September 2012

In March this year Orgalime unveiled the S2012 General Conditions relating to the supply
of mechanical, electrical and electronic products.

The intention of the new conditions is to revise and update the well-known Orgalime S2000 Conditions that are used extensively within the shipping and offshore industry.

WHAT IS NEW?

Whilst Orgalime S2012 introduces some notable changes, importantly, the balanced approach to risk and liability that is a key feature of the Orgalime S2000 Conditions has not been changed. The main differences between the two conditions are:

  • The EXW (Ex Works) Incoterm delivery provision has been replaced by the FCA rule (Free Carrier);
  • The Supplier’s right to extend the time for delivery now includes any circumstance attributable to the Buyer. Under Orgalime S2000 extensions were only permitted if the delay resulted from force majeure or from an act or omission of the Buyer; Liquidated damages are to be calculated on the basis of commencement of the week rather than to each completed week of delay as in the previous conditions;
  • The Supplier has been given the right to claim recovery costs of 1% of the amount outstanding in addition to default interest should the Buyer fail to pay on time;
  • Where defects occur which cannot be repaired by the Supplier, the Buyer’s right to terminate and claim compensation up to 15%  is limited to that part of the product which cannot be used as intended by reason of the defect; Further examples of force majeure events have been added, including currency and export restrictions, epidemics, natural
    disasters, extreme natural events and terrorist acts.

COMPARISON WITH NL 09

The NL Supply Conditions (NL 09) issued by the trade organisations for engineering industries in Denmark, Finland, Norway and Sweden are treated as the Nordic Standard conditions. Comparisons are often made between these conditions and Orgalime S2012. The NL 09 Supply Conditions for the supply of machinery and other mechanical, electrical and electronic equipment were a revision of the 2001 version (NL 01). Whilst Orgalime S 2000 and NL 01 were almost identical this is not the case with the successor revisions.

The liability regime in Orgalime S2012 is not significantly different to that found in Orgalime S2000. The supplier’s liability for delayed delivery, defects and that arising on termination is much greater under NL 09 than in NL 01. This increase in exposure reflects a notable
trend seen in the standard con-tracts adopted in the Nordic countries.

DELAY

The maximum liquidated damages for delay under Orgalime S2012 is 7.5% of the contract price, whilst in NL 09 the figure is 10%. Further, the liquidated damages under NL 09 are payable at a rate of 1% of the purchase price for each commenced week of delay, whereas under Orgalime S2012 the equivalent rate is 0.5%.

The Buyer’s right to terminate due to delayed delivery is exercisable after 16 weeks of delay (15 weeks plus notification of termination of at least one week) under Orgalime S2012, whereas under NL 09 the Buyer needs only to wait 11 weeks (10+1 week) before acquiring a right to terminate.

DEFECTS

Under both Orgalime S2012 and NL 09 if a product defect is discovered during the guarantee period, the Supplier is required to remedy the defect at its own cost without undue delay, failing which the Buyer may undertake the work itself or employ a third party to do the work, and in both cases at Supplier’s risk and expense. If any defect is not successfully remedied then the Buyer may claim a price reduction reflecting reduced value. The maximum reduction in the price is
limited to 15% under Orgalime S2012, but is 20% under NL 09.  If a defect is substantial, the Buyer may terminate the contract and claim compensation for losses. Under Orgalime S2012,
this compensation is limited to a maximum of 15% of the contract price, whilst under NL 09 the maximum is 20%.

The Nordic NL working group working on the proposed revisions to NL 01 identified a general tendency that suppliers (within the Nordic countries) frequently offered a two-year defects warranty period in lieu of one year provided for in NL 01. It was decided to retain the one-year warranty period and an important factor in this decision was that the Orgalime working group indicated that no such amendment would be made.

DISPUTES

NL 09 and Orgalime S2012 are governed by different dispute settlement mechanisms.
Orgalime S2012 refers to International Chamber of Commerce arbitration, whilst NL 09 refers to arbitration in accordance with the law governing at the Seller’s domicile. ICC arbitrations are notoriously time con-suming and expensive and ad-hoc arbitrations in accordance with the laws of the Nordic countries are often more expedient and less costly for the parties.

COMMENT

The updated Revisions to Orgalime S2012 are to be welcomed and it is clear that the terms
are more supplier friendly than those to be found in NL 09, which more closely reflects the contracting trend in Nordic countries. In terms of their overall approach to the allocation of risk and liability the differences between the two standard terms are not significant.

Orgalime S2012 and NL 09 provide parties with a degree of flexibility and choice when adopting a standard contract. Given the introduction of the new standard form in Orgalime S2012 it is important that consideration is also given to additional or rider clauses to ensure that they are consistent with the new provisions. Thought also needs to be given as to what further provisions might be needed in light of the changes to the standard terms that have been introduced.