… Don’t Forget the Contract, Part IV

Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out in our first post, contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

And as we indicated in our second post, good contracts are more than just specifications of product, price, and a few boiler plate T’s & C’s provided to you by legal. A good contract is understandable — by both parties, and, especially, by a party whose first language is not the contract language. And, as we detailed in our second post, it clearly describes the need, which is first captured in a detailed statement of work that the contract will be created around.

But it doesn’t stop there. As detailed in our third post, it also defines the risk, how they are dealt with, who is responsible for mitigation and management, and who has to take action — and responsibility — should a disruption or issue arise. And, more importantly, it doesn’t include an open-ended force majeure, and should a force majeure event happen, it gives both parties a way to continue business, and an out if one party just can’t recover.

But once the Statement of Work, and the risks, are defined, do you start writing?

Nope! You’re close, but you still have to figure out what you will do when things go wrong — and capture how they will be addressed, and resolved, in detail in the contract. This is more than just choosing between arbitration and court, because the choice could be both, or neither, depending on the situation. And it’s more than just specifying the method of resolution, it’s all the terms and conditions around it that specify exactly how you want it handled.

Let’s start with arbitration. Just because you specify arbitration and the counter-party agrees to it, doesn’t mean there can’t be a court case around who the arbiter will be, what powers she will have, who will bear the cost, how binding the decision will be, whether or not there can be any appeals on technicalities, and so on.

You need to figure out who will chose the arbiter, what will be mandatory for arbitration, where the arbitration will take place, and what time limits there will be in initiating, conducting, and concluding the negotiations. Who will be responsible for the cost, under what conditions, and in what amounts or percentages must also be clearly defined. Furthermore, any rules or guidelines that are to be followed by the arbiter are to be completely spelled out. As are any laws they are to be adhered to in any details of the resolution.

Then, you need to specify the terms and conditions around legal action. Legal action should be the last resort, and the contract should be iron-clad forced arbitration wherever it can, and should, be used as litigation is unnecessarily expensive and not always fruitful. Arbitration may not be fruitful, but it’s quick and much less painful even if it doesn’t go your way.

Make sure that litigation opportunities are as limited as possible and that any litigation that could have been avoided, or that is determined by the court to be in violation of the contract, is at the full cost of the party who wrongly initiated the litigation. And make sure that if litigation is authorized, damages are limited to actual monies paid or maximum amounts clearly specified in the contract. And that parties who are responsible for products or services, and any damages that result from these, have appropriate amounts in bonds or insurance to cover worst case scenarios.

And, most importantly, the dispute resolution process must be fully specified in the contract to ensure that the chances of arbitration or litigation being needed are absolutely minimal. If the process is accepted by both parties, it will be embraced by both parties, and even if both parties can’t agree, they’ll try — and each will be much more likely to live with the decision of an arbiter, since they will also have thought through, negotiated, and accepted that process as well.

So, now that you’ve figured out the SOW, the risk management and mitigation, and the dispute resolution, can you start writing the contract? Stay tuned!

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