How do Ukrainian companies agree on the supply of any product - from raw materials to complex production equipment?
A typical contract signing scenario: managers agree in general terms on the quality of the product, its price, method and delivery time, and then - pass these agreements to lawyers so that they can make a contract. And of course, the contract must be signed "yesterday", because today the director must sign, pay an advance to start working. Often at this point, the lawyer becomes the main enemy, because "it does not allow managers to work and earn money for the company." Under pressure from managers, the lawyer either looks at the contract sent by suppliers with one eye and approves it, or takes the first-best supply contract, quickly changes the items already agreed by the managers, and issues something similar to the contract.
More than 90% such hastily agreed deliveries end in a happy ending. The buyer receives the desired raw materials or equipment, and the seller - the money.
But sometimes the system fails: the seller brings damaged goods, the equipment does not perform the functions agreed upon "in words", in the production process it turns out that the purchased raw materials have completely different characteristics, a new expensive machine fails after the first month. There can be many options for the development of events. The worst thing is that the losses from one problematic delivery can outweigh the benefits from all successful ones.
Just when something goes wrong, managers and lawyers begin to read the contract they hastily signed.
They are looking for requirements for the quality of goods, the procedures for receiving and transferring goods for quality, the order of warranty service, looking for how and where to send a claim for quality. And in the contract about it or nothing is written, or there is a standard set of legal phrases, like: "all disputes are resolved by negotiations according to the current legislation", "goods are accepted on quality according to the P-7 instruction", etc.
How to prevent such curiosities? What else besides the price of goods and terms of delivery should be agreed upon when agreeing on delivery? Where should managers and lawyers work together?
We will try to understand these questions in this publication.
At the stage of coordination of all terms of delivery we recommend to discuss with the contractor the following points:
1. Clear and understandable product quality requirements that can be measured and checked.
2. The moment when all the risks of damage to the goods pass to the buyer.
3. The valid procedure for acceptance of goods by quality and the procedure for notifying the supplier of the identified defects of the goods in the process of its acceptance and options for further action by both parties to the contract.
4. Detailed and valid procedure for notifying the supplier of defects in the goods identified after its acceptance and options for further action by both parties to the contract.
5. Effective measures of liability for breach of obligation.
At once we will outline the general approach which, in our opinion, needs to be followed at coordination of details of delivery and the conclusion of contracts. When you develop a contract, try to think about possible problem situations that may arise at any stage of delivery of the goods and its further use. You will need the contract the most in such cases. It makes no sense to write it just to legalize the transfer of money from one account to another and then transport the goods from one place to another. After all, when the delivery takes place in the normal mode, no one looks at the contract, it remains for inspections by regulatory authorities.
The agreement is needed in order to minimize possible conflicts and prescribe effective and understandable to all algorithms for resolving them even when both parties are not in a state of conflict and are able to negotiate.
Now let's analyze in more detail the requirements for the content of clauses of the contract relating to the quality of goods.
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Requirements for product quality
Requirements for the quality of goods can be fixed in the contract in several ways:
1. We refer to a certain state standard, technical regulations, technical conditions or an agreed sample of goods.
Be sure to read the text of such a standard, technical regulation or technical specification and check whether all the requirements for the quality of the goods they contain meet your actual needs and whether they are formulated there clearly enough.
If such a document is not freely available, as is the case with the technical specifications, the supplier must, at your request, attach a copy to the supply contract (Part 2 of Article 268 of the Commercial Code of Ukraine). Make sure that this copy is notarized and that certain pages cannot be changed later.
Sometimes a simple reference to DSTU is not enough, but it is necessary to specify which points of it are used in order to be able to unambiguously define specific requirements for product quality.
Here is an example from my own practice to make it clear what we are talking about:
The company ordered metal beams. The contract contained only some parameters of the beams and the standard phrase "the quality of the beams must meet the requirements of DSTU 3436-96 (GOST 8240-97) Hot-rolled steel channels." Beams set and accepted. There were no comments on the quality. When the welders began to weld the required structure from the beams, it became clear that the thickness of the beams did not correspond to the actual agreements with the supplier. When they looked at DSTU, they realized that no complaints about the quality of the goods can not be made. This DSTU contains the characteristics of many series and numbers of beams, and in the delivery contract no one specified which series and number the beams should be delivered, but only some of their sizes. The company was forced to revise the work plan and buy beams to strengthen the structure. |
2. Describe the critical indicators that determine the quality of goods.
This should be done if you do not have a standard or specifications that set requirements for your product, or if these documents do not describe all the critical quality indicators for your product.
It is important that such indicators are clearly described and that in case of non-compliance of the product with such indicators, it can be checked and recorded.
3. We fix the purpose of purchase of the goods.
If the contract does not require the quality of the goods, then such goods must be suitable for the purpose for which the goods of this kind are usually used.
If you specify the specific purpose of purchasing the goods, then in addition to the usual use, it must also be suitable for use for this purpose (Part 2 of Article 673 of the Civil Code of Ukraine).
This is the least effective way to fix quality, because such a criterion is not always evaluable. Still, sometimes it's better to mention it.
Here is another example, but from the register of court decisions (case №922 / 691/15):
The Chernivtsi enterprise ordered a universal PT-50U pneumatic conveyor from the Kharkiv enterprise, which it planned to use for unloading soda ash from railway cars. The supplier installed the conveyor and put it into operation. A week later, the buyer sends a claim to the supplier, due to the fact that he can not start the pneumatic conveyor. The supplier replies that the warranty obligations for the conveyor must be fulfilled by its manufacturer. The buyer writes a claim to the manufacturer. The producer answers that according to TU pneumatic conveyors for grain are intended for transportation on pipelines of seeds of grain crops. Due to the design features, soda ash powder cannot be transported through such a pneumatic conveyor. Due to the downtime of railway cars with soda, the buyer paid the railway an amount that is 4 times the cost of this pneumatic conveyor. The supplier agreed to take the air conveyor and return the money, but the buyer tried to compensate the damages through the court. The courts have been considering this case for several years. One of the court's arguments was that the parties did not specify in the supply contract for what purposes the buyer buys a pneumatic conveyor and the supplier allegedly did not know that this equipment was needed for unloading soda and not for unloading grain. |
4. We indicate in the contract the document by which the supplier confirms quality of the goods.
It is very common practice in the contract to specify that the quality of the goods must be confirmed by a certificate of quality of the manufacturer.
A document such as a "quality certificate" is mandatory only for a small list of goods (for example, for medicines). In other cases, it is an ordinary document of any form issued by the manufacturer, a kind of "receipt" that the product is high quality. If you really want to get a quality certificate with adequate content, then describe the requirements for it in your contract.
Often a quality certificate is understood by the parties as a certificate of conformity. This is a completely different document that confirms compliance with the requirements of certain technical regulations or DSTU. Instead of a certificate of conformity for some goods, you can issue a declaration of conformity. The declaration and the certificate confirm the conformity of the goods to the requirements of the specific technical regulations. Therefore, the presence of these documents does not mean that such goods meet the quality requirements agreed by the parties.
The choice of the document by which the manufacturer will be able to confirm the quality of the product depends on the specifics of the product and the relationship between the parties. If the seller has a certified quality control system and the buyer trusts it, it is enough to simply obtain a copy of the relevant ISO certificate from the manufacturer when signing the contract.
It is important to specify in the contract one document which the seller will be able to provide precisely on confirmation of quality of the goods, instead of to specify several documents at the choice of the seller.
Let's return to the example with the supply of a pneumatic conveyor. In their supply agreement, the parties stated: “acceptance of the goods is carried out by the buyer in the presence of accompanying documents: invoice, invoice, certificate of conformity and certificate of quality or passport for equipment ".
In fact, the buyer accepted a pneumatic conveyor with technical documentation for a conveyor of another model. The court also used this argument against the buyer: “the above clause of the contract, which is aimed at protecting the buyer, established the possibility of accepting the goods only in the presence of appropriate technical documentation for it, while ignoring this procedure could indicate acceptance of such goods at your own risk. , and, as a consequence, incurring additional costs, including on the grounds of their own negligence.
That is, all responsibility for checking the documents for the goods lies with the buyer at the time of acceptance of the goods. That is why the buyer is interested in recording a specific document, according to which he will be able to check the quality of the delivered goods.
Who will be able to form the right requirements for product quality?
It is at this stage that close cooperation between managers and lawyers of the company is important. Due to lack of technical knowledge, a lawyer often cannot correctly and quickly describe the requirements for the product. In addition, the lawyer may not know why they are buying a particular product. Therefore, it is important to combine the technological knowledge of managers and engineers of the enterprise with the legal knowledge of a lawyer.
If you still have questions or need help preparing a contract, you can always contact us
The moment of transition of risks of accidental destruction of the goods
With this point, everything is really easier. Here you will be helped to choose the right delivery time according to the rules of Incoterms. The moment of transition of risks of accidental destruction of the goods will depend on a choice of term of delivery also.
In order for a lawyer to choose the term Incoterms correctly, he needs to know what transport the goods are delivered to, where the supplier pays for the delivery of the goods (for example, loads into the buyer's car in his warehouse), whether there is insurance of the goods, and whether there were separate agreements , who and to what point of delivery is responsible for the risk of destruction of the goods.
The order of acceptance of goods
Many lawyers do not want to prescribe the procedure for acceptance of goods in the contract and are limited to the usual reference to Instruction P-7. At the same time, many people did not read it and did not think about whether it is realistic to follow the order that is written in it.
We will not explain much, just note that this instruction was approved back in 1966 and is now obsolete. For example, if in the process of accepting the goods you find that it is damaged, and the supplier refuses to come to certify such damage, you can continue to accept the goods in the presence of "expert bureau or representative of the relevant quality inspection." There are no such bodies now and you will never be able to comply with all the provisions of this Instruction.
But Instruction P-7 can serve as a good guide for developing your own algorithm for receiving goods. Many of its provisions are formulated quite clearly and fairly. You just need to update everything over time and bring it into line with your own product and production.
It is important to describe the procedure of acceptance of the goods as accessible as possible: which documents for the goods need to be checked; what characteristics of the goods the buyer checks directly in the process of acceptance of the goods, and what in the process of further use of the goods (the so-called hidden shortcomings); which document confirms the fact and date of completion of acceptance of goods for quality.
The verification algorithm must be clear. It is necessary to acquaint employees who will directly accept the goods with it. It is desirable that these employees also participate in the development of standard algorithms for accepting goods and have the opportunity to provide a lawyer with suggestions for changing such algorithms. This will help to develop real and effective procedures, rather than formal instructions "dropped from the legal department."
In addition to the procedure of acceptance, it is also necessary to agree with the supplier a detailed procedure in case of detection of damaged goods and goods of improper quality:
terms and forms of notifications about such shortcomings;
how and what confirms the fact of notification;
what documents need to be provided to confirm deficiencies;
how to act when the supplier refuses to receive any notification of delivery of substandard goods;
what to do with the whole consignment of goods and with the goods of improper quality while the parties resolve disputes among themselves or conduct independent examinations;
who pays additional costs, such as simple transport, return of goods of improper quality.
We advise you to record in the details of the contract all valid means of communication (phone numbers and messengers, e-mail boxes) and indicate that correspondence with these means of communication is equated to written correspondence.
In formulating all these provisions, it should be understood that in most cases the guilty party does everything possible to avoid liability for breach of its obligations. Therefore, it is necessary to agree on everything in as much detail as possible at the stage of negotiations. Often, formal violations of the procedure for accepting goods or missing deadlines for filing claims can lead to failure in future disputes.
Hidden flaws and warranty service
Not all the shortcomings of the product can be seen at the time of unloading, especially when it is packaged. Therefore, it is often important to clearly separate in the contract, which characteristics of the goods the buyer checks at the time of acceptance of the goods from the carrier, and which - directly on the production. Also, do not forget about the timing of such an inspection.
Describe the shortcomings that can be considered hidden, and how they need to be confirmed and how to fix them.
As in the previous paragraph, it is necessary to provide a detailed and effective algorithm for notifying the supplier of identified deficiencies and how to act when the supplier does not respond to such messages. Immediately upon signing the contract, distribute the future costs associated with the defects of the delivered goods. If the identified deficiencies can lead to the cessation of production or other damage, it is also necessary to record the mechanism for determining such damage.
Important features of hidden shortcomings are the fixation of the causes of their occurrence and the shortened statute of limitations.
The law releases the seller from the obligation to eliminate hidden defects of the goods, if he proves that such defects arose due to violation by the buyer of the rules of operation or storage of the product. Sellers always try to take advantage of this provision. Therefore, it is important for both the seller and the buyer to record the fact of acquaintance with the conditions of proper storage and use of the goods.
Here is an example from my own practice:
Company A supplied enterprise B with stainless steel refrigerators for the dining room. After some time, the surface of the refrigerators began to corrode. The supplier insisted that these surfaces were wiped with an acid-containing substance during cleaning, which is expressly prohibited by the instructions for use. The dispute went to court, but did not end with a decision on the merits of the dispute. To determine the causes of damage, it was necessary to conduct an examination - to cut off a particle of the coating. This scenario did not suit the buyer (he still had problems with missing the statute of limitations) and he did not insist on further consideration of the dispute in court. |
This case also confirms the importance of compliance with the statute of limitations.
In disputes arising in connection with the supply of goods of improper quality, the statute of limitations is 6 months from the date of proper establishment of defects in the goods supplied.
The parties to the contract may extend this period.
Suppliers often manipulate this period - they promise to repair or replace the product, but do nothing. Therefore, buyers need to be extremely careful.
Measures of liability for breach of obligation
This point is perhaps the most painful for the parties, because no one wants to take additional risks. However, it should be understood that the presence of an obligation in the contract, which is not secured by a real measure of responsibility, does not guarantee its implementation.
At the same time, other extremes should be avoided. The measure of responsibility must perform several functions:
deterrence from violations;
inclination to perform duties after their violation;
compensation for damage to the injured party.
If you overdo the measure of responsibility, then at some point after the breach of the obligation, the violator becomes unprofitable to perform the obligation and he will look for all possible ways to avoid liability. Both sides lose out.
If you still have questions or need help preparing a contract, you can always contact us
Instead of a conclusion
At first glance, all these points may seem too complicated. In fact, you can develop several algorithms for typical deliveries and adjust them depending on the arrangements with the contractor.
Of course, the contractors will once again remind you that "the contract is signed in order to work for it, not to sue." Only, unfortunately, this principle does not work, and as soon as something goes wrong during delivery, the guilty party will look for all ways to avoid liability.
Sviatoslav Bartosh
partner of Bargen Law Firm
The original article was published in the May issue of the magazine "Quality management”
If you still have questions or need help preparing a contract, you can always contact us
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