Supplier's Corner #1 – The Devil’s in the Definitions

The Definitions Chapter of a contract is often only subject of cursory review and sometimes completely ignored. It's typically found in the first part of the contract and consist of a number of capitalized terms with a further explanation of each term. Definitions can sometimes also be found throughout the contract. The use of definitions is merely a sensible drafting technique, to avoid having to repeat sometimes lengthy bulks of text, adding unnecessary pages and complexity to the contract.

But, there's more. The definitions are often the most carefully drafted and precise terms of the contract, because they are intended to give specific meaning to a variety of contractual terms in different parts of the contract. The addition or omittance of even a single word in a definition may have detrimental effect on your contractual position, especially when it comes to the extent of the supplier's liability.

One especially important definition that you should pay attention to is the definition of Contractor Group and Company Group. In a supply contract related to the oil service industry and other industries, where the Contractor normally uses sub-suppliers and the Company is not necessary the end-customer, the group definitions can be crucial to understand the liability regime under the contract.

The reason is that the group definitions decide who are included in the agreed liability regime, although they are not necessarily parties to the contract, and who are considered third parties. This is an important distinction for several reasons, one being that third parties do not have to respect such contractual instruments as limitation on liability, whether in the form of specific caps or a total cap on Contractors liability, knock-for-knock provisions or any other terms of the contract for that matter.

As a rule of thumb, if you are a Contractor you would wish to have a wide as possible group definition of Company. It should typically include Company's affiliates (another definition to pay attention to), it's sub-contractors, it's customers, end-users and license partner, as well as all these companies employees, officers and other personnel. On the other hand, you would wish to have a narrow definition as possible of Contractor group, preferably only the entities and persons that you can control.

Poorly drafted or ignored group definitions may have a severe negative effect on your liability and it will have a direct effect on your insurance costs. Consequently, the project margins will suffer.