Contracting Excellence Magazine - May 2012
The Purpose Of Negotiation
“Proving value as in-house counsel and as a law department is a constant grind. Should we negotiate clauses that we'll never litigate? Do we ever litigate contracts? Or, as we say at my company, do we just “manage the suppliers to death” when they are in breach? To wit: we rarely litigate, but we'll negotiate firmly because (our customer) expects us to do so in order to protect the prime contract performance or security interests (export control, classified material, FCPA terms, etc.). Sometimes that makes sense, sometimes it does not. Are we disrupting commerce by negotiating fiercely on clauses that are never litigated or that provide very low risk margin, under the risk formula: B>P*L (does the Benefit of doing the deal outweigh the Probability times the Loss)? Relationship dynamics are key. We deal with the same customers on prime contracts over and again, and we deal with largely the same pool of subcontractors across several prime contracts. Consistency in dealing should be paramount to sustain those relationships but in a big company, our various lines of business and programs often treat both the customer and supplier vastly different. Adding value may be getting to yes, it may be in mitigating risk, and it may be in getting it just right through balanced risk.”
Adding to these challenging questions, IACCM member DC Toedt showed me an excellent blog that does a great job distinguishing between 'a deal, or transaction' and 'a relationship'. Here is an extract:
“A transaction is a quick, short-lived exchange. It's about this deal, these terms. Get a signature, and you're done. Negotiating relationships is a process with no clear beginning or end. Your goal is to build sufficient understanding, comfort and trust between parties that you can work together now and in the future, under conditions that enable both sides to prosper.
There are other critical differences:
- In a deal, the party you are negotiating with is, to a large extent, your opponent. In a relationship, the other party is your preferred partner.
- Deals are about getting as much of what you want as you can carry away. Relationships are based on fair division and joint burden-sharing.
- In a deal, you hold yourself aloof from the other party: hiding information, guarding your responses, pressing your position. In a relationship, you are more relaxed, open, and natural: sharing information and truly seeking to understand and resolve differences.
- In a deal, you may exaggerate the strength of your position or try to trick the other side into giving in. Successful relationships are based on honesty, reliability, and follow-through.
- Deals are static, inflexible, with exhaustive contracts intended to guarantee that every term and condition will remain carved in stone until the transaction is completed. Relationships are also based on fundamental agreements, but they are more accommodating, less rigidly detailed. Because relationships take place over time, change needs to be anticipated and managed constructively rather than ignored because it falls outside of the scope of the initial agreement. Relationships are dynamic, not carved in stone.”
As DC Toedt states, not all deals require relationships to succeed. But often negotiators fail to base their focus and behavior on whether the desired outcome is a transaction or a relationship.
When researching the differences in approach to negotiation between the East and West, a colleague of mine commented, “Westerners negotiate transactions from which relationships might follow; Easterners negotiate relationships, from which transactions will follow.”
In the West, we tend to let legal risk perspectives cause us to be adversarial and 'transactional' in the way we approach our trading partners. Collaboration occurs in spite of the contract, not because of it.
There is no absolute of right and wrong in the way we negotiate.
The point? All negotiators should ask, how can I optimally deliver the right value and the right outcomes for my business?
Improving Results From Your 'Virtual Negotiations'
Negotiating Tips...Should You Listen To The Wise Old Owl?
Less than one-half of respondents on the sales side (and less than one-third on the buy side) responded to a recent IACCM Benchmarking Study that they measure cycle times as a performance measurement. At Agilent Technologies Customer Contracts, we do use cycle time as a performance metric, and we use it to make wise decisions on negotiation and contracts policy and process improvement.
Our negotiators submit a negotiation dashboard each month. We collect negotiation start date, end date, and most importantly, what the top negotiation issues are on any particular negotiation. We set goals for average cycle time, typically 30 days, depending upon the agreement type. We track and report cycle time and hold ourselves accountable for results. We have several other performance measures, such as volume of contracts, and customer satisfaction, which are also popular performance measures, according to the IACCM benchmarking survey.
The real benefit of, and often overlooked reason for, measuring negotiation cycle is this: to obtain supporting data for contracts policy improvement initiatives. Approximately one-half of the IACCM benchmarking survey respondents reported they use “Improvement initiatives” as a measurement of performance. By measuring cycle time and the tracking the frequency of issues consuming that cycle time, Agilent has obtained valuable supporting data for those improvement initiatives.
An Example: Confidential Disclosure Agreements
Each year Agilent considers the contracts policy or terms and conditions that consume our negotiators' time. Should we modify these policies or terms, to be more effective? Would that materially impact our real risk in that area? Perhaps we are already assuming that risk, but the process for doing so is cumbersome, requiring frequent approvals that no longer are adding value.
Consider the “commitment to destroy and return confidential information” clause, which is now common in commercial confidential disclosure agreements. Were it not for tracking cycle time, and tracking issues, we would still view the addition of this clause as “non-standard”, requiring precious time -- both the time of our customers, and our negotiators -- to negotiate, draft, and approve!
Focus on the Critical Few Issues Only!
In the recent IACCM benchmarking survey, 45% of respondents on the sell side, and 52% of respondents on the buy side stated that “…development of terms and contract standards and templates…” is a “…major contracting initiative…” in their organization.
When was the last time you reviewed your contract standards to separate the “critical few” issues your negotiators should focus on, from the “trivial many” that arise in any contract negotiation? And how do you start to go about this?
At Agilent, we use Pareto Charts extensively, on both sell side and buy side negotiations, to display the frequency at which an issue is a “primary contract issue”. A Pareto Chart is a quality control tool, a bar graph that displays variances by number of occurrences. The chart shows variances in descending order to identify the largest opportunities for improvement.
Our negotiators complete spreadsheets with drop-down menus on common negotiation issues, such as Cancellation Rights, Governing Law, or Change Management. We call this our “Dashboard”.
Maybe the “wise old owl” didn't care about the details. Contracts professionals do care about the details. Tools like dashboards, spreadsheets, and pareto charts provide data that in turn supports decision making on policies, templates and contract standards.
Don't be the “wise old owl” and dismiss the details. Add value by measuring and using measurements to update policies that no longer serve your company.
Measuring cycle time and analyzing the results is a lot of work, but not as hard as growing wings on a mouse.
Contracts Can Save Poor Relationships
Using the contract renegotiation as a way to build bridges is one way that relationships can be restored. And that is what happened in the case of Westpac and IBM –who went on to win the Paragon award for the best sourcing relationship in IT outsourcing, despite the early years of their relationship resulting in 'losses of several hundred million dollars'.
In an online article by itNews, the award judge, Don Easter, touted the win as a transformational change that upstaged other finalists. The relationship between the two firms -- once described as dysfunctional -- is now painted with sparkling praises like “marked change in performance,” and “greater accountability in design and management” on the parts of both organizations.
IBM recognized their need to restructure their relationship with Westpac and reshape new ways to work together. The organizations now operate as an integrated team. But in an environment where the relationship was under such stress, the approach to a new contract paved the way to this success. Indeed, the judge observed: " I think that will become a bit of a benchmark for future contracts ... it is a very modern agreement and so I wanted to recognise that."
Other IT outsourcers could learn from this, according to Easter, by insisting on teamwork, total accountability, and behavior changes to achieve desired results.
Benchmarking several simple things like the following might mean the difference between failure and victory:
- Understanding your client's business strategy
- Aligning yourself to it and deliver it
- Adjusting delivery to suit your client
And if something goes wrong, own it and fix it!
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Consequential Loss - What Is It?
In the case of the phrase “consequential loss” one has a category difference in approach in the understanding of language. Commercial people almost always interpret the term “consequential loss” as meaning loss of profit, loss of business and financial losses in general. But judges, generally, interpret “consequential loss” as meaning loss not caused “directly” by a breach.
We do not really know what consequential loss is. We do know what it is not, because there is a body of case law -- mainly from the Court of Appeal of England and Wales -- applied to disputes over the meaning of clauses which use a bare exclusion of “consequential” loss.
Examples of what is not consequential, according to the judiciary, include:
- Wasted overheads resulting from rebuilding a chemical complex destroyed in an explosion
- Loss of profit
- Loss of production
- Additional maintenance costs
- Additional borrowing costs
- Ex gratia payments to customers
- Costs of software errors that can cause you to chase debts thought to be due, but are not
- Additional stationery and correspondence costs for writing to customers to update them on hot topics caused by software failures
- Additional energy costs to run defective boilers
- Loss of sales
- Loss of opportunity to increase margins
- Loss of opportunity to reduce staff costs
- Wasted management time
- Payments for system testing
- Using a processing bureau in lieu of the software you contracted for
- Claim handling services provided to insurers for such costs as:
- payingout unnecessary sums on claims
- reserving claims inaccurately
- delays in passing on claims documentation and disrupting business in addressing the consequences of such delays
- over-reserving claims.
Consequently, when you are drafting consequential loss exclusion clauses use clear words. Be careful not to use linking words in phrases such as the following. They may be interpreted as limiting the exclusion to, for example, indirect loss of profit; whereas, in reality parties wish to exclude all liability for loss of profit.
Example: The Subcontractor will not be liable in any event for loss of anticipated profits, loss by reason of plant shutdown, non-operation or increased expense of operation of other equipment, or other consequential loss or damage of any nature arising from any cause whatever.
Similarly, be careful with phrases that include loss of profit under an umbrella phrase. These may likewise exclude only consequential or indirect profits from recoverability.
Example: XXXX shall not be liable for any indirect special or consequential loss, however arising (including but not limited to loss of anticipated profits or data)…
Be aware of clauses that have been “approved” in the courts. Those usually separate out the categories of loss to be covered and do not link the category to any words which might be interpreted as limiting the category by cause.
Example: MF/1 Clause 44.2  was considered in The London Fire and Emergency Planning Authority v Halcrow Gilbert Associates and Others, where a state of the art fire-fighter training facility in Southwark itself caught fire and burnt down due to a leak in the ductwork. The judge interpreted this clause as excluding each category listed in total, and did not allow an interpretation limiting the exclusion to consequential or indirect losses in each category.
“Neither the contractor nor the purchaser shall be liable to the other by way of indemnity or by reason of any breach of the contract or of statutory duty, or by reason of tort (including but not limited to negligence) for any loss of profit, loss of use, loss of production, loss of contracts or for any financial or economic loss or for any indirect or consequential damage whatsoever that may be suffered by the other.”
The underlined catch-all provision -- for any financial or economic loss -- is vital and should ensure that a good claims expert cannot spend profitable time trying to find alternative descriptions for non physical loss to avoid the exclusion of “loss of profit, loss of use, loss of production, loss of contracts.”
Notwithstanding, it might be sensible for draughting experts -- especially when not dealing with construction or engineering contracts -- to consider major possible heads of loss and cover those explicitly in exclusion clauses. If, for example, the contract concerns the provision of software, you may wish to consider the losses most likely to arise and think about excluding them using explicit words
Unless your team is aware of the basic principles and fundamental risks of not phrasing clauses clearly, and that failing to get the words right really can become a problem, then you may end up in negotiations with an impatient team on your side of the table, a team that is playing with Blackberries, talking among themselves – not interested in backing up your debates about linking clauses, definition of losses to be covered, or catch all provisions.
If you explain to your team why the words are so important and why basic, apparently comprehensive wording -- such as excluding any and all consequential loss -- will not be effective, then you can ensure that the team is engaged in the negotiation and will support you in the debate.
Be sure to include these points in training:
- The law interprets the term “consequential loss” as having no real meaning. In each of the liabilities listed above, a judge determined that the loss was not consequential.
- At worst, a bare exclusion of “consequential loss” will not cover some remote liabilities. Refer to the list of examples above to illustrate this.
- Courts will usually stretch language to define actual damage as not being “consequential”. Again, refer to the list above.
- Essentially one must exclude loss of profit and similar losses by using language clarifying that these losses are excluded whether they are incurred directly or indirectly and whether they are caused in contract or by negligence. It is sensible to assume that this is true for all legal systems.
- Wording is technical and one must either use boilerplates or take serious specialist advice. The drafting is key. The intent is almost unimportant.
- There is no link between contract value and potential loss. In one of the cases, a designer with a contract value of around £400,000 ended up facing a claim greater than £100,000,000.
London Fire and Emergency Planning Authority (LFEPA) v Halcrow Gilbert Associates Ltd, Court of Appeal - Technology and Construction Court, July 31, 2007,  EWHC 2546 (TCC). Clause copied from the Judgment and not given as anything except an example – it is not given as a recommendation
Permanent And Temporary Staff Background Screening - Impact Of Globalization
Personally Identifiable Data, Criminal Data and Consumer Reporting
Researching global background checks requires an understanding of the complex laws and regulations designed to protect personal data privacy and data transfer security. But the diversity of practices among the regions can be challenging, if not problematic!
For example, U.S. corporations commonly require candidate new hires to successfully pass a background check. Outside the United States, law, regulation and customary practice can severely limit a company's standards. As more companies expand globally, they should reassess their own standard hiring practices and review standards of global regions they are expanding into, before hiring not only full-time personnel, but also temporary staff.
The Asia Pacific Economic Conference uses a Privacy Framework for its member countries that purports to “establish principles against a background in which some economies have well established privacy laws and/or practices, while others are [still] considering the issues”. Within the context of the emerging global economy, broad guidelines treat personal data with a view toward implementing “flexibility” in light of the “differences in social, cultural, economic and legal backgrounds of each member economy”.
The reality in many countries where no framework or laws exist to protect this type of data (e.g. China) is that many of the standard background check reports -- like criminal reports or consumer reports --simply are not available. The result is de facto “protection” for the individual, that obviously weakens a corporation's global application of a background check standard!
The European model leads the way with a mandate for all member nations to “adopt laws covering all processing, collection and storage of personally identifiable data, data accuracy and data destruction requirements”.
Essentially the EU Directive creates a presumption against the collection of personally identifiable data unless five primary data quality principals are met. Data must…
- be fairly and lawfully processed;
- exist for a specific purpose;
- be restrictive in nature (not overbroad);
- be accurate;
- be destroyed when no longer needed.
The European Data Protection Act of 1998 provides further guidance to employers and broadly defines “personal data” to include any data “from which a living individual can be identified”. One way to ensure compliance with both the Act and the Directive is to request a prospective employee to consent to collection of background check data and retention of relevant data pursuant to their employment contract when they are hired.
These protections extend to temporary staff by law. The broad implication for global companies is that they cannot avoid the law by engaging temporary staff over permanent staff.
In the United States personal privacy is regulated at the federal, state and local levels. The most established regulatory guidance impacting background check data collection in the U.S. is the Fair Credit Reporting Act (FCRA). The FCRA provides specific guidance on the use of consumer data, requiring employers to do the following:
- certify they have a permissible purposes to request the information;
- obtain a written consent from the applicant; and
- provide a copy of the report, notice of adverse action and opportunity to correct.
These actions are generally concluded prior to the employee being hired. Since most U.S. states support “employment at will”, no contracts or consents are required to retain this type of data after the hiring process is completed. Further, temporary staff are generally not afforded the same hiring standards as potential full-time staff. The burden of complying with corporate temporary staff onboarding policies generally lies with the company contracting with the hiring corporation.
Given the increasingly global reach of corporations, requirements for background checks are likely to continue expanding. Understanding the general legal prohibitions on the collection of information about prospective permanent or temporary employees is a good place to start. But a global corporation also must be aware of local customs. And know that some, if not most, information you can request for background checks in the United States, may not even be available in some developing countries.
Erlam, Understanding International Background Checks, Association of Corporate Counsel, ACC Docket, June 2011
EU Directive 95/46/EC of the European Parliament and the Council of 24 October 1995 on the Protection of Individuals with Regard to the Processing of Personal Data and the Free Movement of Such Data, 1995
The European Economic Area Data Protection Act of 1998
Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq.
Asia Pacific Economic Conference has promulgated a Privacy Framework
Wolters Kluwer, SHRM Poll Reveals Half of Employers Conduct Drug Tests on Final Job Candidates
The U.S. Equal Employment Opportunity Commission, Employment Tests and Selection Procedures Fact Sheet, published September 23, 2010.
European Workplace Drug Testing Society, http://www.ewdts.org/index.html
SAI Global World Watch, http://compliance.saiglobal.com/wwcce/
Karch, Workplace Drug Testing, CRC Press 2007
Keep The Value Attached To Your Contracts
Originally published by CPO Agenda: Summer 2009. cpoagenda.com
Extreme Negotiations With Suppliers
Extreme Negotiations with Suppliers
By Jonathan Hughes, Jessica Wadd, and Jeff Weiss, Vantage Partners, www.vantagepartners.com
The article above is a companion to this article below.
Click here and "register" at Vantage Partners to read this entire article.
Harvard Business Review, www.hbr.org
Spotlight on Leadership Lessons from the Military
What U.S. soldiers in Afghanistan have learned about the art of managing high-risk, high-stakes situations.
By Jeff Weiss, Aram Donigian, and Jonathan Hughes
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