Mission Critical Care: Terms of Endearment
Webster’s defines terms as provisions that determine the nature and scope of an agreement, and it defines a condition as a premise upon which the fulfillment of an agreement depends. The contract is the most common instrument we encounter in the day-to-day transaction of the mission critical business.
A contract consists of an offer and acceptance.
An offer depends on three conditions:
An expression of a promise, undertaking, or commitment to enter into a contract
The expression of promise must be definite
The offerer (the party making the offer) must communicate the expression to the offeree (the party accepting the offer).
Acceptance of an offer can occur by words that show agreement or by conduct of the offeree.
Whether the offer at hand is a maintenance agreement, a fixed price service, or an emergency call, terms & conditions are in play. In the case of the maintenance contract, negotiations occur before the contract is signed. An emergency call, on the other hand, may result in a PO with imbedded terms & conditions that is issued after the fact. In order to get paid for the service, we may have to agree to unacceptable terms & conditions. We can improve this process by settling on the terms of a master agreement ahead of time.
Terms & conditions fall into two categories, commercial and legal. Commercial issues are things like payment terms, length of warranty, response time etc. Commercial issues are usually fairly easy to resolve.
Legal terms are another story. The problem occurs when terms are so onerous that the risk to the provider far exceeds the amount of business at hand. These are known as deal breakers. Most sales people or managers know enough to spot deal breakers up front.
When faced with 60 pages of boilerplate containing egregious terms for a $1,500 maintenance visit, the reasonable company will walk away as the time and expense to negotiate far exceeds the revenue.
Our challenge as an industry is to craft agreements that adequately protect our respective organizations while being reasonably negotiable. Here are some of the most common deal breakers.
Consequential damages are broad in scope, difficult to quantify, and open ended by nature. An example would be a “breach of warranty” as a result of a product failure. As a consequence the customer loses revenue because a major server was shut down. By extension, consequential damages may also include property damages, third-party claims, attorneys’ fees, cancellation of third-party contracts, loss of goodwill (business reputation), loss of use, data, cost of recall campaigns etc. Acceptance of these types of potential penalties is a huge risk.
Direct damages are more easily quantified. Direct damages are usually related to physical failures of components or property as a direct result of a failure. In the case of an emergency power system, a direct damage could be loss of a voltage regulator as the direct result of incorrect interconnect wiring. In this case, the party responsible for the error would be liable for the cost of the replacement component and the labor required.
Liability is intertwined in many aspects of a contract. One may be held liable for property or personal injury and is therefore responsible to pay compensation for any damage incurred. Negligence is the trigger that often drives liability to astronomical levels. Manufacturers and service providers will always seek to limit liability for obvious reasons.
A warranty is essentially a representation between a manufacturer or vendor and the customer that something is true or accurate.
There are two basic types of warranty: implied warranties, which may become part of the contract unless the seller does something affirmative to get rid of them, and express warranties. Implied warranties are obscure by nature. An example would be that a product is fit for a particular purpose. The problem is that the customer and the provider may define “purpose” differently. Left open ended, the warranty could require the provider to modify or replace the unit if the customer’s definition of purpose differs from the provider’s.
Providers create express warranties to support affirmative claims about their products or services. Express warranties are quantifiable and therefore acceptable. For example, “this breaker will perform 200 cycles before service is required.”
According to Webster’s, indemnification “secures against hurt, loss, or damage and to make compensation to for hurt, loss or damage.”
The purpose of indemnification is to reimburse another party for all loss or damage that may result, to shift loss from customer to the provider (usually includes attorneys’ fees), to protect the customer and their employees against harm in the event of litigation, and to control the defense.
It’s really hard to do justice to the complex subject of terms & conditions within the confines of this column. The next time you are faced with terms & conditions understand that:
- Each party needs to protect itself
- Lawyers get paid to develop terms & conditions they consider necessary from the legal standpoint but do not necessarily understand your business; therefore, some terms & conditions may be unrealistic or irrelevant.
- Separate the legal from commercial terms & conditions.
- Stay involved if you don’t want to get bogged down.
- When intermediaries are involved (building management companies for example), terms & conditions become more complex.
- Some organizations will blindly sign terms & conditions. If something goes wrong, they may cease to exist but your organization will probably not receive the remedies you are entitled to under your agreement.