Building a Model of a Supply Contract Adapted to the Needs of a Consortium of Purchasers Francis Charpentier, Yves Ruggeri, Cynthia Perret, Joël Saltsman, (France Telecom Orange) Al Brown, Vito Pavone (AT&T) Nikki Shone (Southern Cross) Dieter Sieber (DT AG) Seng Keat Ooi (Singtel) John Horne (Sub. Optic EC) Paris, 24 April 2013 Sub. Optic Conference
Model Contracts § Model contracts are common practice in business life (such as ready-to-sign sale of mobile phone subscription) and even for individuals (such as renting a house). – Advantage: It saves the effort of writing up a contract from scratch by reusing contract language from well proven existing contracts – Caveat: The clauses are most probably in favor of the party having built the model contract § Model contracts structure – Ready to use contract language – Blanks to fill in the specific information of the contract, typically – Identification of Parties, dates (signature, delivery, end of warranty) , financial conditions. § Model contracts for Large Projects (such as construction of submarine cables) require: – Many pages of contract language carefully reviewed by legal experts – Many blanks to fill in – Large appendices for project specific system description, price lists, billing schedule – Are a great help but they cannot be considered as ready-to-use and are subject to extensive negotiations 2 Consortium Model Contract - Poster Presentation - 24 April 2013
Model Contracts for the Construction of Submarine Cable Systems § A first Model Contract for the Construction of Submarine Cable Systems was published at the Sub. Optic 2010 Conference in Yokohama § This effort was driven mainly by Suppliers of the Submarine Cable industry, therefore reflects the point of view of a Supplier § In fact Consortium of Purchasers already had their models with ( « ITT Models» ) reflecting their own point of view, used in the Invitations To Tender (ITT) sent to suppliers at the beginning of projects. § Typical Request For Proposal (RFP) are based on ITT Models: – Suppliers are requested to comply with the proposed ITT Model – Extensive negotiation take place during the supplier selection phase – Level of compliance with the ITT model is on of the three key criteria, along with technical quality and price, for the selection of the supplier 3 Consortium Model Contract - Poster Presentation - 24 April 2013
The first Model Contract (Sub. Optic 2010) § It simplified the contract language w. r. t. ITT models by – Avoiding repetitions, duplicating technical specifications, rephrasing of legal obligations, etc – Removing specific figures and replaced them by blanks (to fill in) – Skipping purchaser protection clauses commonly requested by Purchasers in ITT models – But it did not address the case of consortia of Purchasers § It provided commentary paragraphs to explain the contract language – And to highlight the typical areas of negotiation between Suppliers and Purchasers § In favor of the Supplier, as far as the contract language is concerned – But provided a balanced point of view in the commentary paragraphs 4 Consortium Model Contract - Poster Presentation - 24 April 2013
Can a model contract be balanced ?
Can a model contract be balanced ? § Supplier and Puchasers have diverging target requirements for a supply contract – Suppliers target requirements can be represented by the 2010 model contract – Purchasers target requirements could be represented up to now by the ITT models § It is difficult to find a criterion to define a balanced, neutral, intermediate point between those diverging models § An approach would be to conduct an exercise of a real negotiation on a virtual project – But there would be no urge to conclude (no deadline to launch a real project, no urge to secure revenue) pushing either party to make concessions and to resolve disagreements § For a specific project, the result of the negotiation depends on many factors: – Relative negotiation power of the Supplier vs. The Purchasers – Specifities of the project itself § If such a neutral reference model existed: – Using it would mean the Parties would accept having negotiated the contract once for all. – But in real life Purchasers would not accept this, so the contractual requirement of the ITTs would not really change: – The Purchasers would use the neutral reference model to request maximum concessions away from it – They would still need to provide an ITT model to show their target, and as a final reference to compare the moves made by the tenderers 6 Consortium Model Contract - Poster Presentation - 24 April 2013
Contract negotiation with extreme models Supplier’s target contract Purchaser’s target contract Project A Signed contract (ITT Model) (2010 Sub. Optic Model) Project A: Weak purchasers negotiation Project B Signed contract Project B: Strong purchasers negotiation 7 Consortium Model Contract - Poster Presentation - 24 April 2013
Neutral model and what contract negotiation may be Supplier’s target contract Intermediate Model contract (2010 Sub. Optic Model) Purchaser’s target contract (ITT Model) Establishing an intermediate neutral model contract requires a « balanced negotiation » once for all, or some criterion for neutrality, or both Signed contract With an intermediate neutral model contract, purchasers would still need to provide an ITT model 8 Consortium Model Contract - Poster Presentation - 24 April 2013
The second Model Contract (Sub. Optic 2013) § The goal was to publish a model representing the point of view of Purchasers – Traditionally contained in the ITT models – Address the very frequent case of consortia of purchasers § But also to borrow from the 2010 model to simplify to the contract language – Eg avoiding repetitions, duplicating technical specifications, rephrasing of legal obligations, etc – Removing specific figures and replaced them by blanks (to fill in) § And to borrow from the 2010 model the principle of providing commentary paragraphs – To explain to the contract language – To highlight the typical areas of negotiation between Suppliers and Purchasers – To provide a balanced point of view 9 Consortium Model Contract - Poster Presentation - 24 April 2013
Important areas of negotiation
Specificities of Consortia of Purchasers Important areas of negotiations § Consortia use a Central Billing Party (CBP) to centralise all supplier’s billing to the Purchasers § Purchasers form a consortium but they refuse to be jointly liable – « Several but not joint » § So what happens if one Purchaser does not meet its payment obligations ? – Other Purchasers: « We don’t want to be impacted » – Supplier’s options: – Deal directly with the defaulting purchaser (as requested by Purchasers) – Request right to suspend, or to terminate – Request payment guarantees from purchasers rated vulnerable – Take a stake in the system ( ~ vendor financing) § § 11 The related clauses of the contracts (Payment terms, Suspension right, Termination rights) are therefore subject to intense negotiation for real projects Even though in practice, when such problems arise in real projects, Purchasers and Supplier turn to be flexible and cooperative Consortium Model Contract - Poster Presentation - 24 April 2013
Important areas of negotiations Financial guarantees in favour of Purchasers § Guarantee Against all intermediate Payments (GAP) – So long as the transfer of property has not occurred – Transfer of property occurs normally at Provisional Acceptance § Performance Bond (a. k. a. LPG for the implementation phase) – Can be seen as a single GAP for the initial down payment – Generally expires at Provisional Acceptance also § Warranty Bond (a. k. a. LPG for the warranty phase) – Starts when the Perfomance Bond exprires – Expires at Final Acceptance 12 Consortium Model Contract - Poster Presentation - 24 April 2013
Important areas of negotiations Final Acceptance § Purchasers pay a lot of attention to the reliability of the systems delivered, above all to the reliability of the wet plants (repeaters, cable, etc) – In addition to standard warranty (replacement of faulty equipment), they request warranty against abnormal degradation (such as a « pattern of failure » ) that would prevent the system from meet its « end of life » performance. § Diverging definitions of Final Acceptance (FA) – In the 2010 Model: FA as the closure of deficiencies identified at PA, normally long before and of the warranty period – In the 2013 Model: – FA is a key milestone at the end of the warranty period where the system is checked for its internal degradation in time – If abnormal degradation (e. g. a « pattern of failure » ) is observed: – FA is postponed – The Warranty bond is extended (it should really be called a Final Acceptance bond) – Purchasers request the Supplier to remedy the situation so that the system be able again of meeting its « end of life » performance. 13 Consortium Model Contract - Poster Presentation - 24 April 2013
Important areas of negotiations Purchasers responsibilities § In addition to payments, Purchasers responsibilities include: – Delivery of landing sites (beach manholes, land cable routes), stations (space and technical infrastructure) – In some cases, permits in principle § Purchasers request graceful ways to handle the risk of delays in delivering landing sites, stations, or permits in principle. – Avoid the situation where the cableship is held up at the limit of territorial waters, waiting for the permits in principle to be delivered 14 Consortium Model Contract - Poster Presentation - 24 April 2013
Conclusions § § They are subject to intense negotiation between supplier and purchasers § The 2010 and 2013 contract models published by Suboptic represent the respective target contracts for suppliers and purchasers § For a specific project, the signed contract will be some intermediate point beween both models § 15 Supply contracts are complex sets of interacting clauses Furthermore, by comparing the signed contract to both models, it is possible assess the negotiation power of each party Consortium Model Contract - Poster Presentation - 24 April 2013
References “Model Contract with Guidelines for the Construction of a Submarine Cable system”, Sub. Optic 2010, available on the Sub. Optic website. Shota Masuda, “Consortium contracts – Captive techniques for managing the diverse credit risk profiles”, Sub. Optic 2010. “Consortium Model Contract with Guidelines for the Construction of a Submarine Cable System”, Sub. Optic 2013, distributed with the Conference CD. 16 Consortium Model Contract - Poster Presentation - 24 April 2013
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