The importance of knowing if your commercial arrangements are inside or outside of your contract.


The importance of knowing if your commercial arrangements are inside or outside of your contract.

Anyone carrying out a contract review will have read, and possibly skimmed over, the ‘Entire Agreement’ clause. The effect of this clause is that only those matters set out or incorporated into the contract, form part of it. Any other process or document (unless a separate contract) dealt with elsewhere, won’t normally be considered in the event of a dispute arising out of a purported breach of contract.

Consider the very useful processes for calculating costs - Target Cost Estimates and Cost Time Resources, often used in connection with service agreements and other contracts. Parties should be aware that the principles agreed in these processes and the calculations reached, may be immaterial if the process itself is not part of the contract. I have discovered this to be the case on a number of occasions.

These processes and others,such as KPI performance schemes, often operate outside the contract. They tend to be agreed at project level and after the main contract is signed. Numerous supporting contract documents are also often agreed at this point and at project level.

To ensure these mechanisms and document shave the same force as the contract, they or at least their principles, should be incorporated into the signed contract. If not,the ‘Entire Agreement’ clause may mean they have little effect. If you are relying on receipt of a bonus, for achieving KPIs, this is not something you want to miss out on.

Another consideration for commercial processes is to ensure they are comprehensive. Often the sum reached when applying the process is only an estimate. Is it clear what happens if the estimate is exceeded?

  • Does the client simply pay the extra?
  • Does the contractor need to satisfy the client of the reasons for exceeding before getting paid?
  • Do the reasons need to be notified and a new estimate agreed before further work is done, to ensure payment?
  • Does the risk lie with the contractor if the reasons for exceeding, fall outwith pre-agreed parameters?

The same considerations should be given to KPI performance schemes, where ‘penalties‘ and bonuses are at risk.

As well as ensuring they form part of the contract, time should be taken to ensure:

  • the KPIs are clear and measurable,
  • the amount at risk or bonus payable is clear, and
  • when such amounts are payable and not left solely to the client’s discretion.

It isn’t in anyone’s interest to be involved in a contract dispute. Both sides should be willing to commit to being clear and comprehensive at the start and ensure all important matters are set out in the contract to avoid problems later.


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