Drafting B2B Performance Guarantees

09-Jun-23

25 min

Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Performance guarantees are a fundamental part of any B2B contract, offering a legally binding assurance that one party will make good on their commitments. With the confidence that comes from this assurance, both parties involved have a greater sense of trust in each other, and any losses incurred as a result of failing to meet performance guarantees can be recovered through legal action. Consequently, when drafting these guarantees for any business agreement, it’s important to consider several key aspects.

First and foremost, the performance guarantee should be tailored to the specific services outlined in the agreement. This means that all contingencies or unforeseen circumstances must also be taken into account - these should be specified as part of the guarantee itself. It’s equally vital that the performance guarantee is explicit; providing details on exactly what constitutes an acceptable level of output and what remedies might be available if it isn’t met. Finally, dispute resolution should always feature within performance guarantees; this typically takes place via mediation or arbitration.

The ��Ƶ team understand how important performance guarantees are and they’re here to help ensure you get them right. With millions of datapoints teaching its AI what constitutes market-standard documents and access to an extensive library community templates, anyone can draft high-quality contracts without paying an expert lawyer fee - no account required! For more information on drafting B2B Performance Guarantees using ��Ƶ’s template library click ‘read on’ below for our comprehensive guide or access our free templates today for simple yet effective document protection!

Definitions

Performance Standard: A set of criteria or rules that must be followed to achieve a desired outcome.

Minimum Acceptable Performance Level: The lowest level of performance that must be achieved to meet the requirements of the performance standard.

Remedies: Actions taken to address a problem or issue.

Compensation: Payment or reward given to someone for completing a task.

Responsibilities: The duties or obligations that someone is required to fulfill.

Consequences: The outcome of an action or event.

Review: A close examination of something to make sure it is accurate or meets certain standards.

Agreement: A formal agreement between two or more parties to do or not do something.

Monitoring: Observing or tracking something to make sure it is functioning correctly.

Action Plan: A set of steps taken to achieve a specific goal or solve a problem.

Training: A process that teaches someone new skills or knowledge.

Development: The process of improving something or making it more advanced.

Documentation: Written or recorded information about something.

Reporting: Presenting information in an organized way.

Auditing: Examining something to make sure it is accurate or meets certain standards.

Dispute Resolution: The process of resolving a disagreement between two or more parties.

Termination: Canceling or ending something.

Renewal: Restarting or continuing something.

Establishing Performance Standards
Outline the performance standard that both parties agree to
Define the minimum acceptable performance level
Establish a timeline for when the performance standard must be met
Developing Remedies
Identify the types of compensation the other party will receive if the performance standard is not met
Outline specific remedies for when the performance standard is not met
Drafting the Agreement
Clearly define the responsibilities of each party
Clearly outline the consequences of failure to meet the performance standard
Finalizing the Agreement
Review the performance guarantee for accuracy
Both parties should sign the agreement before it becomes legally binding
Monitoring Performance
Establish a system for regularly reviewing the performance of both parties
Create an action plan for addressing any performance issues that arise
Training and Development
Establish training and development programs to ensure that both parties are meeting the performance standard
Ensure that both parties are aware of their responsibilities and the consequences of failure to meet the performance standard
Reporting and Documentation
Document all performance standards and updates
Create a system for reporting on the performance of both parties
Auditing of Performance
Establish an auditing process to ensure that all performance standards are being met
Identify any areas of non-compliance and develop an action plan to address them
Dispute Resolution
Establish a dispute resolution process for resolving any disagreements between the parties
Outline the process for addressing any disputes that arise
Termination and Renewal
Establish the conditions for terminating or renewing the performance guarantee
Determine the process for terminating or renewing the performance guarantee

Get started

Establishing Performance Standards

Determine the specific performance parameters or criteria that must be met for the performance guarantee to be successful.
Examples of performance parameters may include customer satisfaction ratings, delivery times, quality of goods or services, etc.
When the performance parameters are identified, both parties need to agree on what constitutes satisfactory performance for each parameter.
Establishing this standard will help to determine when the performance guarantee has been satisfied.
Once both parties have agreed on the performance standard, it should be documented in a legally binding agreement.
When this step is complete, you can move on to outlining the performance standard that both parties agree to.

Outline the performance standard that both parties agree to

Identify the objectives of the performance guarantee
Agree on the metrics or criteria that will be used to measure success
Establish the performance standard the two parties agree to for the guarantee
Document the agreed-upon performance standard in a written agreement

When all the objectives and metrics for the performance guarantee have been agreed upon and documented, you can move onto the next step of defining the minimum acceptable performance level.

Define the minimum acceptable performance level

Determine the minimum expectations for the performance of the product or service
Identify any performance parameters that must be met in order for the guarantee to be valid
Agree upon a minimum satisfactory level of performance
Decide if additional performance guarantees or incentives should be provided in order to reach the minimum acceptable level
Document the minimum acceptable performance level and any additional guarantees or incentives in the contract
Once all parties have agreed to the minimum acceptable performance level, the next step can begin

Establish a timeline for when the performance standard must be met

Research applicable laws and regulations that may impact the timeline
Set reasonable timeframes that allow for the service to be performed, and time for businesses to react to any changes
Consider variables such as seasonality, weather, and other factors that may impact performance
Make sure the timeline is included in the guarantee
Check to ensure that the timeline is reasonable, and consider the customer’s perspective
When complete, the timeline should be included in the guarantee document
Once the timeline is established, you can move on to developing remedies.

Developing Remedies

Establish a timeline for when the agreed-upon performance standard must be met.
Identify potential remedies that could be implemented if the performance standard is not met.
Determine the types of compensation the other party will receive if the performance standard is not met. This could include a combination of monetary and non-monetary remedies.
Draft the performance guarantee and include the agreed-upon remedies and timeline.
Have the performance guarantee reviewed and approved by both parties.
Once the performance guarantee is approved, both parties should sign it and keep a copy for their records.

How you’ll know when you can check this off your list and move on to the next step:
Once you have established the timeline for when the performance standard must be met, identified potential remedies, determined the types of compensation, drafted the performance guarantee, and had it reviewed and approved by both parties, you can move on to the next step.

Identify the types of compensation the other party will receive if the performance standard is not met

Research the industry standard for performance guarantees
Consider the type of compensation that would be appropriate in the event the performance standard is not met
Negotiate with the other party to determine the best type of compensation for the situation
Document the types of compensation that the other party will receive if the performance standard is not met

When you can check this off your list:

When the other party has agreed to the compensation for when the performance standard is not met, and the agreement has been documented.

Outline specific remedies for when the performance standard is not met

Identify the performance standard that was not met
Determine the type of remedy that should be implemented to resolve the issue and make up for the missed performance standard
Draft a clause that outlines the specific remedy that will be implemented
Include language that explains how the remedy will be determined
Ensure that the remedy is fair and reasonable for both parties
When complete, review the clause to confirm accuracy and legality

You can check this off your list when you are confident that the clause includes all relevant information and is accurate and legal.

Drafting the Agreement

Draft the performance guarantee agreement, taking into account the outline of specific remedies established in the previous step
Include the legal language necessary to ensure the agreement is legally binding
Make sure to include details such as the date of the agreement, the parties involved, the performance standard, and any other necessary specific details
Once the agreement is drafted, review it with all parties involved to ensure that everyone is in agreement
When all parties have signed the agreement and it is legally binding, you can move on to the next step

Clearly define the responsibilities of each party

Outline expectations of each party in the agreement.
Identify which party will be responsible for providing the services and/or goods in the agreement.
Specify the quality standards of the services and/or goods to be provided by each party.
Include provisions for both parties to make sure the performance standards are met.
Establish the timeline for when services and/or goods must be provided and/or delivered.

You can check this step off your list once you have written a clear outline of the responsibilities of each party in the agreement and when the services and/or goods must be provided and/or delivered.

Clearly outline the consequences of failure to meet the performance standard

Assess the potential consequences of non-performance and craft language that outlines the penalties for failing to meet the performance standard, such as any economic damages, penalties, or other remedies that might apply
Consider the limitations of any remedies, such as any limitations on remedies due to applicable law, industry custom, the size or type of business involved, or any other considerations
Draft language that explains how each party will bear the costs of any remedies outlined in the agreement
Make sure the language is clear and concise, and that it addresses any potential disputes that may arise
Check that the agreement clearly outlines the consequences of failure to meet the performance standard
Once all of the above has been completed, you can check this step off your list and move on to the next step.

Finalizing the Agreement

Ensure the performance guarantee agreement is in writing, signed, and dated by both parties
Review the performance guarantee for accuracy and completeness
Make sure both parties understand their obligations, and that you have the authority to enter into the agreement
Ensure all costs and fees associated with the performance guarantee are clearly outlined
Check that all required fields are completed and all necessary signatures are collected
Once all of the above steps have been completed, you can move on to reviewing the performance guarantee for accuracy.

Review the performance guarantee for accuracy

Carefully review the performance guarantee and ensure that all details are accurate
Confirm that all parties understand the guarantee and are in agreement with its terms
Look for any discrepancies and make sure to clarify them with the other party
Make necessary changes to the guarantee, if any, and have both parties sign it
Once the agreement is reviewed and agreed upon, both parties can sign it to make it legally binding.

Both parties should sign the agreement before it becomes legally binding

Obtain signatures from both parties on the performance guarantee.
Once both parties have signed the performance guarantee, the agreement is legally binding and enforceable in court.
Verify that both parties have signed the agreement before moving on to the next step.

Monitoring Performance

Arrange regular meetings between both parties to discuss and review performance
Set a timeline to review performance - this could be monthly, quarterly, or annually
During the meetings, review performance indicators and KPIs that are relevant to the agreement
Make sure there is a system in place to track and review the performance of both parties
Keep track of any changes to performance that arise during the meetings
When both parties have agreed to a satisfactory performance review, it is time to move on to the next step.

Establish a system for regularly reviewing the performance of both parties

Determine how often the performance of both parties should be reviewed; this could be monthly, quarterly, or yearly.
Establish a timeline for when reviews should occur and set reminders for both parties.
Communicate the review procedure and timeline to both parties.
Once the review procedure and timeline is agreed upon and communicated, you can check off this step and move on to the next step.

Create an action plan for addressing any performance issues that arise

Determine the root cause of the performance issues.
Assess the impact of the performance issues on the project.
Develop a plan to address the issues and achieve the desired performance level.
Identify the resources needed to implement the plan.
Implement the plan and monitor its effectiveness.
Adjust the plan as needed.
Document the plan and any changes made.

Once the action plan has been developed and implemented, you can move on to the next step of training and development.

Training and Development

Assess and evaluate current performance of all employees
Establish training and development needs based on evaluation
Develop targeted training and development plans
Outline the resources that will be used to facilitate training and development
Identify any external partners or contractors that will be used to facilitate training and development
Set a timeline for completion of training and development
Track progress of training and development
Provide feedback on training and development
Monitor progress and performance of employees post-training

Once all training and development plans have been developed, resources identified, and timelines set, you can check this off your list and move on to the next step.

Establish training and development programs to ensure that both parties are meeting the performance standard

Outline the training and development program needed to ensure that both parties are meeting the performance standard
Identify the resources needed to develop and implement the training and development program
Develop a timeline for the implementation of the program
Set a budget to cover the cost of implementing the program
Provide the necessary tools and resources to ensure the program is implemented successfully
Monitor the progress of the program to ensure the performance standard is met
Once the program is completed and the performance standard has been met, you can check this off your list and move on to the next step.

Ensure that both parties are aware of their responsibilities and the consequences of failure to meet the performance standard

Identify and agree on the performance standard and the consequences of not meeting it
Make sure both parties understand the roles and responsibilities associated with the performance standard
Document the agreed upon performance standard, roles and responsibilities, and consequences of not meeting the standard
Ensure both parties have signed off on the agreement
Check that both parties have received and understood the agreement

You can check this off your list once you have documented the agreement, ensured both parties have signed off and received the agreement, and verified that both parties understand their roles and responsibilities and the consequences of not meeting the standard.

Reporting and Documentation

Create a system for regular reporting on performance standards
Set up a schedule for when reports are due, who is responsible for creating the report, and who will review it
Include information about performance standards, actual performance, and any necessary corrective action
Document any updates to performance standards, along with a timeline for implementation
Keep a record of all performance standards, reports, and updates in an easily accessible location
When all of these steps are completed, you can move on to the next step of documenting all performance standards and updates.

Document all performance standards and updates

Define the performance standards in measurable terms
Establish how often the performance standards will be reviewed
Identify the parties responsible for updating the performance standards
Set a timeline for when performance standards will be reviewed and updated
Create a system for logging any updates to the performance standards
Develop a process for informing all parties of any updates to the performance standards

Once all these points have been completed, you can check this step off your list and move on to the next step.

Create a system for reporting on the performance of both parties

Develop a system for both parties to report on their performance, keeping in mind the standards and updates outlined in the previous step.
Ensure the system is regularly monitored and that both parties are held accountable for their performance.
Agree on the frequency of reporting (e.g. monthly, quarterly) and format (e.g. online/email, in-person).
Create a system for both parties to track and analyze performance data over time.
When the system for reporting is established, you can move on to the next step of auditing performance.

Auditing of Performance

Determine the metrics and parameters that need to be audited in order to ensure performance standards are being met
Establish a frequency for the audit process that is suitable for the business arrangement
Come up with a process for documenting and verifying the audit results
Create a system for tracking and reporting on the audit results
When the audit system is in place, you will be able to check this off your list and move on to the next step.

Establish an auditing process to ensure that all performance standards are being met

Create an audit plan outlining the performance standards that need to be monitored
Identify the metrics that will be used to measure performance
Set a timeline for when the audits will be conducted
Assign responsibilities for conducting and recording the audits
Establish a process for regularly reviewing the results of the audits
Document any areas of non-compliance
When all of the above steps have been completed, you can move on to the next step.

Identify any areas of non-compliance and develop an action plan to address them

Review performance standards to identify any areas of non-compliance
Identify the root cause of any non-compliance
Develop an action plan to address any non-compliance
Ensure any action plan is comprehensive and addresses the root cause of the non-compliance
Ensure any action plan includes measurable goals and objectives
Allocate appropriate resources to complete the action plan
Monitor the action plan to ensure it is being implemented effectively

You can check this off your list and move onto the next step when you have identified any areas of non-compliance, developed an action plan to address them, and allocated resources to implement the action plan.

Dispute Resolution

Establish criteria for when a dispute should be escalated to a dispute resolution process
Identify the most suitable dispute resolution process for the agreement, such as arbitration or mediation
Make sure that the dispute resolution process is fair and balanced and is in line with the agreement
Include a clause in the agreement that outlines the dispute resolution process and the process for escalating a dispute
Establish a timeline for when each party must respond to the dispute resolution process
Specify any costs associated with the dispute resolution process
Ensure that both parties are aware of their rights and obligations when entering into a dispute resolution process

When you have completed the above steps you will have established a dispute resolution process for resolving any disagreements between the parties.

Establish a dispute resolution process for resolving any disagreements between the parties

Determine who will handle dispute resolution (e.g. an independent third-party arbitrator, a mediator, etc.)
Outline the process for resolving any disputes that arise (e.g. timelines, deadlines, etc.)
Include a clause in the contract outlining how disputes will be handled
Agree to the dispute resolution process with the other party
When done, document the dispute resolution process in the contract

When you can check this off your list and move on to the next step:

When the dispute resolution process is agreed upon, documented, and signed by both parties.

Outline the process for addressing any disputes that arise

Agree on a timeline for responding to disputes
Identify a contact person who will be responsible for handling any disputes
Establish a clear and defined process for resolving any disputes
Consider the use of mediation or arbitration options to resolve disputes
Clearly outline in the performance guarantee any fees associated with dispute resolution
When all parties have agreed to the dispute resolution process, document it in the performance guarantee

When you can check this off your list and move on to the next step:

When you have established a dispute resolution process and documented it in the performance guarantee.

Termination and Renewal

Include the conditions under which either party can terminate the performance guarantee
Establish the notice period that must be provided in advance, if either of the parties wishes to terminate the performance guarantee
Specify the conditions under which the performance guarantee can be renewed, including any renewals fees that may apply
Check that all conditions of termination and renewal have been clearly outlined in the performance guarantee
Once all conditions of termination and renewal have been established and verified, move on to the next step.

Establish the conditions for terminating or renewing the performance guarantee

Review any existing contracts and terms of service to determine if they have provisions for a performance guarantee termination or renewal
Determine what conditions must be met in order to terminate or renew the performance guarantee
Outline how the termination or renewal conditions will be put into effect
Document the conditions clearly and ensure all parties understand the terms
Once these conditions have been established and documented, you can move on to the next step.

Determine the process for terminating or renewing the performance guarantee

Decide on the process for terminating or renewing the performance guarantee. Consider a review period between the two parties to ensure the performance guarantee is still valid.
Set a timeline for the termination or renewal process.
Draft the process in writing and have both parties sign off on the agreement.
When both parties have signed off, you can check this off your list and move on to the next step.

FAQ

Q: Does a performance guarantee need to be in writing?

Asked by Lily on October 3rd 2022.
A: Yes, performance guarantees should always be in writing, as verbal agreements may not be enforceable in court. You may also find that you have additional legal protections if a guarantee is written down and signed by the parties involved. It is important to note that the language used in a performance guarantee should be unambiguous and free of any legal jargon. To ensure enforceability, the performance guarantee should also comply with relevant local laws and regulations.

Q: Is there a difference between a performance guarantee and an indemnity?

Asked by Jack on April 15th 2022.
A: Yes, there is a difference between a performance guarantee and an indemnity. A performance guarantee is a contractual commitment to meet certain standards of performance or to provide a specific level of service, wh