Models of Supply Contracts The view of consortia of operators and - - PowerPoint PPT Presentation

Models of Supply Contracts

The view of consortia of operators and the view of turnkey suppliers

Panel members: Francis Charpentier (France Telecom Orange) Vito Pavone (AT&T), Motoyoshi Tokioka (NEC), Nigel Bayliff (Huawei Marine), Keith Schofield (Pioneer Consulting), John Horne (SubOptic EC Secretary)

What We’ll Discuss Today

1. Building a Model of a Supply Contract Adapted to the Needs of a Consortium of Purchasers 2. Feedback on the SubOptic 2010 Model Contract 3. Panel Discussion

Building a Model of a Supply Contract

Adapted to the Needs

• f a Consortium of Purchasers

Presenter: Francis CHARPENTIER Company: France Télécom Orange

Presenter Profile

Francis Charpentier is the Head of the purchasing and deployment of submarine systems for France Telecom Orange. He and his team take part actively to the Procurement Groups of many submarine cables, such as ACE, LION, SMW4, SMW3, IMW and SAT3/SAFE.

• Name: Francis CHARPENTIER
• Title: Head of Submarine Systems

Deployment

• Email: francis.charpentier@orange.com

What We’ll Discuss Today

1. MODEL CONTRACTS 2. THE 2010 MODEL CONTRACT 3. CAN A MODEL CONTRACT BE BALANCED ? 4. THE 2013 MODEL CONTRACT 5. SPECIFICITIES OF A CONSORTIUM OF PURCHASERS 6. IMPORTANT AREAS OF NEGOTIATION 7. CONCLUSION

Model Contracts

• Model contracts are common practice in business life
• Advantage: It saves the effort of writing up a contract from scratch
• Caveat: The clauses are 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
• Model contracts for Large Projects (such as construction of submarine cables):
• 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

Model Contracts for Submarine Cable Systems

• A first Model Contract for the Construction of Submarine Cable Systems was published at

the SubOptic 2010 Conference in Yokohama

• This effort was driven mainly by Suppliers of the Submarine Cable industry
• 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)

• 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

The first Model Contract (SubOptic 2010)

• It simplified the contract language w.r.t. ITT models by
• Avoiding repetitions, rephrasing of legal obligations, etc
• Removing specific figures and replaced them by blanks (to fill in)
• Skipping purchaser protection clauses commonly requested 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
• It appears in favor of the Supplier, as far as the contract language is concerned
• But it provides a balanced point of view in the commentary paragraphs

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 side to make concessions and to resolve disagreements

Can a model contract be balanced ?

• For a specific project, the result of the negotiation depends on the relative negotiation power
• f the Supplier vs. The Purchasers
• If 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 use the neutral reference model to request from the Supplier

maximum concessions away from it

• They would still need to provide an ITT model to show their target, and as a

common reference to compare the moves made by the tenderers

Supplier’s target contract (2010 SubOptic Model) Purchaser’s target contract (ITT Model) Project A Signed contract Project B Signed contract

Project A: Weak purchasers negotiation Project B: Strong purchasers negotiation

Contract negotiation with extreme models

Supplier’s target contract (2010 SubOptic Model) Purchaser’s target contract (ITT Model) Intermediate Model contract

Establishing an intermediate neutral model contract requires a « balanced negotiation » once for all

Neutral model and what contract negotiation may be

With an intermediate neutral model contract, purchasers would still need to provide an ITT model

Signed contract

The second Model Contract (SubOptic 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
• 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

• Use of a Central Billing Party (CBP) to centralise all supplier’s billing to the Purchasers
• Purchasers form a consortium but they don’t accept joint liability
• So what happens if one Purchaser does not meet its payment obligations ?
• 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)
• The related clauses of the contracts (Payment terms, Suspension right, Termination rights)

are therefore subject to intense negotiation for real projects

Specificities of Consortia of Purchasers

Important areas of negotiations

• Financial guarantees in favour of Purchasers
• Guarantee Against all intermediate Payments (GAP), so long as the transfer of title has

not occured (it occurs normally at Provisional acceptance)

• Performance Bond (a.k.a. LPG for the delivery phase): generally can be seen as a

single GAP for the initial down payment; generally expires at Provisional Acceptance

• Warranty Bond (a.k.a. LPG for the warranty phase): follows the Perfomance Bond in

time, and expires at Final Acceptance

Important areas of negotiations

• 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.

Important areas of negotiations

• Diverging views 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.

Important areas of negotiations

• Purchasers responsibilities
• 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

Conclusion

• Supply contracts are complex sets of interacting clauses
• 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

• By comparing the signed contract to both models, it is possible to assess the negotiation

power of each party

2013 MODEL CONTRACT CAN BE FOUND ON THE CONFERENCE CD