Category Archives: contract management

Dear Big Co. Here’s Why Your Contracts Suck …

… and why no one wants to sign them, yet alone even read them!

And since all contracts should be written in plain English (or, if between two parties whose native language is Elbonian, in plain Elbonian, for e.g.), at a senior high school reading comprehension level, we are going to write this post in plain English too.

They are too long. No one wants to read 100 pages of your lawyer’s hyperbole rhetoric that is, in common terms, the literary equivalent of a steaming pile of cow dung.

You read that right. No one wants to read 100 pages of your lawyer’s hyperbole rhetoric that is, in common terms, the literary equivalent of a steaming pile of cow dung.

Furthermore, at least 90 pages of this is guaranteed to be completely unnecessary (and you should feel ashamed at the money you wasted paying your high powered corporate lawyer to write it in the first place).

Let’s go back to the purpose of a contract.

To clearly specify

  • the obligations between two parties,
  • the benefits to both parties from meeting their respective obligations, and
  • the recourse available to one party if the party defaults on the obligations of the contract.

In plain English, even English written by the bard himself, how many pages does that take? Even in the most sophisticated of transactions with a list of obligations by both parties, probably not more than a few pages. (Now, if you are contracting for the construction of an office building, you might need hundreds of pages of addendums on architectural, structural, municipal, etc. requirements, but that’s not the heart of the contract. This can be clearly captured in a sentence that states party X agrees to build the structure required by party Y, as clearly detailed in appendices A through T that detail obligations 1 through 20 respectively, do so for a fixed fee of Y M, and delivery by due date, with penalties accruing at the rate of Z00 K per month. Simple, eh?)

After you’ve specified the mutual obligations, there are only three other requirements for a contract:

  1. Requirements of your Insurance Company
    If your insurance requires limitations of liability, certifications, etc. to explicitly be included for it to remain in effect, you include these requirements, and only these requirements, and only to the extent required.
  2. Requirements of the jurisdiction in which you are operating your business
    If you are doing business in the US, and you are buying technology that could possibly fall under ITAR (for example) if certain requirements are not adhered to, then it must be contractually clear that the products will be designed to adhere to those requirements. (Encryption will not exceed a certain level, etc.) Furthermore, if there are regulations against human trafficking in the supply chain, taking measures to insure denied parties do not receive financial payments, etc. that must be adhered to, then these are included as well.
  3. Requirements of any jurisdictions in which you are subject to as part of the transaction
    If the jurisdiction of the other party can imposed requirements on you, or if you plan to sell the products or services bought in a third jurisdiction, you need to include any requirements imposed by those jurisdictions.

However, this does not mean you include pages and pages of detailed requirements and regulations, that are well defined in the appropriate laws and statutes and regulations you are bound to, merely that you reference those regulations and require the other party to adhere to them. This usually requires only a few sentences per regulation, max. Not paragraphs and definitely NOT pages.

That’s it. Nothing else. And I cannot emphasize enough that you don’t include something else just because your lawyer decides there is a minute 1 in 1,000,000 risk that something could go wrong and someone with a better funded legal team could possibly find an innovative way to wiggle out of a contract that didn’t cover the obscure case of a worker tripping and skimming his knee because he stepped on a snail on the way to your worksite. Over funded legal teams under the control of people with more money than brains can always come up with harebrained arguments and ridiculous legal challenges — but how often does it really happen? Especially between two parties who were open and honest in negotiations and go into the contract fully intending to fulfill it? And is it really worth spending tens of thousands (or more) of legal time on an average contract which is usually a small fraction of organizational spend? (If an organization has 10,000 contracts and it’s revenue is less than 10 Billion, the average contract value would appear to be one million, but give that there will be a few large contracts with key suppliers that leverage volume, you’ll have a few dozen contracts in the tens or hundreds of millions and an “average” contract in the tens or hundreds of thousands.)

Remember, your lawyer’s job isn’t to tell you what to do. Your lawyer’s job is to listen to what you want to do, advise you of the risks, and then do whatever you tell him to do, which definitely includes writing short, easy to understand, contracts that people will actually sign. At the end of the day, you need to do your business. Contracts should enable that, not get in the way.

… Don’t Forget the Contract, Part V

In this series, we’ve indicated that contract lifecycle management (CLM), which is becoming big, is useless without good contracts. But good contracts don’t just happen. They have to be created through a careful process. A process that first creates a detailed SOW, then defines the risk, and then defines the dispute process and resolution options where both parties can agree. And that even defining all of this might not be enough to construct a good contract. And we proved a lot of details. And we are at the point where we asked if you do all of the above and everything it entails, can you finally start drafting the contract? And the answer is …

Well, you can, but if you do, the contract will be mostly harmless, and that’s just not good enough. There’s still a few things that need to be figured out first. Possibly a few dozen things, but the following is a starting list.

Performance Monitoring and Rights of Action

Specifying acceptance criteria and performance requirements of each product, service, and deliverable, as well as corrective action requirements on failure is a great start, but there should be performance improvement requirements if performance is not, or barely acceptable, in the beginning or starts to go downhill. One should not have to suffer a supplier continually being late or underperforming just because they continually correct their mistakes at the 11th hour.

One needs to be sure to specify actions that can be taken or retributions that can be demanded if one party repeatedly fails to meet their agreement. In addition, the contract should also specify that both parties may maintain performance data beyond the contract and consider such performance in future sourcing events and contract negotiations.

Unpredictable Events

There’s force majeure, and then there is the collapse of the only mine the supplier has at their disposal, the banning of a product, component, or raw material in your target market, or some other unforeseen, and totally unpredictable event that makes it impossible for one or both parties to continue the contract.

In addition to a solid force majeure clause, there must be an explicit specification of what could constitute an unpredictable event that is contract ending.

Unalterable Order of Precedence

There will be a contract. Appendices. Statements of Work. Addendums. Etc. At some point, contradictions, real or perceived, will creep in. All your hard work to try and prevent disputes that can lead to unforgiving arbitrations or costly litigations could be for naught! Be sure to specify in a clear, and unarguable manner, which document will take precedence in the case of conflicts.

Then, you have to get in the right mindset and figure out how you will ensure the following will be the case when you actually draft the contract.

No double (or triple) negatives anywhere. NO EXCEPTIONS!

Let’s face it. The more negatives, the more opportunity for misinterpretation. A lawyer might understand a 73 word sentence with 3 negatives, but will an average person? Probably not. And if all lawyers fail to understand equally, this could not only be used as a foundation for a lengthy, and costly, litigation that could easily be settled via arbitration but also result in an extremely costly decision not in your favour.

No reliance, or lack there-of, on Oxford Commas

The lack of one single Oxford Comma cost Oakhurst Dairy millions, and it will cost you too. (Source) Every condition should be clearly specified, and where there is any ambiguity, bullets, numbers, or smaller sentences should be used. Lawyer preferences be damned.

No sentences or paragraphs that cannot be shortened for clarity.

Remember your goal that this should be easily readable, and understood, by anyone with a high school diploma. So, if you can simplify it, without losing any meaning or detail, do so.

If you can address the key issues above and figure out how you are going to meet these key drafting requirements, then, and only then, are you ready to start drafting your contract.

But are you ready to complete it? That’s a good question and the answer is …

… 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!

… Don’t Forget the Contract, Part III

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, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

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

But do you start writing the contract as soon as you have the Statement of Work drafted? Definitely not! Remember, there are two primary reasons you create a contract. One, to get what you want. Two, to mitigate risks associated with getting what you want. So, the next thing you have to do is:

Define the Risks
… and how they are dealt with

What are the risks? Start with the product. What are the risks in quality? In transportation? In import/export? In use? In recovery? Then move on to service. What are the risks in performance? In delivery? In quality or acceptance criteria? Then to the supplier? Will they be around? Are they financially stable? Are they sustainable? Are they located in a relatively risk free zone or risky zone?

Then, assess what are the impacts if a risk situation comes to pass. Additional Costs? Customer dissatisfaction? Brand damage? Regulatory fines or injunctions? Do they need to be mitigated? By who? When? Is there a penalty if the impact of the risk is not mitigated and could have been? What risks are excluded from mitigation because they can’t be, the risk is too low, or the mitigation too costly?

Is Force Majeure allowed? When? How long can it be claimed for? What documentation or proof is required? What happens if one party tries to claim it for longer than is reasonable under the circumstances? (E.g. if a power outage shuts a factory down for two days and the average line restart time is one day, and the supplier is still trying to claim Force Majeure after 10 days, that’s not reasonable.) What is the recovery if the product or service must be obtained on a regular basis or within a certain timeframe but the supplier cannot provide during the Force Majeure period? Can the buyer use another source? For how long? Can the contract be cancelled if the supplier cannot recover within a certain time frame?

Remember, generally speaking, a contract is not needed when everything goes according to expectations. It’s needed when things go to hell in a hand-basket and one or more parties that need to take responsibility for their actions don’t want to and/or still demand payment for products not delivered or services not rendered.

If something goes wrong, you need to make sure that the responsibility for remediation, recovery, and restitution lies with the appropriate party and that if the responsible party doesn’t own up, you have other options. Being locked into a sole source contract when a supplier can’t deliver for three months when you only have two weeks of inventory left is not acceptable. Nor is the ability for a supplier’s lawyers to tie you up in court for months because responsibility was not clear, remediation or penalties were not clear, or vague terms were included.

So, just like it’s critically important to specify what you want before you start writing a contract, it’s also critically important to specify what the risks are and what will happen if, and when, they materialize. (And we say when because your chances of not being hit by a disruption in at least one important contract every year are less than 15%, and since you don’t know where that disruption will come from and which contracts will be affected, it’s just best to assume they all will be.)

So can you start writing your contract now? Stay tuned!

 

… Don’t Forget the Contract, Part II

As pointed out in yesterday’s post, 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 yesterday, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

Poorly created contracts that don’t define anything more than a bulk price and a term don’t ensure defensible pricing, loss management, or risk control. To be more exact, they don’t even ensure that absence of a typo or careful insertion of a single word by a litigious lawyer that could negate and entire contract and make it totally useless.

So where do you start?

Define the need

What do you really need? (And what are the core requirements?) When? Where? How do you need it delivered? Who is responsible for the production, delivery, support, and return? Why does it need to be this way? What are the risks and how will they be mitigated? Split?

Create a Statement of Work

Clearly specify what is required, when, by who, in what quantity, how it is to be packaged, stored, delivered, supported, maintained, and recovered. Specify delivery dates for products if known or delivery timeframes if exact dates are not known but response or replenishment times are needed. If the contract revolves around the construction of a particular deliverable (system, machine, building, etc.) specify key milestones and acceptance criteria. If it revolves around ongoing services, specify delivery timeframes and required service levels. Specify as much detail as is known and where specifics can’t be specified up front, specify how the details will be worked out later and agreed to, as well as the procedure that will be followed in case of disagreement or conflict.

Make sure Milestones are Clearly Specified
… with Deliverables and Acceptance Criteria

Go so far as to explicitly number the milestones and make sure they are easy to index, track, and assign to buyers, supplier managers, and other organizational individuals who are affected by the contract. It should be easy for the CLM to auto-index these milestones and even auto-assign the milestones (and monitoring management responsibilities) to the most logical individuals in the organization (who can reassign if necessary).

Make sure the deliverables are clearly annotated, that precisely what they entail is defined, that the acceptance criteria that will be used are spelled out in sufficient detail to allow work products to be rejected if they are not up to requirements, and who has final determination of whether those criteria are met. Also, if there is a dispute, the process that will be used for resolution must be indicated.

Define the Payment Schedule
… and Tie it to the Milestones

Don’t just specify how much will be paid, but when it will be paid, and what the dependencies are on the milestones and deliverables. Also specify if there are any penalties for late or unsatisfactory delivery, precisely how they are calculated, and when the remaining payment(s) will be made. Also clearly specify how disputes will be filed, handled, and resolved and whether any payments will be made during the dispute, and in what amounts.

Define any SLAs and Warranties the Supplier Must Adhere to

Do so up front and in plain English. It’s critical that the supplier understand exactly what is being expected, how it will be measured, what guarantees the supplier is making, and what it will cost them if they are not adhered to. If the products are rejected, do they have to deliver replacements? Are they penalized? Is the contract terminated?

Then, and only then, start thinking about writing the contract. But don’t write it yet!