Chapter 3.2 Flashcards
Recognise examples of contractual terms typically incorporated into contracts that are created with external organisations
Liability
Being legally responsible for something
Strict liability
A standard of liability under which a person is legally responsible for the consequences of an activity, even in the absence of fault or criminal intent on the part of the person
Indemnity
A security or protection against loss, usually by way of financial recompense
Name 7 things to consider in respect of liability and indemnity clauses
- Liquidated damages
- Exclusion of liability (e.g. force majeure)
- Negligence of the other party
- Indemnity
- Financial limit of indemnity
- Limiting scope of liability
- Transfer of liability - often called transfer of risk
How may contract terms seek to limit liability
By placing a financial limit on indemnity levels
Insurance
An arrangement where a fee is paid to one party (the insurance company) so that it will accept the risk and meet any costs that would normally fall to the person who has the legal liability for them. Effectively the risk is transferred from the person with the legal liability to the insurer
Name 5 types of insurance cover referenced in contracts
- Employers liability
- Public/products liability
- Professional indemnity cover
- Goods in transit cover
- Works/buildings
What is employers liability
A legal requirement for any company that employs staff, this covers the duty of care owed by an employer to those staff; for example, compensation for injury suffered in the course of their employment
What is public/products liability
sometimes known as ‘third party cover’, this relates to any injury, loss or damage caused by the company’s products, or on its premises, or as a result of the actions of its personnel
What is professional indemnity cover
This relates to losses that occur as a result of poor or negligent advice that is given in a professional capacity
What is goods in transit cover
This is for damage caused during the delivery process
What is works/buildings insurance
This is cover for partially completed building works, or the buildings in which they are being carried out
Name 9 things to remember in respect of insurance clauses
- Employers liability
- Public/products liability
- Professional indemnity insurance (PII) or PI cover
- Goods in transit
- Works/buildings in which works are being carried out
- Level of cover required
- Aggregate or ‘each and every’
- Scope of cover
- Audit-ability of insurance
What is insurance used to do
To make certain that the offending party can meet the financial costs of its liability in the event of a claim
How can you make sure subcontractors are appropriately insured?
Use contract terms
Subcontract
A contract that sits below, is directly linked to and is partly governed by a higher contract to deliver part of the requirements of that higher contract. There can be several layers if sub and sub-contractors
What does it mean when talking about a subcontract?
One that sits underneath a higher one, is directly related to it and often partially governed by it
What are layers of a contract often referred to as?
‘tiers’
Name 3 reasons why a purchaser will want to control the suppliers subcontracting
- Supply chain
- Contract terms
- Liability
Assignment
A situation where the responsibility for the delivery of the contract is passed to a third party
Novation
The transfer of both burdens and benefits of a contract; the old contract is destroyed and a new one created
Name 5 things to consider in respect of clauses relating to subcontractors
- Do you wish to permit subcontracting at all?
- How much control over the selection of subcontractors do you need?
- What influence over subcontract terms do you want?
- Ensure that the main contractor retains liability
- Beware the impact on price
What should contract terms be used to do in relation to subcontracting
To control subcontracting, including whether it is permitted at all and any specific terms that may be necessary in the subcontracts regarding payment terms, insurance etc
Guarantee
A commitment from the seller (or original equipment manufacturer) that should a product (or in some instances, a service) not meet a stated quality in a specified period then it will be repaired, replaced or refunded. There are likely to be terms and conditions. The guarantee is usually written
Does the guarantee outlive the contract?
Yes
Name 3 things to consider in respect of guarantees
- Do you need a guarantee
- How long does the guarantee need to be
- What needs to be included in the guarantee
Liquidated damages
An agreed sum of money which is payable by one party to another in the event that they breach a term in a contract; the damages must be a genuine estimate before the breach occurs of any consequences from a financial viewpoint
Damages
The legal term for financial payments to compensate for a loss of some kind.
Are liquidated damages commonly used in respect of late delivery?
No
Are liquidated damages intended to be compensation or a penalty?
Compensation
In terms of numbers, what must liquidated damages be?
A genuine pre-estimate of loss
Name 4 things to consider in respect of liquidated damages
- What breaches of contract should carry liquidated damages
- Estimating the sum
- Tying the figure to the degree of lateness
- Process for claiming damages
Romalpa Clause
A contractual clause that allows a supplier to claim back goods to recover a debt
Right of set-off
A very unusual option to allow a purchaser to deduct debts that are owed under once contract from payments that are due on a different contract
What can use in seeking to impose or encourage ethical sourcing in the supply chain?
Contract terms - but they must be supported by a right of audit to see what actually happens on the ground
For any business to survive, what are the two factors of its reputation that are critical?
- What investors think
- What its consumers of its product or service think
What is likely to happen if a business is tarnished by association with poor labour standards? (2)
- Investors will not want to invest so the business capital will become strained
- Purchasers will not want to buy the product so sales will diminish
What is the net impact of investors not wanting to invest or consumers not buying due to being tarnished by association with poor labour standards?
A fall in the share price which undermines confidence in the business further
In law, what is the first duty of a limited company?
It’s not to the society in which it operates, it is to its shareholders
How have CIPS shown that they are committed to ethical sourcing and ethical contracting
By introducing its own ethics test, which all members are encouraged to take and all Fellows and Chartered Professional members are required to renew on an annual basis
International Labour Organisation (ILO)
A United Nations organisation uniting governments, employers and workers with the common goal of improving labour standards for all
Debt-bondage
A form of modern slavery where a person who cannot repay a debt is forced to work as a slave as repayment, usually with no hope of ever repaying the debt
What do labour standards refer to?
The terms and conditions of employment of the workforce, particularly the non-professional workforce who are generally the lowest paid and most vulnerable members of an organisations human resource
How many members does the ILO have?
187
Name the 7 UN countries that are not members of the ILO
- Andorra
- Bhutan
- Liechtenstein
- Micronesia
- Monaco
- Nauru
- North Korea
What do the 4 standards laid out by the ILO cover?
- The right of workers to associate freely and bargain collectively
- The end of forced and compulsory labour
- The end of child labour
- The end of unfair discrimination among workers on the basis of ethnicity, national origin, religion, gender, gender identity, sexual orientation or physical or mental disability
Upstream
The supply flow of raw materials, components, parts etc, needed for production
What 2 things must procurement professionals do in regards to workers rights
- As a minimum, apply the national laws of the state in which they operate and the laws of any other state that affects the contract, subcontracts and upstream supply chains
- Wherever possible to seek to encourage higher standards by means of commercial negotiation
Name an enhanced standard many countries may have
Minimum wage
Environmental, social and governance (ESG)
A measurable sustainability assessment, similar to CSR but more measurable. Financial performance remains key and so can create a sustainable credit rating for the organisation and investors
At what stage of the contract should you consider ESG?
All stages of the contract
Define ethical sourcing
Ensuring the products being sourced are obtained in a responsible and sustainable way, that the workers involved in making them are safe and treated fairly and that environmental and social impacts are taken into consideration
What three things must be considered when embedding ESG concepts into commercial contracts
- Things the supplier will do directly themselves
- Things that will be done via subcontract arrangements
- Indirect inputs
Modern slavery
The ‘ownership’ and exploitation of humans in a workplace
Name 6 things to consider in respect of labour standards, ESG and ethical sourcing
- Labour standards
- Environmental impacts
- Social impacts
- Fraud, bribery and corruption
- Subcontracting
- Upstream impacts
Downstream
The supply chain that the organisation feeds in to from product to end user
Conflict minerals
Metals and minerals sourced from areas where their mining is used to finance armed conflict and is linked to human rights abuses and corruption. The most commonly recognised ones are tin, tungsten, tantalum and gold, although others include cobalt and coltan which are commonly used in electronics and are very highly priced. Several states globally have been identified by the UN as exploiting the mining of resources using slavery and child labour, and the subsequent use of the revenues from these operations to fund conflict
Is ESG measurable?
Yes
How can you measure ESG
Include KPIs to measure ESG requirements to ensure that they are being met and to identify any gaps or areas for improvement
Globally harmonised system for the classification and labelling of chemicals (GHS)
An international standard for labelling hazardous substance
Name 5 reasons for the increased use of environmental, social and governance criteria (ESG)
- Ethics, labour conditions, bribery and corruption
- Customer-led, changing demands, willingness to pay premium prices, brand reputation & boycotts and protests
3.Stakeholder pressures, international agreements, government policies - Proposed regulations, internal policies and marketing strategies, funding agreements
- Economic incentives, cash savings, process efficiencies & skills shortage
Name 4 driving forces of ESG
- Regulation
- Consumer and other stakeholder pressure
- More informed stakeholders
- Cost savings from waste reduction
Social value
The output from a contract that benefits society at large rather than the purchaser or end user
Level the playing field
Take action to remove an advantage or disadvantage that only applies to some parties
What belief does the concept of added value suggest?
That you are getting something for nothing - this is naive
Name the 3 ways a supplier can cover the costs associated with ESG criteria
- Treating it as a general business cost and increasing the overheads element of price
- Increasing the price of goods or services being delivered
- Absorbing the cost and reducing the profit margin
Name 2 ways of monitoring ESG requirements
- Audits
- Site inspection
What should purchasers seek in relation to ESG
Disclosure of costs associated with ESG criteria to ensure that costs are not disproportionate to gains
Name 5 ways of incorporating the ESG criteria into the specification
- Use international standards where these exist
- Ensure that the inclusion of the criteria does not create conflict with other aspects of the specification
- If different aspects are specified by reference to standards, ensure that the standards do not themselves create conflicts
- Include an order of precedence for standards if there are conflicts
- Be clear about whether the requirement is a minimum standard, a mandatory level, or an aspiration or target. This can be important in determining whether failure to meet the standard would consitute a fundamental breach of contract
Name 4 examples of ESG being increasingly encouraged in public sector contracting
- UK: The Public Services (Social Value) Act 2012
- Australia: The state of queensland, australias department of housing and public works social procurement guide
- South Africa: Preferential Procurement Policy Framework Act No.5 of 2000
- USA: Socioeconomic Programs for Small Businesses
