Contracting Excellence Journal

Articles, news and insights from IACCM staffers and over 50,000 Members.

Subscribe and never miss out. There's always something going on here!

I just spent over 6 months on and off negotiating a new liability cap into an existing contract for one of our clients -- countless meetings, reports, presentations, approvals and so forth.  Now the ink is dry, and I’d be amazed if we ever talk about it again during the remaining term of the contract.  

Am I correct?  Or too presumptuous?  

Tomorrow is the monthly service review for the same client.  We will discuss service performance against the service levels as stated in their contract.  If any have failed this month, the customer will deduct service credits which come straight off my client’s bottom line.  

So, I’m wondering how much time we really spent modeling and negotiating the service levels when the contract was initially developed (before it was signed) to ensure if dependencies were clearly stated or how relief would be obtained, etc.?  Considering how much time I just spent debating the new liability cap, probably an inverse proportion of time!

Here’s the issue: are we spending enough time to make sure we have clearly established mutual understanding and agreement with terms of the contract and issues surrounding them?  Or have we crossed the bridge between pre- and post-contract signing too quickly?

IACCM research1 has proven that the terms that cause conflict and dispute in contracts today are the same as 20 years ago.  IACCM’s annual Most Negotiated Contract Terms survey2 still shows that the terms surrounding liability, warranty and termination as the ones we spend the most time negotiating, yet amazingly none of these typically cause problems or disputes; nevertheless, we choose to focus most of our time on them while agreeing on a contract.  

… but all of that changes at post signature!

In recent years IACCM has also asked its global membership what terms we should spend our time negotiating based on post-signature dialogue.3 This analysis turns out to be the secret for determining how we should go about creating our contracts.  

When you look at the common causes of project failure and value leakage1 and then compare them with the topics we feel we should spend our time negotiating3 it is not a surprise that the following are the same ones we spend the most time discussing -- and often disputing -- after the contract is signed:

  • responsibilities
  • scope
  • change
  • acceptance
  • payment
  • timescales  

These live at the heart and soul of our contracts, yet they are too often hidden in contract behind the headline terms and conditions.  I would imagine that most reading this article have had a conversation on at least one of these issues this week.  When was the last time you reviewed your warranty provisions?

Joseph Chitty4 wrote a practical guide to contracts in 1826 and almost 200 years later the same traditional approach to contracting is largely still adopted.  Do we really need to draft our contracts to win a future dispute, that may never occur?  Will this drive the best value and a partnerial approach?  I think not -- it’s time we shake things up.  

First, we have to get up to speed with technology.  When I started my career, I proudly carried bulky A5 hard copies of the contract around like it was some form kryptonite to overpower the people sitting on the other side of the table.  How partnerial must I have looked sitting behind 18 inches of contract… Today, the thought of muscling 5 volumes into my hand luggage while traveling is absurd.  In fact, I cannot remember the last time I read a hard copy of a contract or marked one up in red pen.  

If we all draft and review contracts on our computers then why don’t we use technology to insert images, photographs, audio, and video, etc. into our contracts?  That sounds obvious now, right? I am convinced that a number of needless, time-consuming and expensive disputes could have been avoided if the contracts in question had included some pictures or a video clip.  Perhaps when reviewing such a diagram pre-contract, the parties may have at that time realized that one was selling a mackerel while the other thought they were buying salmon and resolved the situation before the ink was even put to paper.

Second, ensure all parties understand our agreements, that contract language is really clear. You should not have to read a contract two or three times to be able to understand it.  Helena Happio, an international dispute avoidance lawyer, a regular IACCM contributor, and author, uses a simple technique to get her audience to consider all the requisite factors for a clear contract.   I have slightly adapted this method over the years, which is all about asking the right questions:

  • Why is it (product or service) needed?
  • What does it need to do?
  • How is the supplier going to produce it?
  • Who is going to do what?
  • When will they do it?
  • How much will it cost?
  • What if something goes wrong?

If you cover all the above points when writing your contracts, you are going to make them not only clearer but easier to understand and you will remove a lot of ambiguity.  In fact, rather than writing paragraph after paragraph, reformat each of the above points into column headings in a table when describing the scope of a project.  Also, the beauty of using a table is better and faster readability.  Tables make it easy to see if a field has not been populated.

Third, avoid ambiguity.  Clearly, state the consequences of not following the contract clauses correctly on any of the above bullet points.  For example, I hate clauses that leave you hanging like when the contract states “The supplier shall ensure the lights stay on 24/7…” but then fails to specify what happens if lights go off.  In this case, if the lights go off, the parties will naturally make up their own conclusions on what should be a reasonable response.  But such ambiguity is where disputes and conflicts start.

Finally, read the research!  If a team about to negotiate a contract spent a morning discussing the IACCM studies referred to hereinbefore commencing a negotiation, I guarantee it will refocus their direction and provide a significantly better outcome.

Contract management has been a recognized profession widely used globally for some time.  There is no excuse for a contract being difficult to use or to understand.  Rethink what your contracts look like and how you actually use them.  Look at other industries to see what best practice you can adopt.  You would not contract for services like you would for a product, yet the overall approach to what a contract should look like has never really changed.  Is there any excuse not to demand best practices and get more clarity and ease of understanding to reduce disagreements and disputes?  Let’s make a change for the better and let’s do it now… Yesterday is history, tomorrow is not a mystery.

END NOTES

  1. Ten Pitfalls to Avoid in Contracting
  2. IACCM’s Most Negotiated Terms 2018 
  3. Commitment Matters blog, Tim Cummins, Most negotiated terms2018
  4. A Practical Treatise on the law of contracts not under seal.  Joseph Chitty. 1826

 

ABOUT THE AUTHOR

Paul Hemlin in CEO and Founder of international contract management consultancy Contract Management Direct. www.contractmangementdirect.com

Topics: contract management, communication

    Download our
    Ten Pitfalls Report

    Download the Pitfalls Report

    See the February Edition of the Newsletter
    See the December Edition  of our Contracting  Excellence Newsletter

    Recent Posts

    IACCM Membership Types & Pricing

    Take a look at the various membership types, or take a better look by becoming a FREE Trial Member

    Membership Types & Pricing