Framework Agreements Part 2: Important terms to review and how to negotiate them

Framework Agreements are a popular contract structure for governing the provision of goods and services. The contract is split into two parts:

• The Framework Agreement, setting out the common terms for each project and the relationship in general
• The Order, setting out the terms bespoke to a particular project.

In this article, we will analyse some of the terms usually found in the Framework Agreement that should be reviewed in detail.

Contract value

This may be set out in the Order instead, but watch out for rates cards, price lists and caps that are contained in the Framework Agreement as well. If the contract is over a year (or shorter if you require), check you have the ability to increase the agreed rates, in line with inflation or price indexes. In each order ensure that the value is as quoted or otherwise agreed.

Works

Whilst the exact description of works for a particular project will usually be found in the Order, the Framework Agreement should also set out details of the type of works you are required to perform. Ensure that you are not obliged to carry out any works outside your expertise. In each Order, check the definition of the works matches your understanding of the works you have agreed to provide, and that goods and services are separately articulated as such in the Order.

Service Level Agreements (SLAs) and Key Performance Indicators (KPIs)

These are agreed levels of services and measurements of that service. Ensure that each are practically achievable. Check if any sums are to be repaid on breach of any SLAs and consider if the sums are reasonable and if they are likely to affect the profitability of the contract.

Subcontracting

If you require the ability to subcontract any element of the works, be sure to check the contract terms. If subcontracting is prohibited negotiate with the customer to allow for subcontracting. If this is resisted, perhaps the customer will agree to subcontracting with their consent, or to a list of pre-agreed named subcontractors.

Insurance Limits

Ensure that the contract’s insurance requirements match your own and any subcontractor’s insurance levels and negotiate the levels accordingly.

Payment Terms

Check the period of payment is not too long, as this can really affect cash flow, which in turn has financial consequences for your business. If works are likely to be over a protracted period of time, ensure that there is the ability for stage payments e.g. on a monthly basis or on the achievement of milestones.

Limit of Liability

You can attempt to limit your liability to the value of each Order or as a general cap in the Framework Agreement. Failing that, try to limit your exposure to the aggregate value of one year’s worth of orders under the Framework Agreement, or another predefined figure. If this is still rejected ensure the liability limits reflect the value of your insurance limits. You should also carve out “loss of profits” and “indirect losses”.

Indemnities

Unfortunately, indemnities are a fact of life in most contracts. It is helpful if you can limit them e.g. to losses flowing directly from your breach of contract, instead of all losses arising out of the works. Caps on indemnification are also useful e.g. to levels of insurance or to the value of the works. Where possible, you should seek to avoid indemnification for consequential losses.

Termination

Do you have the ability to terminate the contract if it becomes too onerous or unprofitable? This is particularly important if you do not have the ability to reject Orders that are issued under the Framework Agreement. Be sure to negotiate rights to terminate on the customer’s insolvency and if required on giving notice (3-6 months is usual, but it will depend upon the nature of the works being provided).

Confidentiality

Ensure that you are complying with confidentiality clauses or separate non-disclosure agreements and not publishing case studies and client lists on your website or other promotional materials, as breach of these terms can lead to termination of the Framework Agreement. Where you do wish to use customer names and details ensure you have prior consent and that personal data is not used.

Incorporation of documents

You should watch out for any clause which incorporates other documents including schedules, specifications, policies, tenders and head contracts. They become part of the binding contract and so will also need to be reviewed thoroughly as well.

Contracts are all too often agreed in the construction and service industry without proper review, but with real consequences when transactions do not go to plan. Framework Agreements in particular might govern a relationship that will run for years. They are worth investing in at the outset to ensure that they work for you, as well as your customer.

I have a wealth of experience negotiating Framework Agreements and contracts for the provision of services, from my time spent in-house as Legal Director for a nationwide contractor. If you would like any advice on a particular contract or transaction, please do not hesitate to contact me.