‘Legalese’ contracting terms procurement professionals should know

While there is widespread agreement that digital procurement transformation is no longer optional, too many…...

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While there is widespread agreement that digital procurement transformation is no longer optional, too many procurement teams are focusing on solutions for spend analytics, cost reduction, and tail spend management while leaving a crucial area – supplier agreements and the accompanying legal documentation – to manual management, according to The Strategic Sourcerer.

Expensive digital contract management tools may not, though, be necessary – providing procurement makes a concerted effort to liaise with legal teams early on to devise a strategic approach to contracting with suppliers. Doing so can prevent roadblocks arising at the last moment, such as a foreign supplier failing to meet Legal’s regulatory requirements and getting disqualified even after ‘winning’ procurement’s business.

While procurement pros have their own areas of expertise and can’t be expected to be lawyers, they should have some legal terms and clauses in their repertoire. The Strategic Sourcerer cites the following:

Continuous improvement clauses, requiring a supplier to commit to cost reduction, and improving service levels over the life of an agreement. 

Early termination clauses, specifying the rules for ending an agreement before its agreed expiration date, for example, when one party fails to meet the obligations set out in the agreement.

Force majeure clauses, exempting procurement’s organisation from liability following ‘acts of God’, e.g., natural disasters, war, and strikes.

Indemnification clauses that detail the financial responsibilities one party will shoulder should another party be sued, e.g., an office supplies contract could include an indemnification clause preventing you from suing if an employee cuts a finger on a pair of scissors.

Right to audit clauses, authorising customers to audit their suppliers’ internal documents to ensure the terms of the agreement are being honoured.

Right of first refusal clauses, permitting customers to end an agreement early if they find a lower cost option in the marketplace.

Allying with Legal will help to ensure smoother negotiations and a risk-approach to managing contracts, although procurement should maintain full control over supply relationship management.

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