Commercial Contract Negotiation & Management Flashcards

In a contract dispute, what is the difference between 'mediation' and 'arbitration' as alternative dispute resolution methods?

Answer: Mediation uses a facilitator to help parties reach agreement; arbitration involves a neutral decision-maker whose ruling is typically binding

Mediation relies on a neutral facilitator to assist parties in reaching a voluntary settlement, while arbitration results in a binding decision made by an arbitrator.

A 'milestone payment' structure in a contract is most commonly used to achieve what objective?

Answer: Align payment with verified performance progress, reducing the buyer's financial risk

Milestone payments tie disbursements to achieved deliverables, ensuring the buyer pays for demonstrated progress rather than advancing funds before work is completed.

What is 'contract privity' and why does it matter in commercial contract management?

Answer: The legal principle that only parties to a contract can enforce its terms or be bound by it

Privity of contract means that generally only the parties who signed the contract have rights or obligations under it, limiting third parties from making claims.

When a supplier requests a 'take-or-pay' clause in a long-term supply agreement, what obligation does this create for the buyer?

Answer: The buyer must purchase a minimum quantity or pay a fee equivalent to the shortfall

A take-or-pay clause requires the buyer to either take delivery of the agreed minimum volume or pay a penalty equal to what the supplier would have earned on that volume.

What does 'commercial close' mean in the context of a major contract negotiation?

Answer: Agreement on all commercial and business terms, typically preceding legal/financial close

Commercial close is the point at which the parties have agreed on all key commercial terms, allowing the transaction to proceed to financial and legal formalization.

A contract manager identifies that the counterparty is using 'salami tactics' in renegotiation. What does this describe?

Answer: Requesting one small concession at a time to gradually erode the original agreement

Salami tactics involve extracting concessions incrementally, one thin slice at a time, so each individual ask seems minor but the cumulative effect is significant.

Under which circumstance would a 'force majeure' clause most clearly excuse a party's non-performance?

Answer: A hurricane destroys the supplier's production facility, making delivery impossible

Force majeure typically covers extraordinary, unforeseeable events beyond a party's control (like natural disasters) that physically prevent performance, not commercial hardship.