Driving value through procurement and supply is the aim of every firm that has mastered the market forces. Such firms know that quality of the products they deliver to their customers and the price they shall charge all depend on their procurement strategies. As such, it is important to develop techniques that can be used in acquiring raw materials to improve the benefit, especially when the implementation is to be done in the future. The management should know the inclusions that should be made in the contract and measures that should be taken to ensure that changes in the market forces do not affect the agreements made in the contract. Effective management of the supply chain can help reduce the cost of production and in increasing value for the customers.
Inclusions that should be Made in Procurement and Supply Contracts
Developing contracts is one of the most complex processes that require a deep understanding of the law of contracts and the reasons why a firm needs to make a commitment to another firm. In most cases, a contract often has four essential components, which include an offer, acceptance, consideration, and intentions to create legal relations. If the contract is to be executed soon after an agreement is made, then both parties will look at the present market forces and make sure that they get the best deal. They will look at the offer made and if they feel the other party is not fair in their offer, they can make a counter-offer. The process may continue until such a time that the parties reach an agreement. However, there are other cases where the parties are forced to look beyond the current market forces. Engaging in contracts formed in the future is a very complex process because market forces may drastically change and what seems to be very fair today may be unreasonably unfair in the future. Cases where the cost of the raw materials increases or decreases by as much as 25% have been witnessed in the past.
Futuristic contracts must have additional clauses that clearly stipulate how both parties should address these changes that may occur. In the spirit of utmost good faith, both parties entering into a contract agree that they intend to ensure that neither of them will be subjected to unfair conditions during the period of engagement. After signing the contract, the procurement officers at organization must understand that it will be legally required to abide by the set conditions irrespective of the future market forces. As such, it is very important to make some inclusions in the contract that will primarily protect both parties in cases of environmental changes. The following are very important clauses that should be included in any contract that is expected to be executed in the future.
1. Indemnity Clause
The indemnity clause is one of the most important inclusions that must be clearly stipulated in a contract formed in the future. As explained above, the parties may not be absolutely sure which of them may be favored by futuristic forces. Sometimes it may be the supplier and in other cases, it may be the buyer. As such, the two parties must agree that they are committed to compensating either of them in case the future forces are not favorable to them. The indemnity clause is primarily meant to ensure that the relationship between the buyer and supplier remains fair as a way of protecting the relationship. The inclusion of an indemnity clause eliminates cases where one party may consider violating the terms of the contract because of the inability to execute it as per the terms specified in the past.
2. Limitations of Liability Clause
The parties involved in the contract must also state the limitation of liabilities among them based on their agreement. For instance, it may be agreed that it is the supplier that will be responsible for the transportation of the raw materials to the supplier’s premises. In the transportation process, it is possible that unexpected events may occur that may cause damage to the products. Terror attacks, piracy, arson, or natural disasters are some of the events that may affect goods while on transit. The two parties must agree on the issue of liability in case such events occur. They may jointly consider paying for an insurance cover for the period that the goods will be on transit to ensure that the liability is transferred from them to the insurance company. Lack of this clause in the contract may lead to conflicts between the parties that may affect their future relationship.
3. Dispute Resolution Clause
It is common for the parties in a contract to have disagreements on a number of issues, especially in contracts formed in the future. Sometimes one party may realize that the agreements made are unfair in one way or the other. In other cases, one party may feel betrayed by the other party. Whatever the case may be, once a dispute arises both parties must have a mechanism of resolving it. When signing the contract, both parties must come up with a mutually agreeable way of resolving conflicts. In most cases, the two parties may choose re-negotiation, arbitration, or mediation as the basic means of resolving the conflict. It is only when these options fail that they may consider litigation as the last resort of resolving their conflict.
4. Warranties Clause
When purchasing the raw materials, both parties must appreciate that mistakes may occur. Sometimes the mistake may be made by the supplier in terms of providing defective raw materials. Mistakes often occur even in situations where maximum care is taken to eliminate them. As such, it becomes necessary to have a warranty clause that expressly protects the buyer from possible losses arising from the mistakes made by the supplier. In this clause, it should be clearly stated how the supplier will compensate the firm for any defective product that it delivers. The clause may also specify the timeline within which the warranty will be applicable. Specifying the timeline in the warranty protects the supplier from instances where the buyer makes claims to damages on the products that may have occurred at the firm’s premises.
5. Force Majeure Clause
In contracts made in the future, force majeure is one of the most important clauses that must be included to protect both parties in case unforeseen forces occur in a way that inhibits the ability to undertake the project. A good example is a natural disaster such as a major earthquake or a cyclone. These forces may affect either of the parties in a contract. It may be the buyer’s premises that are destroyed by such forces, making it impossible for it to receive the products from the supplier as per the agreed timeline. In other cases, it may be the supplier affected by the forces of nature or a direct attack by terrorists or criminals. In the contract, the force majeure clause will define how to address concerns arising from such unexpected occurrences.
6. Termination Clause
On some rare occasions, the parties may find it necessary to terminate a contract before the actual day of the execution. There may be a number of reasons that may justify the termination of a contract. It may be a case of either the supplier or the buyer leaving the local market. Whichever reason that may be given, the parties should have a clear mechanism of how the contract should be terminated. In the termination clause, interest will be to ensure that necessary compensations are made to eliminate instances where any of the parties are subjected to unfair losses. If the payments had already been made, the clause should explain how the refund should be made and if any additional compensation is necessary for a possible breach of the initial agreement. In other cases, the termination clause may explain how the responsibility and benefits may be transferred to a third party. In cases where a third party is introduced, their consent must be sought and they must commit themselves to the terms in the contract in writing. Such commitments eliminate cases where the third party may distance itself from the contract.