Choosing A Proper Contract is Critical to the Success of Every Transaction!

Google now makes almost every purpose and application of form contract readily available to anyone with access to the internet. Users of all kinds, both attorneys and clients, avail themselves of this benefit by copying, editing, and re-using form contracts to fit every purpose and application relating to sales and services.  Without regard to whom is the preparer, it has become far too commonplace to encounter form contracts, intended for one purpose, to be applied and often misused for an entirely different purpose.  [See, "Does the UCC or Common Law Govern Your Contract?”, posted 12/13/23]. It seems form contracts are often viewed as generic documents that can be used interchangeably for every purpose and application.  When used for the right purpose and properly modified to fit the proper application, form contracts can provide great cost savings. But when improperly used, form contracts can wreak enormous havoc, incur great cost, and promote broad ranging disputes. When it comes to form contracts – one size does not fit all!

For starters, form contracts should be segregated between contracts for the sale of goods versus contracts for the provision of services.  Each type of contract differs greatly in purpose.  Contracts for the sale of goods are commonly referred to as purchase orders or PO’s and are governed by the Uniform Commercial Code or UCC. Contracts for the provision of services or Service Contracts are governed by the common law of contracts, or CLC.  Other significant differences between PO’s and Service Contracts include, acceptance, implied terms, modifications, available remedies, parol evidence, rejection of performance, statute of limitations, etc...  POs are often shorter than Service Contracts, because many terms are pre-established by the UCC, whereas Service Contracts tend to be longer since the CLS does not pre-establish terms for the parties.  Yet, I have run across multiple instances in the past several years, where un-named owners with significant assets have improperly used PO’s as a substitute for Service Contracts.  Simply put, POs should never be used as a form contract for Service Contracts and vice versa.

Once segregated between goods and services, form contracts should be further segregated between single purpose vs multiple purpose usage.  Single purpose PO’s and Service Contracts are used for a single purpose transaction, and clearly set forth the material terms of such transaction, including price, scope, and schedule.  Multiple purpose PO’s and Service Contracts, commonly called Master Sales/Service Agreements or MSA’s, are used for multiple un-defined transactions and contain only general commercial terms with material terms specific to each transaction defined at a future date.  As each transaction is defined, material terms specific to each sale or service, such as price, scope, and schedule, are added to the MSA through work orders, or task orders.  Once again, it has become commonplace to see MSA’s used for single purpose applications and PO’s and Service Contracts used in conjunction with work orders for multi-purpose applications.

Form contracts should then be further segregated between the scope of responsibility, namely design-build or build-only contracts.  Design-build contracts render one party responsible to both design and manufacture or build the end product, thereby reducing the risk exposure to the other party. Such contracts expressly define the duties and obligations with respect to both design and build responsibility. Build-only contracts require one party to build the end product based upon the design provided by the other party, thereby splitting the risk exposure between each party. Such contracts are silent as to design since design duties and obligations are defined by a separate agreement with a third-party provider. Once again, design-build contracts should never be used for a build-only application and vice versa, since design risk would not be properly allocated. 

Finally, form contracts should be further segregated by how and when the contract sum or price is established. Service Contracts are typically based upon a contract price using a lump sum, guaranteed maximum price or GMP, or cost plus a fee, each of which is established through a different methodology.  Lump sum prices are the most common and are reflected by a fixed price set forth in the Service Contract prior to the start of work. GMP prices are established similar to a lump sum pricing either prior to, or after the start of work. The GMP represents the maximum contract sum with payments based upon actual costs plus a fee, thereby allowing the other party to both cap risk and benefit from cost savings. Cost plus a fee pricing is also based upon actual costs incurred without a cap of any kind and places all risk of cost overruns upon the other party.  Most PO’s are based upon a single purpose transaction and use unit pricing, although some MSA supply contracts may be based upon a lump sum or cost plus pricing. Each type of form contract contains the methodology for establishing the contract price and cannot be easily modified to satisfy a different methodology.

These general rules provide a starting point for selecting the proper form contract to serve the purpose and application of your transaction.  However, once the proper form contract has been selected, the real work begins when the terms are customized to  reflect the specifics negotiated between the parties.  The most challenging aspect of using form contracts, is not customizing what is already include in the form, but rather identifying what should be there but is not.  For some preparers, the best method to identify missing terms is to examine multiple form contracts to compare what is included in some but not others.  But starting with a contract form  used for the right purpose and properly modified to fit the proper application, will save time, costs and headaches.