Question 8

Explanation

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Contract terms and conditions can become a tool for managing supplier in procurement and supply. The following terms can be added to a contract:

• Indemnity clause

• Termination clause

• Arbitration clause

1. Indemnity

By definition, indemnity is the promise to pay some amount when a trigger event happens. In procurement context, indemnity clause is a way to transfer the risk to the supplier. If this clause is written in a contract, the supplier shall indemnify the buyer when some event occur, i.e. the product causes some damages to the buyer's premise.

Indemnity is an express term in the contract. It only applies when the two parties agree specifically. This clause is commonly used in case that a third party suffers damages from a party's negligence. For example, the buyer outsources the cleaning service to a supplier. One day, the supplier's employee forgets to put a warning sign on the slippery area, which causes a visitor falls when he is walking by. The visitor claims the damages from the buyer. In this case, if the buyer and the supplier has an indemnity clause which states that the supplier shall hold the buyer harmless from any claims arising from supplier's negligence, then the supplier will have to pay the damages.

2. Termination clause

Commercial contracts usually come to an end due to many reasons. Together with termination, some complex legal implications may present, such as restitution, the intellectual property rights, outstanding obligation, etc. To mitigate such complex implications, the parties to the contract can write a termination clause. An express termination clause should include the following:

• When a party is entitled to terminate the contract without negative consequences;

• Is there any time period that a party must notify the other party before he terminates the contract?

• What are the consequences of termination? How will IP rights and outstanding obligations be arranged?

3. Arbitration clause

Arbitration is a way to settle the dispute. If the contract has arbitration clause, rather than going to the court when a dispute arises, the parties shall ask an arbitrator or an arbitration panel to help them settle. Using arbitration has many advantages:

• Arbitrators can be selected by the parties. They can be experts in the particular area that contracting parties are working. Also, the arbitrators are impartial as the judges.

• Arbitration process is shorter and more secret than traditional litigation

• Arbitration award is also binding and can be enforced by the public authority.

• To use arbitration, the parties must write an arbitration clause in the contract, stating clearly the scope of arbitrator's authority.