Contracts Matter
Published: 21 Jan 2019
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Author: Tim Cummins
Contracts 'set the tone for the relationship', especially in more strategically important interactions. The design of the contract, the way it is worded and negotiated, all have a psychological impact on the parties, influencing the way they perceive the counter-party and subsequently behave.
The research is available
For at least 30 years, academic research has indicated the importance of the contract to subsequent performance. IACCM's studies, especially those related to 'The Ten Pitfalls', have confirmed both the elements and the impacts of poor contracting. In one study, 'Using Psychological Theories to Shape Partner Relationships through Contracting', the authors observed: “if a firm can develop specific competencies in the contractual process, particularly in the more complex end of the contract spectrum, then it is possible for it to create a competitive advantage based on these contracting capabilities. This idea is akin to that of alliance capabilities, in which some firms develop competencies in creating and managing alliances that other firms cannot imitate (Kale, Dyer & Singh, 2002). One way for firms to develop a contracting capability is to first identify what type of relationship it desires with the partner, whether arms-length or a trust-based relationship, and then use psychological theories to guide the framing that it uses in the contract. Although this process seems straight-forward and therefore imitable, it is, in fact, difficult to determine the type of relationship that is most appropriate and the best approach to accomplish this end”.
I have highlighted the sentence regarding the type of relationship because it is remarkable how frequently businesses fail to give this adequate consideration. Indeed, a mentality that is based around standard templates and compliance almost inevitably results in a failure to address - or even care about - the psychological impact of the contract. Far too often, behaviors are driven by narrow views of efficiency and risk, rather than the economic or business outcome to be achieved.
Getting things wrong
IACCM's work regularly confirms the pervasive nature of this issue. For almost 20 years, the annual study of 'The Most Negotiated Terms' has indicated the divide between the terms that are most important versus those that receive greatest attention. This in turn explains why many in Sales or within business units consider contracts to be negative or even destructive in the formation of relationships. One result of this is that the type of relationship - and the appropriate contractual framework - is often ignored. Indeed, a common complaint by contracts and legal staff is that they are involved too late, meaning that often they have little or no influence over the contractual framing.
In many cases, technology makes this situation even worse. ERP and P2P Systems in particular typically relegate the contract to a point of little significance, imposing a cookie-cutter standard, almost regardless of its applicability or suitability.
Avoidable costs
All this sums up to the fact that most organizations fail to build robust contracting capability. This results in a whole host of avoidable costs - not only is it intrinsically inefficient, but it generates extensive downstream operational costs, as well as lost revenues, missed opportunities for innovation and damaged reputation.
Unfortunately, the pervasiveness of these failings makes it hard for enlightened organizations to break the mould. Even those who wish to develop sound, productive relationships typically find themselves frustrated by the contracting practices of their counter-parties. This goes a long way towards explaining why the stories of highly successful contracts are so rare and why they are then so hard to replicate.
Achieving change
Although the evidence is compelling, achieving change is not easy. One major factor is education. The facts about contracts and their economic impact are simply not taught. Hence a multitude of stakeholders emerge with little or no understanding of the way that contracts frame their business relationships and as a result, few organizations make the investments needed to build a true contracting capability. Things are improving and new technologies will accelerate the change, but it remains frustratingly slow and sadly is often perpetuated by people who really should know better.
It's time for all those who care about business results to start shouting the message. If you want successful relationships, contracts matter!
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• Ngamuru Advisory
•
2019-06-15 23:42:10
In terms of the 8 different payment schemes I was specifically referring to what we call 'payment curves' (see attached graphic) as opposed to payment regimes such as cost+ (time and material), fixed price, cost + fixed fee, etc. In this light these are grouped into 5 main families with a couple of variations inside each. These are as follows:
- 'all or none' payment curves
- Linear payment curves
- Non-linear payment curves
- Alternative payment such as demerit point and visual payment curves
- Matrix payment curves
The intent of this discussion is to simply highlight that the choice of payment curve, similar to the choice of performance measure and level, can have a significant impact on the success (or otherwise) of the overall performance management framework. My blog (www.performancebasedcontracting.com) has 3 posts specifically on this topic including the graphics.
I hope this helps and answers your questions. However, please let me know if you have any further questions.
Replies: 1
Anonymous
2019-02-12 17:03:56
Limitation of Liability
I was recently having coffee with four other individuals involved in contracting for IT Professional Services. During the course of conversation one of the participan...
I was recently having coffee with four other individuals involved in contracting for IT Professional Services. During the course of conversation one of the participants suggested that rather than having unlimited direct liability for certain aspects (breach of confidentiality, indemnification of third-party claims, gross negligence and willful misconduct) that EVERYTHING be limited to the extent permitted by law -- but then increase the limitation to a number that would cover the majority of potential issues ($5,000,000 USD was a suggestion).
When questioned, the participant stated that when it comes to contracting parties where one has "deep pockets" and the other does not, having the unlimited liability may sound nice on paper, but in reality it is a one-way protection that benefits the party that does not have deep pockets. Effectively, if the party that does not have deep pocket had a very large claim against them, they could declare bankruptcy and later reorganize as a different business concern - while the deep pocket party with the same claim would be obligated to pay.
Their perspective was in essence: No consequential damages; limit all direct damages to a pre-defined/agreed amount ($5,000,000 or amount that will cover 90%-95% of historic claims in the industry); and include indemnification from third-party claims in the cap.
Thoughts?
•
2019-07-13 18:32:13
I agree with the idea, basically due to the possible huge claims that may cause extreme damage to the supplier.
sometimes the liability is capped to the total amount of the contract money value, which seems only fair to me as a professional against going with unlimited liability clause, however is there any case that this may be rejected by the client?
• SPL
•
2019-08-20 13:54:21
This is a good notion. I recall many years ago a friend of mine who had a well documented idea for a screenplay. The agent he showed stole it (allegedly) and a big entertainment company benefited (allegedly). My friend wanted to sue and he had a great case, but the other side simply put a giant pile of money on the table with a grinning lawyer sitting on the top of it and he had to back down. If he had the option to settle "a couple of hundred" I think he would have taken it.
Replies: 2
• Allianz Technology
•
2019-01-10 08:45:28
Hi,
I'm just trying to understand your position.
Considering that you are managing all contractual relationship with another company (buy and sell side) sounds actually good from your company perspective. It would mean, that your leadership can expect you to have a full overview about the contractually back and forth with this JF. Therefore I assume it's hard to change the mind of your leadership, since I would expect them to see your doublerole as positive.
However on the other side, there is your personal position, meaning being something in the middle of a sandwich, right? I'm not sure about your empowerment, but in worst case you have also very limited authority to change some company rules (discounts, penalties, payment conditions, acceptance criteria etc.). And on buy side you usually have different contractual expectation than on sell side. I assume, this is the tricky part in your situation. Fulfilling the internal requirements for buy- and sell side with the same contractual partner at the same time (and maybe also your partner asks you if you are a bit crazy, since requesting sooo different contracts when you are either on sell side or on buy side).
When the conditions your company expect in contracts are very different on sell side and buy side, this should be communicated as an issue (to your leadership). I think there are 2 options as solution: either the requested second CM as you suggest, or an escalation to the leadership to align clear buy and sell conditions between your company and the JF, which are equal to both parties. such framework conditions would make at least your position more clear. And maybe there won't be anymore need of a split of the CM roles buy side and sell side?
Since I couldn't find many information in your post, I hope, this is somehow helpful?
If your uncomfortable position has other reasons, please let me know.
BR
Kristin
• Omaha Public Power District
•
2019-01-21 20:58:03
I probably would start collecting facts: Firstly, establish the relationship between Your Company ("Y Company") and Company X ("X Company") by looking at any specific, written agreement about the services ("X and Y Services"). Also, establish clarity around (1) Y Company's services to be provided to X Company, and (2) X Company's services to be provided to Y Company. At this point, are there any conflicts that you can see/anticipate in your ability as the Contract Manager during the provision of X and Y Services, that perhaps could result in non-performance or non-compliance? Also, how do you escalate and cure any issues of non-performance (for example)? Secondly, I would review the files documenting any legal review, if any, prior to said agreement being reviewed for signature/execution. Were there any concerns that were raised and eventually resolved (internally)? AT the very least, you could start with the resource allocation -- that is, regarding your time management and how to better allocate your skills - in developing your case. Hope this helps. Regards ~ Rose
• CoreLogic
•
2019-05-17 09:01:17
Its an interesting role and I recommend your decision to bring in another manager to take one of the contracts.
I would recommend to present this as two different roles:
On the buy side - Contract Manager would play role of a customer and to manage Company X, need to drive and establish Vendor Management Discipline around Contract Administration / Governance / Service Performance / Financial Management / Risk and Compliance
On the sell side - Contract Manager would play role of an engagement partner to drive business relationship / Value addition to Company X/ increase revenue generation from Company X to your company / Joint go-to-market strategy if possible.
Regards,
Dave
Replies: 3
•
2018-01-31 10:06:02
Hello Prem Chandar,
What is to be included and what is to be carved out is entirely left to the parties. The important point to be kept in mind is that you should specify what type of losses are considered as consequential losses which you want to carve out. Just specifying consequential losses many not help.
Coming to the second part of your question, the whole idea of carving out consequential losses is to exclude losses which are remotely connected with the breach. So taking your example, loss of tender may be the result of several other factors and not necessarily only due to sub-contractor's breach and will not stand judicial scrutiny. So it is better to exclude such remote losses.
Regards,
Rajesh
• Pretorius Consulting
•
2018-02-07 07:35:54
NDA breaches should not contain a consequential loss Clause. It is important that you know what your rights are for recovery of damages in case of a breach. This will be based on case law under the governing law. Please note, in most cases, the burden of proof is the entity that is making the claim. This may be extremely difficult.
Replies: 2
• IACCM
•
2017-06-05 16:12:42
Much has been written in this subject and our IACCM learning modules cover many of them. At first sight I´d strongly recommend to check previous entries of this forum where in response to Natarajan Balachandar´s post, for instance, we received multiple responses: refer to
www.iaccm.com/network/contract-management-forum/
Best
Pablo Cilotta
• Shapoorji Pallonji & Co. Pvt Ltd
•
2017-06-26 11:11:44
Most important wording to be included is the subcontract is mutatis mutandis and not "back to back".
The content of subcontract depends on the content of main contract.
Thanks,
Vivek G
• Reference Contracting Co.LLC
•
2017-10-01 08:38:08
The back to back subcontract agreement binding the main contractor with the nominated subcontractor reference to the prime contract terms and conditions specifically as follows
1. Payment terms : the subcontractor payment to be release within (i.e 10 days) from the main contract evidence of receiving his payment
2. The variations terms: in the event that the engineer has issued instruction for variation, thereto the subcontractor to submit the variation substations to the main contractor and he will submit to the engineer fro review and approval.
3. Communication : The back to back contract the main contractor is obliged by law to forward all related exchanged correspondences copy to the subcontractor and the subcontractor attendance for meetings is a must.
4. Indemnities : The subcontractor shall indemnify the contractor against any damages so the subcontractor to submit all warranties and guarantees, as well as the insurances..
The back to back sub contracting is very vital related to the important prime contract deliverable packages in terms of cost control requirement and liabilities (time , quality , indemnities ..etc). Subcontracting back to back for all terms and conditions reference to the main contract in case of nominated subcontractor and back to back as a part ( related to payments and variations only ) for the domestic subcontractor.
• LogMeIn, Inc.
•
2017-10-08 18:06:17
Regarding the issue of termination for convenience.... you need to determine whether or not you want your company to have a right to terminate for convenience or whether or not you want your customer USING THEIR right to terminate for convenience TO ACT AS A TRIGGER for the contract with the subco to come to an end.
One of the issues I find often gets lost with 'back-to-back', is that people tend to copy exactly what is in the main agreement with their customer into the agreement with subco. When they do this, people often don't take delays in communication into account. I always try to include a buffer regarding obligations of subco to my company.
For example, if there's a service level that obliges me to respond to a customer ticket within 8 hours, and I need to route that to a subco via a non-automated process, or if there's some issue of lag, I need to make sure that the subco is obliged to respond to the ticket in 6 hours. I need to do that to make sure that my company doesn't get 'caught in the middle' by copying obligations and not thinking about how the underlying issue works in practice and understanding if my company can fulfill them when I'm relying on a third party.
Feel free to get in touch.
BR, Nick
Replies: 4
• IACCM
•
2019-08-15 21:25:58
Hi Pippa. I look forward to seeing what our members can provide to you. When you get to negotiating the agreement, please have a look in the Resource Library / Recent Research for 'contracting as-a-service'. This IACCM research indicates what is typically standard (and non- negotiable) and what can vary in different situations.
• sussex university
•
2019-08-28 09:35:17
Thank you Bruce!
Replies: 2
• ATCO Electric
•
2019-08-06 16:55:45
We have moved some of our Procurement & Construction projects from progress based payment to milestone based payments. The major reason was to motivate contractors to expedite milestone achievement, and get paid faster. However, we found that most of the time delay had come from owner, consultant, designer or suppliers (not under contractor). In those cases, contractor resisted to get paid nothing, for not their mistake. We had to amend few contracts to move back to progress payments, or we had to breakdown milestones into smaller units. For few projects, it went smooth and milestone payment were successful. So you may have to see what you can offer and what are your limitations, before introducing this change. A survey feedback from your routine contractors can also be helpful in decision making.
Replies: 1
•
2019-08-30 18:01:18
In the US, Texas or New York are largely considered "neutral territory" whereas in Europe, until very recently UK law was considered neutral. I think that may change with the recent political upheaval.
• Ministry of Defence
•
2019-10-04 08:50:59
Or try international trade law?
www.jus.uio.no/lm/index.html
• Legal and Commercial Training Limited
•
2019-11-05 09:40:02
In the case of one party proposing Indian law and the other proposing Singapore law, the parties may well choose the law of England and Wales as both Indian law and Singapore law are based upon English and Welsh common law. (Note that there is no such concept as "UK law" as one commentator has suggested below).
However, a party should consider a wide range of factors before proposing a particular governing law and should weigh up the legal and commercial advantages and disadvantages of all the options.
One factor may be the degree of certainty that a contract will be interpreted in a particular way. English law adheres to the doctrine of binding precedence. Some legal systems do not. This could lead to significant uncertainty as to how the law will be applied.
In English law, it may be perceived that the courts allow a greater degree of freedom of contract. Subject to certain exceptions, freedom of contract in English law means that commercial parties are completely free to make disastrous bargains. This illustrates the comparative reluctance of the English courts to interfere on policy or other grounds to rewrite the parties' contracts for them.
For example, in English law it is possible, provided very clear wording is used, to include an exclusion clause that excludes any and all liability whatsoever, even for a deliberate breach of contract. And there is still no recognition of a duty of good faith being applied generally to commercial agreements (but watch this space!). This may or may not be an advantage to you but it remains the case that the courts are likely to give effect to the wording of the contract without imposing their opinions as to what does or does not amount to good faith.
And you may wish to consider the approach of a particular legal system to particular clauses.
For example, in English law, a liquidated damages clause will be subject to the clarification set out recently by the Supreme Court with a subsequent judgment, applying that test, indicating that a freely-negotiated LD clause is likely to be upheld subject to the requirements set out by the Supreme Court. Under UAE law, such a provision would be subject to Article 390(2) of the Civil Code and either party may apply to the court to adjust the agreed amount of compensation so it is equal to the loss. If Indian law were to apply, we would have to consider the effect of section 74 of the Indian Contracts Act 1872.
English law will also recognise an asymmetric jurisdiction clause.
And it may be that the choice of law clause will be reflected in the choice of jurisdiction. So, English law and the English courts. If the choice of courts is to reflect the choice of law, it may well be the consideration should be given to the efficacy of the court system and the technical expertise and other qualities of the judges.
Lots to consider.
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Replies: 3
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