Agreements and contracts

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Agreements and contracts
5EURES International Training June 12.-16 2006
Joensuu
Petteri Ojarinta
North Karelia University of Applied Sciences
15.6.2006
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The Contract

• A tool
• Which reduces uncertainty
• Creates confidence
• Improves productivity
• Reduces risks
• Points to take notice
• Suffiency
• Suitability
• Otherwise the tasks mentioned in contract will
  not come true
• The contract will not necessary mean a confidence
  between contracting parties, actually it may
  produce quite big gaps between them

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Contract types

• Contracts can be divided into
• Written contracts
• Oral contracts
• Offer answer - contracts
• Operation based contracts
• Tacit contracts

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The Contract

• The prevent of juridical problems is profitable
  because
• Those problems cost a lot to companies and
  communities
• Those problems waste time and resources which
  would otherwise be targeted to profitable work
• When the contract is well made and easy to
  understand it gives an oppurtinity for solving
  the problems by using negotiations

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The hierarchy of the contract law

• Mandatory norms
• Terms between contract parties, delivery limits,
  technical spesifications, time schedules,
  capacity warranties, other appendixes
• Customs of the trade, principles assumed by
  contract parties
• Optional, non-mandatory norms and principles of
  law

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A good contract

• As simple as possible but still extensive
• Always made under the terms of mandatory norms
• Very important is to remember what if questions
• A good contract contains a base for equal
  negotiation and solving procedure

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A good contract

• Needs
• Juridicial expertise
• Knowhow about the heat energy business and
  targets of the contract
• This kind of co-operate between different sectors
  requires good social and interaction skills

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How to make a good contract?

• When preparing the contract it is good to be
  prepared for the worst possible outcome and what
  are the risks to end to it
• Making of the contract is quite much like doing a
  risk analysis. With the help of jurisprudence it
  should be possible to find out a compromise which
  is as good as possible now and in future

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How to make a good contract?

• Things to be account when determing breaches of
  the contracts
• What is the contractual oblication, how it is
  definated?
• Is the contractual oblication absolute or
  target-oriented?
• Is the schedule of the contract binding or
  target-oriented?
• Do the contract obligate that the target of the
  contract (eg. goods) is suitable for the needs of
  other contractual part?

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How to make a good contract

• Other things to take into account
• Warranty conditions and default fee
• Agreement on the limitations of risks
• Force majeure
• How to solve

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How to make a good contract?

• It might be useful to use some question words
  while preparing the contract. It makes it
  possible to think the contract as a wholeness
  which builds up from small details. Possible
  question words
• what?
• where?
• when?
• how?
• where from?
• to where?
• who?
• which one?
• whose responsibility?
• Whose expense?
• what if not?

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Basic question when doing the contract

• What kind of contact would be reasonable made and
  gives possibility for co-operating and lets open
  space for new inspirations?

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Interpretation of the contract

• Contracts are interpreted as an aggregate
• Hand printed conditions pass over conditions
  printed by typewriter and conditions printed by
  typewriter pass over printed conditions
• Unclarities are solved against the draftsman of
  the contract
• Condition against the common practice will be
  interpreted narrow
• Minimum rule

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Problems, difficulties?

• The contract is made in the wrong time
• Do they tap a situation?
• The contract between friends
• No focus to small details, because have thought
  that it is very unlikely to have any problems
  with friends
• It may lead to situation where the other party
  have to face unreasonable responsibility because
  of the some small point in contract

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Common problems in the contracts

• Workings of the co-operating, targets of it and
  the risks of it are not thought sufficiently
• Contracts are not extensive enough
• Very important thing is also to remember that too
  big non-confidence and gathering will also make
  the co-operating uneffective

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Voidable contract

• The voidable norms in the contracts can be
  divided
• To the legal capasity of the contract parties to
  make the contracts
• Legal capasity
• Lack of the statutory representation
• To the facts consired of making of the contract
• Intimidation
• Fraud
• Undue influence
• Dishonourable and unworthy act
• Forgery

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Different kind of contracts in the heat energy
business

• Customer owns equipments needed in heat
  production
• Entrepreneur owns equipments needed in heat
  production
• Who owns the heating network
• Is the client consumer or not, what is the
  difference

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The contracts in heat energy business

• Several problem points
• The contract is long lasting and economically
  significant
• The contract parties do not have necessary
  knowhow how to handle this kind of situation
• What are the mandatory norms to be account in
  procurement phase
• The situation might also be that friends make
  contracts without any thinking what are the
  responsibilities in the contract
• In practice the jurisprudence is seen as a thing
  which difficulties co-operating

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The content of the heat delivery contract

• The amount of the produced heat energy
• The price of the heat and the determination of it
• When the heat production will be started
• Measurement of the produced heat
• The ownership and maintenance of the heating
  equipments and heat energy meter
• Assurement of the heat delivery
• When the contract comes into force and when it
  ends
• Retirement of the contract and compensations

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The content of the heat delivery contract

• What to do if the consumption of the heat changes
• Temporary interruptions and limitations in heat
  delivery
• Eg. For the break downs of the heat production
  equipments

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Contract parties in the heat delivery contracts

• As a buyer of heat (customer)
• Municipality
• City or town
• Company etc.
• As a seller of heat (entrepreneur)
• Private entrepreneur
• Co-operative
• Limited company
• Group of entrepreneurs

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The meaning of the contract

• With the contract will be agreed about
• Building responsibility of the heat plant
• Maintenance and running of the heat plant
• Producing, delivery and pricing of the heat
  energy
• Other practical things
• Other targets could be
• Purpose to increase the use of domestic energy
  sources
• The use of energy wood will increase the profit
  of forest and increases employment

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Building and ownership of the heat plant

• Heat energy entrepreneur
• Takes care of the constraction of the heat plant
• May own the district heating network
• Rents or have a permission to use an estate for
  the heat plant

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Running of the heat plant

• Heat energy entrepreneur
• Takes care of the running of the plant. This
  means also organizing the fuel supply,
  supervising the heat delivery to customers and
  maintenance or repairing works
• Takes care of the water and electricity costs of
  the plant
• Takes care that heat plant will be running
  between agreed limits
• Takes care of the insurances for plant and
  possible employees

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Running of the heat plant

• Customer
• Determines the water temperature circulating in
  the district heating network, pressure in the
  pipes etc.

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Production of the heat energy

• Most of the needed heat energy will be produced
  by wood chips or other wood based fuel (target
  80 - 90)
• Entrepreneur has a right to use light heating oil
  during peaks in winter and in summertime when
  heat load is not big enough
• Cost related to use of light heating oil will be
  settled case by case

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Measurement of produced heat energy

• Produced heat will be measured with an energy
  meter
• Entrepreneur delivers monthly a report about the
  produced heat energy to the customer
• The energy meter will be maintained as agreed in
  the heat delivery contract. Costs of maintenance
  work will be paid as agreed in the contract

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The price of heat energy

• Compensation of the investments
• Investment costs will be amortized during the
  contract period
• Energy payment /MWh
• Maintenance costs and costs of repairs

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The price of heat energy

• Energy payment /MWh
• Contract parties have negotiate peridiocally
  about the bases of the energy payment price
• To take account the cost level there is several
  ways to bind the price of produced
• As a target is a price and binding method of
  energy price that satisfy both contract parties

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The price of heat energy

• Price basket
• 2-4 factors
• Light/heavy heating oil, sod peat, price indexes
  etc.
• The shares of the factors may be equal or one can
  be emphasized
• Light heating oil
• Very common way to bind the price of heat energy
  at the moment
• Problematic because high price level and
  unstability of the price

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The price of energy

• Maintenance and repair compensation
• Customer pays compensation for the costs related
  to maintenance and repair costs
• The amount of compensation may be yearly 1 of
  net investment costs of the plant without taxes
• Compensation will cover normal maintenance and
  repair works during the year

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Validity of the contract

• Contract come into operation when it is signed by
  both contract parties
• Heat production as agreed in the contract will be
  started after acceptance inspection and test
  drive of the plant
• Entrepreneur has a right to stop the heat
  production temporarely because of the necessary
  reasons (repair or maintenance work)
• Entrepreneur has to do all for it that heat
  production will be started after stop so soon as
  possible
• Contract period is usually 10 15 years

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Cancellation of the contract

• Both contract parties have a right immediately
  cancel the agreement if other party breaks the
  terms of agreement and causes danger or financial
  harm to other party because of it
• Groundless cancellation will lead to the
  compensations
• Disagreements between contract parties will be
  usually settled in district courts if necessary.
  Conciliation procedure is used seldom because it
  is an expensive way to settle