23 Procurement Contract Clauses You NEED to KNOW 🧠

Summary

In this video, a procurement expert shares 23 crucial contract clauses and principles every procurement professional should understand. Drawing from years of experience in fintech and defense consultancy, the speaker covers key topics such as contract terms, choice of law, dispute resolution, payment terms, intellectual property, and audit rights. Emphasizing the importance of negotiating well-rounded agreements, the speaker advises on avoiding hidden fees, monitoring performance through service level agreements, and ensuring clear terms on renewal and termination. By mastering these clauses, procurement professionals can create stronger, more balanced contracts and foster positive supplier relationships.

Takeaways

• 😀 MSAs, DPAs, and SaaS contracts are essential in procurement, and each requires specific clauses based on the industry.
• 😀 Contracts must include a clear contract term, specifying the duration, renewal, and auto-renewal conditions.
• 😀 The choice of law and jurisdiction clauses ensure clarity on which laws govern the contract and where disputes will be resolved.
• 😀 Dispute resolution procedures in contracts can help prevent lengthy court processes by providing alternative methods for conflict resolution.
• 😀 Termination rights in contracts determine when and how either party can end the agreement, with or without cause.
• 😀 Limitation of liability and indemnification clauses define the extent of responsibility in case of issues like cyber breaches or death.
• 😀 Service Level Agreements (SLAs) outline performance guarantees, like software uptime, that are crucial for service delivery expectations.
• 😀 Payment terms, such as standard 30-day payment periods, are important to maintain strong relationships with suppliers.
• 😀 Precedence clauses clarify which documents take priority when there are contradictions in the contract, ensuring consistency.
• 😀 Right to audit clauses allow procurement teams to review supplier compliance, especially concerning regulatory and ESG issues.
• 😀 The ability to handle price increases and inflation clauses in contracts is key to navigating uncertain economic conditions and ensuring fair pricing.
• 😀 Hyperlink clauses in contracts must be carefully reviewed, as they could lead to unexpected changes in contract terms if not properly managed.
• 😀 There's a growing shift toward plain language in contracts to make terms easier to understand and less reliant on legal jargon.
• 😀 Procurement teams are increasingly taking on the responsibility of contract management, moving away from legal teams being directly involved in every contract review.

Q & A

What is the importance of understanding contract clauses in procurement?

Understanding contract clauses in procurement is crucial for managing risk, ensuring compliance, and fostering strong supplier relationships. It helps procurement professionals ensure that the terms align with organizational goals and minimize the chance of disputes or misunderstandings during the contract lifecycle.

What is the significance of the 'Choice of Law' clause in contracts?

The 'Choice of Law' clause determines the jurisdiction under which the contract will be governed. It's important because it clarifies which country's or region's laws will apply to the contract, reducing ambiguity in case of disputes. For example, specifying 'the laws of England and Wales' is more precise than just 'UK laws'.

Why is 'Jurisdiction' an essential aspect of a contract?

The 'Jurisdiction' clause defines the specific location where legal disputes will be settled. It's vital because it ensures both parties know where legal matters will be addressed, which can save time and reduce costs if disputes arise.

What are the benefits of including 'Dispute Resolution' mechanisms in contracts?

Including 'Dispute Resolution' mechanisms provides a clear process for addressing conflicts before they escalate to litigation. It may involve mediation, negotiation, or escalation through leadership, helping both parties to resolve issues amicably and efficiently, saving time and resources.

What is meant by 'Termination Rights' in a procurement contract?

'Termination Rights' refer to the conditions under which either party can end the contract, whether for cause (e.g., breach of contract) or for convenience. This ensures that both parties have a clear understanding of the circumstances that can lead to contract termination, as well as the consequences of such termination.

How can 'Limit of Liability' clauses protect parties in a contract?

'Limit of Liability' clauses set a cap on the amount one party is liable for in the event of a breach or incident, such as a data breach or cybersecurity attack. This helps manage the financial risk for both parties and ensures that neither side faces unmanageable costs from unforeseen circumstances.

What does 'Indemnification' mean in procurement contracts?

Indemnification clauses specify when one party agrees to cover the costs or damages incurred by the other party, particularly in cases of legal defense or liability. For example, if one party's actions cause harm to the other, indemnification ensures the responsible party will cover the costs of those damages.

Why are 'Service Level Agreements' (SLAs) important in contracts?

SLAs outline specific performance standards, such as uptime percentages, service delivery timelines, and other measurable goals. These clauses help ensure that suppliers meet expectations and provide a basis for monitoring performance and holding them accountable for any shortfalls.

What should procurement professionals consider when reviewing 'Intellectual Property' clauses?

Procurement professionals should clearly define ownership of intellectual property (IP) created under the contract, especially for customized work. This ensures that both parties know who holds the rights to any IP, preventing future conflicts over usage and commercialization.

How do 'Precedence Clauses' work in contracts with multiple documents?

Precedence Clauses clarify which document takes priority in case of any conflict between multiple agreements, such as between a Master Services Agreement (MSA) and a Statement of Work (SOW). This ensures that the terms of the highest-priority document will prevail, reducing the risk of confusion or contradictions.

Why should procurement professionals be cautious of 'Hold Harmless' clauses?

'Hold Harmless' clauses can transfer liability unfairly to one party, especially in service contracts. Procurement professionals need to scrutinize these clauses to ensure they don't unduly expose their organization to legal or financial risks without justification.

What is the role of a 'Statement of Work' (SOW) in contracts?

A Statement of Work (SOW) outlines the specific tasks, timelines, deliverables, and other details related to a particular project under a broader contract, such as a Master Services Agreement. It ensures both parties are clear about the scope and expectations for each individual project.

How can procurement professionals protect against unexpected price increases in contracts?

Procurement professionals should carefully review clauses that allow for price increases, especially in times of high inflation. Negotiating clear terms around price adjustments and setting limits or caps can help avoid unexpected cost escalations and maintain budget stability.

Why is it important to ensure contracts are written in clear, plain language?

Contracts should be written in clear, plain language to avoid confusion or misunderstandings. Overly complex legal jargon can create ambiguity and lead to disputes. Transparency and simplicity help ensure that both parties fully understand their obligations and rights under the contract.