responsibilities, facilitate the drafting process and minimise the risk of future misunderstandings. If post-tender negotiation on terms and conditions take place this will ensure that the existing groundwork is in place.

The key objective to achieve in writing a contract is to ensure that all clauses and conditions are written in precise and very clear language that leaves no room for misinterpretation by either party; preferably using succinct sentences that are easy to understand. Where there are complex specifications for example, these should be attached in full and national and international standards quoted where appropriate.

Practice and procedure in drawing up complex contracts will also vary from one sector to another. A Ministry of Health contract for the provision of drugs and medicine will not only include the approved technical specification but will also include other requirements such as:

• batch number and production date
• test/approval details
• shelf life
• packaging requirements
• storage and transport requirements (refrigeration)
• disposal methodology

Where a contract has to be drafted from first principles, or considerably customised from the existing model form, heads of agreement are often established as a first step in writing the contract. These should avoid prejudicing formal contract negotiations but will provide the basis to facilitate drafting of the final version of the contract.

Contract amendments

It is good practice to put the specific details of the contractual relationship into schedules. This allows for flexibility, as schedules can easily be amended to reflect the changing requirements of the contract. The parties must agree any amendments using a documented change management process and amendments are formalised on appendices to the contract. An example of this is when the delivery schedule or point of delivery is changed for a specific vaccine for an immunisation campaign.

To ensure that amendments to contract are effective, clauses devoted to change control procedures must be included in the contract. These clauses should always be clear and concise.

It is important that the contract clearly demonstrates who has authority to make changes to the contract on behalf of the procuring entity and who has the authority to accept or reject the amendment for the supplier.

Disputes

Fortunately, only a small percentage of contract disputes in procurement cases ever go to litigation, often because litigation is a lengthy and expensive process and usually both parties have an interest in continuing their supply relationship. This should be viewed as a last resort and reliance placed upon the contract management system and the quality of the appointed staff to find and agree a workable resolution to the issue. Ideally, the procurement specialist will be able to highlight potential issues in advance and initiate early remedial action.

Alternative courses of action to resolve disputes are:

Mediation - this method should be used wherever possible as this allows the parties to the contract to maintain control over the solution to the dispute.

Adjudication - should be considered as an alternative as its aim is to resolve disputed issues in order to enable work to continue.

Arbitration - is a formal process and the arbitrator’s decision is legally binding on both parties. It is less expensive than formal litigation but may be adversarial and will affect supply relationships.

It is critical that dispute resolution clauses are included in contracts and the proposed methodologies and potential dispute resolution bodies identified.

Benefits

Contract documents, that have been carefully and correctly drafted, provide a sound basis not only for successful relationships between the parties but will also serve as a solid foundation for effective procurement management processes. They provide:

• an accurate record of what has been agreed
• clarification of the rights of the procuring entity vis a vis the supplier
• identification of the procuring entity’s obligations to the supplier and vice versa
• in case of dispute, a clear record of the bases upon which the contract was established

[1]  For more information see Terms & Conditions in the Sourcing section of the HPA library