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CONTRACT TIPS AND SAMPLE CLAUSES
Take a look at some tips and sample clauses from contracts contained in the Purchaser’s Contract Forms diskette.

MISCLASSIFYING AN EMPLOYEE AS AN INDEPENDENT CONTRACTOR
Employee or Independent Contractor? Learn how to determine the difference. Classifying individuals as contractors when they should be employees has serious legal implications under employment and tax laws

CONTRACT CLAUSES FOR PRICE PROTECTION
This article identifies opportunities for price protection in agreements relating to goods, services and capital equipment and provides sample contract provisions.

If so, you have not cultivated your lawyer as a good resource. Get the inside information how to effectively do so!

Our purchasing department recently bought an accounting software package that didn’t measure up to our expectations. While most of the packages we had considered appeared to have comparable capabilities and quality, we ultimately made our decision based on the promises of the sales rep during several pre-award negotiations.

However, now we find, after using the software for several weeks, that it doesn’t perform the way the sales rep said it would.

After making several payments to our supplier, we are now at a stalemate. What can we do? And do you have any suggestions to avoid a situation like this in the future?

The first thing you need to do in determining your rights it to look at your purchase order. While you might have had several discussions with the sales rep about the program’s capabilities, were those promises inserted into the PO? For your sake, I hope so.

One of the most frequent mistakes made during the contracting process is failing to clearly write into the contract your requirements and expectations. This creates several problems, the first of which may be caused by your own terms and conditions.

Take a look at the reverse side of your PO and you’ll probably find a clause know as the "Integration" or "Entire Agreement" clause. This states that the written contract is the complete agreement between the parties and no other prior conversations or documents will be a part of the bargain. Courts often uphold the enforceability of that clause, excluding past conversations and proposals from the seller’s contract obligations.

Another frequent problem is one on misunderstanding. I have been asked to write contracts in the past where, once the words were on paper, I found that the other side didn’t have the same understanding of the deal. Communication is often fraught with misunderstandings; one reason for a contract is to eliminate miscommunication by clearly defining each party’s requirement and expectations upfront.

So here’s the bottom line: If the sales rep’s promises are contained in your PO, then they are legally enforceable representations known as "warranties," giving your company the rights outlined in your PO’s terms. If they weren’t inserted into the contract, you may be out of luck.

As the training manager at my company, I frequently attend seminars where written materials with copyright notices are distributed.

I find some of this material to be valuable and from time to time, I make copies to disseminate in my organization for educational purposes. In fact, I sent our purchasing manager some material recently, and she wants me to include it in her policy and procedure manual.

The U.S Copyright Act of 1976 prohibits its copyrighted material from being reproduced without permission from the owner of the copyright. Violation of this act entitles the owner to collect up to $50,000 in statutory damages from the infringer.

But there is an important exception called the "fair use" doctrine, which permits unauthorized copying "for purposes such as criticism, comment, news reporting, teaching, scholarship, or research." Unfortunately, there is very little case law to give clear guidance regarding the application of this exception.

I would play it safe and advise against continuing your practice of making multiple copies of copyrighted material. While the safest approach is to avoid copying altogether, I suggest an alternative – send a copy of the material with a distribution list attached and route it to interested people. Copy only that portion of the material you think is of interest, not the entire document. Avoid reproducing or distributing copies of a copyrighted work as a substitute for an inadequate number of subscriptions or attendees.

I also advise your procurement department not to reprint the copyrighted material in its manual unless you have obtained written consent from the copyright owner.

As we focus on our principal business, our company is making the decision to outsource more of its functions unrelated to our core business.

What issues should we generally be concerned with in preparing contracts with these outsourcers?

While the issues that arise in drafting these contracts are dependent on the function being outsourced, the following are some of the major considerations:

Pricing: In outsourcing arrangements, the contract often provides to the supplier incentives for cost reduction. Price discounts based on certified reductions in supplier costs are common. This necessitates the audit by the customer of the supplier’s financial books.

In addition, issues of frequency of price changes and length of the billing period should be addressed.

Duration Of Contract: This may be a point of contention since it is more profitable for the supplier to have a long contract term, while the customer may be concerned about becoming a captive customer at the mercy of the supplier.

One compromise approach is to require shorter initial term, but substantial advance notice if either party wishes not to renew the contract.

In addition, you may wish to have an "early out" clause (termination for convenience) to maintain flexibility to meet your company’s changing requirements. If so, this clause should address how much and early out will cost the customer and the advance notice required.

Product Manufacture And Quality Assurance: In manufacturing outsourcing contracts, acceptable quality levels, audits, and certifications should be stated including procedures for the purchaser to visit and test the supplier’s manufacturing quality assurance systems.

Services To Be Provided: In service outsourcing contracts, it is important to specify form the outset the responsibilities of each party. For instance, who is responsible for maintaining the software and the hardware? Who pays for the telecommunications link? Every day-to-day detail should be included in the contract to avoid facing problems in the future.

Ownership Of Tooling And Other Equipment:If your company will be paying for the tooling acquired by the supplier, it is likely that you will expect ownership rights to the tooling. Your contract should state this as well as the supplier’s obligation to maintain the tooling in good condition and to keep it insured.

Consignment Of Material: If any material will be consigned to your supplier, the issue of yield losses in the material should be considered. Many contracts permit a percentage of yield loss above which the supplier is responsible to reimburse the customer.

Availability Of Repair/Spare Parts: If the outsource contact is for manufacture of a finished product, the customer will want to ensure that repair parts are made available for purchase by the customer for a specified period of time at a protected price.

Confidential Information: The customer will undoubtedly be handing over large amounts of confidential information to the supplier. This may be in the form of software, databases, specifications, bills of material, statistics, and memos. There should be a nondisclosure provision which requires the supplier to hold the information in confidence.

Ownership Rights: If the outsourcer will also be involved in the design of your product or development of software, your contract should specify that the outsourcer will assign all its rights in the design to your company and your company will be the sole owner. If you do not have such a provision, the outsourcer will be the owner of the information it developed.

Several years after downsizing, our company is experiencing a growth spurt which requires that we now add workers. Due to our fluctuating needs and other circumstances, the managers of several departments (including purchasing) would like to retain these new workers on a consulting or independent contractor basis rather than as employees.

But I know of a situation in which the IRS audited and fined a firm for retaining its workers as independent contractors when they were really employees.

Over the last several years, the IRS began a crackdown on businesses that illegally claim regular employees as independent contractors, paying them straight cash and avoiding social security, federal income, and state taxes.

The federal and state assessments can be staggering if you misclassify and employee as an independent contractor. There can be liability for retroactive federal, state, and local payroll taxes, and social security and unemployment taxes as well as interest and stiff penalties.

The IRS has established 20 different tests based on common law to determine whether a worker is an employee or independent contractor. And while none of these factors alone will determine the status of a worker, the primary issue is that of direction and control. A worker would be considered an employee if the company retains the right to direct and control the way the worker performs, both as to the final results and as to the details of when, where, and how the work is accomplished. If the worker is chargeable only with the end result and is not subject to control in how the work is carried out, he or she is more likely to qualify as an independent contractor.

In other words, the more control, the more the person looks like an employee. And, in theory, if you retain an independent contractor, you should only be concerned with the results of the work, not the way the work is done.

Answering "yes" to these questions will often carry the most weight in the eyes of the IRS in classifying the worker as an independent contractor:

If the independent contractor needs more help, he or she should be responsible for hiring and paying such workers.

Finally, if you have any questions about the status of the relationship, you should seek professional advice.

Our company is embarking on an international sourcing program. More often than not with our domestic suppliers, we issue purchase orders rather than have signed contacts. At times, we engage in the "battle of the forms" with our suppliers when they issue their proposal or acknowledgment forms with their terms and conditions.

Should we take a different approach when dealing with international suppliers? What suggestions can you give me in terms of the contracting process and issues to watch out for?

International sourcing involves legal issues different form those pertaining to contracting with your U.S suppliers.

In the United States, you are concerned with the Uniform Commercial Code (UCC) when purchasing goods, and general contract law when purchasing services. However, when you buy from a foreign supplier, the UCC and U.S. contract law do not automatically apply, In fact, unless you and your supplier agree (in writing) that the UCC applies, law or even the law of your supplier’s country. In addition, in the event of a dispute, your company could wind up defending itself in the court of a foreign land.

The Convention on Contracts for the International Sale of Goods (CISG) was created by a United Nations conference as a neutral body of legal rules to govern transactions between buyers and sellers from different countries. To date, over 30 countries have joined the convention and have agreed to be bound by the rules of the CISG. (To find out if a particular country has adopted the CISG, call the United Nations Treaty Section at (212) 963-3918.)

Unlike the UCC, the CISG demands that parties agree in writing on all terms—including price, delivery, payment, quality, governing laws, and place of dispute resolution. So it is imperative that you get a signed contract. This can include having your supplier sign your company’s purchase order acknowledgment form.

Shipping Terms. The terms FOB isn’t widely used outside the United States. Frequently, international buyers and sellers will use the International Chamber of Commerce shipping terms (INCOTERMS). If you will be using the INCOTERMS, you should say so in your purchase order or contract form. Alternatively, your purchase could spell out the important issues regarding spell out the important issues regarding shipment – who pays the freight and who is responsible for risk of loss.

In addition, you will want to state that the seller is responsible to pay all freight forwarding fees, customs brokerage fees, and any export permit costs required in the transportation of the products to the common carrier.

Currency. Your contract should specify the payment currency; not to do so is often the cause of disputes.

Letters of Credit (LCs). In international transactions, the seller often requires the buyer to open an LC. The bank pays the seller based on the seller submitting to it certain documents as specified in the LC. The bank doesn’t personally inspect the goods. If you want to ensure that the goods conform to the contract before the seller draws on the LC and receives the money, you should insert a requirement in your LC that the seller submit an inspection certificate signed by a representative of you choosing.

Customs: Proper Labeling. If you have ever had your imported goods seized by Customs, you will understand the importance of having the package correctly labeled with the proper country of origin. If it is not properly marked and labeled, it can be held by Customs for months. You should ensure that your contract specifically spells out the seller’s requirements for labeling.

Customs: Calculation of U.S. Import Duties. Generally, the problem facing purchasers is figuring out exactly which class your imports fall into, and to which duty they are subject. One option is to request an advance ruling from Customs. Your up-front understanding of the amount of duties involved will enable you to make a better purchasing decision and avoid unpleasant surprises.

Signature Authority. Company officers generally have authority to bind their companies. If you can’t get an officer of the supplier’s company to sign the contract, get a specific representation in the contract that the person signing has the authority to do so.

Arbitration. If you become embroiled in a legal dispute with your supplier, you (and your supplier) will certainly want to avoid fighting a legal battle in the other’s country. Arbitration is generally considered an agreeable compromise. You and your supplier should agree up-front to the rules and location of the arbitration.

If you learn the "rules of the game," if you take the time to negotiate all the important points with your overseas supplier, and if you write a comprehensive and clear contract, your procurement will yield the benefits that you originally anticipated.

The following clauses are from contracts contained in the Purchaser’s Contract Forms diskette.

Want to "fight" the Battle of the Forms to win? If so, it is important that you follow the guidelines of the Uniform Commercial Code. You should insert a clause similar to the following in your purchase order terms and conditions.

This Purchase Order is limited to the terms and conditions contained on the face and reverse. Any additional or different terms proposed by Seller in any quotation, acknowledgment or other document are hereby deemed to be material alterations and notice of objection to them is hereby given. Any such proposed terms shall be void and the terms herein shall constitute the complete and exclusive statement of the terms and conditions of the contract between the parties.

The U.S. Copyright Act provides that copyright ownership initially vests in the author of a work (for instance, a software program, training program, design, or photographs). When your company retains an independent contractor, this will often mean that the independent contractor not your company will be the owner of the copyright in the work. This is the case even if your company pays the independent contractor all the non-recurring engineering required to develop the work.

If you expect that your company own the intellectual property in the work, you must have a clause in your contract that transfers ("assigns") the I.P. from the independent contractor to your company. You might use a provision such as the following:

Consultant agrees that all ideas, inventions, designs, ideas, discoveries, specifications, drawings, schematics, prototypes, models, inventions, and all other information and items made during Consultant’s performance of the Services under this Agreement ("Work Product") will belong solely to Company, and Consultant will retain no rights therein. Consultant further agrees to assign to Company all right, title and interest to such Work Product. Upon Company's request, Consultant agrees to assist Company, at Company's expense, to obtain patents or copyrights for such Work Product, including the disclosure of all pertinent information and data with respect thereto, the execution of all applications, specifications, assignments, and all other instruments and papers which Company shall deem necessary to apply for and to assign or convey to Company, its successors and assigns, the sole and exclusive right, title and interest in such Work

When on-time delivery or completion is critical, try using a Liquidated Damages clause. These provisions "fix" the amount of damages in the contract that may be deducted from the contract price if a supplier is late in delivering or performing.

While there is no legal requirementto provide a bonus for on-time or early delivery, it may make good business sense to include such a provision in some contracts.

For every hour or part thereof the Equipment or any component fails is inoperable in excess of the time between notification by Customer and the deadlines set out above, Customer shall receive, in addition to any other remedies Customer may be entitled to hereunder, a credit of [Insert either: Dollar Amount or Percentage of the monthly maintenance charge] to be applied to future maintenance invoices hereunder.

For use in a Construction Contract:

If Contractor fails to complete the work by the date specified in Exhibit A, the actual damages caused to Company for the delay would be large and difficult to determine and document. Therefore, in lieu of actual damages, the Company shall deduct from the Contract Price set forth in Paragraph 4, the amount of [Insert Dollar Amount] as fixed, agreed and liquidated damages for each day completion is delayed beyond the date specified in Exhibit A.

D.Price Protect On-Going Services

Whenever you have a need for ongoing services, make sure that you "Price Protect" the renewal of the prices for those services. The best time to negotiate price protection is at the acquisition stage of the Equipment.

You might want to use a clause such as the following in your Equipment Acquisition Contract:

There shall be no charge for maintenance services covered under this Agreement during the Warranty Period. Upon expiration of the Warranty Period, Buyer agrees to pay Seller for maintaining the Equipment, the sums set forth in Exhibit B for a period of twelve (12) months on a monthly basis. Maintenance services shall be automatically renewable from year to year for [insert number: eg., ten] years from the Date of Acceptance. When so renewed, the payment and any further charges pursuant thereto will be at Seller's then current rate, which rate shall not exceed the original rate set forth herein, increased by an amount equal to the change in the Consumer Price Index, published by the United States Bureau of Labor Statistics as of the date Seller notifies Buyer of the new rates. In no event shall the increase in any year exceed five percent (5%) of the prior year's rate. Notwithstanding the foregoing, Buyer shall have the right to terminate maintenance services at any time upon giving Seller at least thirty (30) days advance written notice thereof.

E.Language which Ties your P.O. Releases to the Blanket (Corporate) Agreement

Corporate Agreements are one way a Buyer can avoid the "battle of the forms". The idea is that the parties negotiate the terms that will govern their future purchases and sales and put those terms in the Corporate Agreement. Thereafter, the Buyer uses its purchase order as a release.

Each Purchase Order should refer to the Corporate Agreement but often does not. To ensure that all purchase orders are governed by the Corporate Agreement, consider including language such as the following in your Corporate Agreement:

Unless otherwise agreed by the parties in writing, this Agreement shall apply to all purchase orders and other documents issued by either Buyer or Seller (referred to as "releases") in connection with the purchase and sale of Products. No inconsistent or additional term or condition in any release shall be applicable to a transaction within the scope of this Agreement.

The parties agree to use reasonable efforts to place a legend on each release that refers to this Agreement. However, the terms and conditions of this Agreement shall apply to any such release whether or not such legend appears on the release.

If you want your supplier to maintain products on a consignment basis at your facility, you will want to use clauses such as the following the establish such an arrangement:

Supplier will maintain the Products in the minimum quantities listed in Exhibit A at Buyer’s facility located at [Insert Address of Consigned Inventory]. Supplier shall be responsible for all transportation and other expenses associated with shipment of the Products to Buyer’s facility. Buyer will maintain, at its expense, a dedicated inventory storage area for the Products, which will be physically segregated from all other inventory and property during the term of this Agreement (the "In-Plant Store").

Whenever Buyer wishes to remove any Product from the In-Plant Store, it shall furnish Supplier with a purchase order. Buyer will transmit its purchase orders [eg. weekly] for all Products removed from the In-Plant Store during the prior [eg. week] and Supplier likewise will replenish the Product [eg. weekly] or as otherwise agreed. Buyer may, in its sole discretion, elect at any time to return any or all Products in the In-Plant Store to Supplier and Supplier shall accept return of said Product within [eg. five] business days from the date of initial notification issued by Buyer.

It has become a familiar scenario: As a result of the cyclic nature of business and reduced labor costs, more companies are retaining workers as independent contractors rather than employees. Although the independent contractor status is appropriate in some cases, classifying individuals as contractors when they should be employees has serious legal implications under employment and tax laws. The determination of independent contractor status is made by the Internal Revenue Service, which carefully monitors the tax returns filed by independent contractors and the employers that hire them, the ensure that organizations are not misclassifying employees to avoid payroll taxes.

Federal and state tax assessments can be staggering if your company misclassifies an employee as an independent contractor. There can be liability for retroactive federal, state, and/or local payroll taxes as well as social security and unemployment taxes. In addition, interest and severe penalties may be assessed.

In various case decisions, the courts have recognized several legal standards for determining independent contractor status. From these cases, the "common law" definition of employee and independent contractor evolved.

The Internal Revenue Service training manuals 8463 and 3142-01, in a chapter entitled "Employer-Employee Relationships," list 20 common-law factors to determine whether an individual is an independent contractor or an employee.

Although several criteria need to be considered, the most import factors are direction and control. A worker would be considered an employee if the company retains the right to direct and control the way the worker performs, both as the final results and the details of when, where, and how the work is accomplished. If the worker is chargeable only with the end result and not subject to control in how the work is carried out, he/she is more likely to qualify as an independent contractor.

In other words, the more control, the more the person looks like an employee. And in theory, with independent contractors, you should only be concerned with the results of the work, not the way the work is done.

Clearly, it is in your company’s best interest to document the independent contractor status. To help avoid being charged with being a "statutory employer," consider the following procedures:

If you wish to obtain further information about independent contractors, you can contact the IRS for copies of the training manuals noted above. In addition, your state’s chamber of commerce is often a good resource for material on this subject.

Pricing issues always influence your bottomline. Since you have the greatest leverage at the time of contracting, this is the time to protect yourself against excessive price increases and negotiate all of the hidden and future costs before you sign a contract. Various contract clause issues relating to price follows.

When a contract for products of a long-lead nature is signed prior to actual delivery, prices defined in the contract should be clearly protected for a fluctuation either upward or downward. Prices can increase due to reasons of allocation or increased costs of raw material.

Alternatively, prices may also decrease due to rapidly changing technology. If this occurs, you should negotiate the benefit of the decrease downward. An example follows.

" If seller’s published purchase price for any item of equipment delivered or any service provided shall be less on the date of delivery or performance than the price for such equipment or services as specified herein, this agreement shall be deemed to provide such lower price. If such price shall be higher, the prices set forth herein shall prevail."

Capital equipment and software require ongoing maintenance at the conclusion of the initial warranty period. The price of ongoing maintenance costs should be addressed up front. Consider the following price-protection provision which designates a fixed-percent increase by which your supplier may adjust the price:

"Upon expiration of the warranty period, the price of the twelve-month maintenance period shall be as set forth in Exhibit A. Each year thereafter, maintenance services shall be available at prevailing prices, which prices, however, shall not exceed the maintenance price for the proceeding year increased by five percent."

An alternate method is to tie any annual adjustment in price to the changes reflected for that year in an index, such as the Producer Price Index (PPI). However, if you select this alternate method, it’s advisable to put a maximum cap on the increase.

The original contract should list available expansion equipment and parts required for ongoing operation and current prices. The contract should provide for the continued availability at those prices or at later prevailing prices, subject to outside limits, such as a maximum of xpercent per year, or the increase of the CPI (for example) whichever is less. Consider the following example:

"For one (1) year subsequent to the final acceptance of the equipment by Your Company, the supplier shall make replacement components and your parts for the equipment available to Your Company at the original contract price. Thereafter, the price shall not be increase more than ____ percent (%) per year."

A strategic alliance agreement is a good vehicle by which to motivate your supplier to implement cost reductions. An example of an incentive sharing provision to reduce prices follow.

"The first x percent (X%) savings from productivity increases will be kept by the purchasing company. Benefits from productivity projects yielding annual savings greater than xpercent (X%) below base price levels will be kept by seller for the period following implementation after which time the base price will be reduced to the appropriate amount."

The most common way purchasers and sellers agree on a price for a long-term agreement in inflationary times is to use escalation clauses. An effective clause will address the following criteria:

1. Is the base price to which the escalation factor is to be applied clearly stated?

3. Does the clause specify the time from which changes in the price will be measured?

5. Are there any upper or lower limits on the adjustment? Don’t neglect to provide for downward adjustments as well as upward adjustments.

Before signing a contract, work-in-process should be clearly defined, as well as what kind of materials on order the purchaser is liable for should he/she terminate midstream. In addition, in a contract where you may wish to make future changes to the specification, negotiate the prices for those changes at the time of contracting. Remember, if you don’t get it up front and written into the contract, you probably won’t get it.

If these scenarios are all too common, then you have not cultivated your lawyer as a good resource.

It is a fact of business life that today’s purchasers must have an understanding of the legal issues involved in procurement. Your ability to make well-reasoned decisions and protect your company involves balancing all factors involved in a transaction: business as well as legal.

The more knowledgeable you are, the better questions you will ask of your attorney and the better advice you will obtain.

Attend seminars. Ask questions. Read purchasing newsletters and legal columns of magazines. Develop a greater understanding of contract law and the Uniform Commercial Code (UCC). The American bar Association (ABA) has a list of publications available to both lawyer and layman. Librarians at local university law libraries are also good resources. Your state’s chamber of commerce is an excellent source for publications dealing with environmental, OSHA, safety, and employment issues.

If your company does not have an internal legal department and you want to develop a working relationship with a lawyer, there are several ways to locate an attorney. One of the best ways is by referral. An excellent source of referrals for an outside lawyer is the inside council of a company within your industry. Attorneys in corporate legal departments are generally familiar with those lawyers who concentrate in areas of the law in which their companies are involved.

Another source of referrals is your local or state bar association, The ABA publishes a directory of all state bar associations which can be purchased for a nominal fee by calling the ABA at (312) 988-5000. Many bar associations offer limited consultations with an attorney on a no-fee or small-fee basis.

When retaining an attorney, inquire about his/her experience with your type of issues, and don’t discount the "comfort" factor. If you don’t have a good rapport or the attorney doesn’t return your telephone calls in a timely manner, it is likely that this is not the attorney for you.

The legal aspects of purchasing are becoming increasingly important. If you are not obtaining the appropriate legal advice, you need to change the situation and develop a better working relationship with your company’s attorneys.