WHY CONTRACTS MANAGEMENT?
Executing and operating contract is our day to day activity. We will enter into a contract knowingly and some unknowingly (example: oral contracts).
An agreement is formed if the offer by one party is being accepted by other and if such agreement is enforceable under law it becomes a contract.
Generally, for contracts of less value/consideration, the tendency is to go with formats available in the legal portals on the internet and user more often than not does not show much importance on the contract clauses.
For contracts with high value or consideration, parties may be executing a reasonably good contract, but, may miss incorporation of the key contract clauses.
I am attempting to elaborate those important aspects in contract and its management in this article, and present to the reader as how a good contract management helps to achieve profits, eradicate losses, maintain good relationships with various parties and helps to grow (y)our business.
Given below are examples of loosely worded Contract:
• Payments will be made.
• Losses will be recovered.
• Work is to be completed.
• Contract value will be arrived after completion of contract.
• Lump sum contract. To complete the total work.
• If claim submitted within 24 hours of the claim arisen, then only claim will be considered for review by customer.
• Contract is on complete back to back basis.
• Bank Guarantees to be extended as and when customer requests.
• Arbitrator to be appointed by one party.
• No extra costs will be paid on account of whatsoever reason.
• Invoices will be released only after due satisfaction by scrutiny officer. Invoices can be rejected any number of times.
• Works to be continued and it should not be suspended even though invoice payments are not paid.
• Do you know?
• 9.2% of Revenue every year is lost because of poor contract management and / or oversight (Source: Research from the International Association for Contract and Commercial Management (IACCM))
• In extreme cases people are driven to end their lives because of lack of appropriate execution and operation of their contracts.
• Strikes / Lockouts / Boycotts that create disruption to productive time and inconvenience to public at large can be avoided by initiating contractual/legal process in time.
To understand why this happen, we need to understand the important steps in contracts management.
• Why does this happen?
• When one enters into a contract, it is very important for the parties to understand the terms and conditions in the context of the objective that is proposed to be attained, and also the practicality of performing the obligations undertaken. Improper, incomplete review or inadequate terms and conditions will be detrimental to the objective.
• Loosely worded contract clauses. e.g.,: In a particular contract, Date for completion is mentioned as 15 days from the date of commencement as per letter from the customer. However, the contract is silent as to when the commencement letter will be issued.
• No proper understanding on consequences for the breach of obligations of either party, including the damages/penalties.
• Improper correspondence and inadequate operation of the terms and conditions of the contract.
• Contract terms not being commensurate with the discussions on ground and hence the expectations / assumptions leading to different outcomes resulting in a dispute.
• All unresolved issues do not reach the dispute resolution provisions, instead people try to resolve them using adhoc methods leading to further compounding of issues.
How can this be resolved?
• First up, to have clear understanding on the scope and purpose of work.
• Always encourage and negotiate fair contract conditions to both parties.
• Determine the milestones of the contract with clearly defined terms which leave limited scope to or no scope for any ambiguity.
• Determine the obligations of each party for fulfilling the scope of the contract in writing and perform accordingly.
• Insist for damage obligation with appropriate limit.
• Insist for easy Dispute resolution mechanism.
• Always maintain correspondence as per contract clauses. Always discuss with the other party after communication about the breach and insist adherence or settle amicably.
• On noticing any breach, the aggrieved party should initiate in writing an immediate notification to the other party quoting the provision of contract that has been breached. The notice should clearly state the required action to rectify the breach along with timelines and implication for non-adherence with reference to the contract. Follow up after the timeline granted is elapsed and relate the outcome during the period to the rectification suggested and prepare for the next step.
• In case there is no agreement that can be reached, invoke dispute and initiate settlement meetings for amicable settlement. In case settlement cannot be reached, then invoke Arbitration in consultation with your Legal Personnel.
• Points relating to breach could lead to unexpected losses and hence be very expensive misses.
• Visualize the practical problems that may arise in execution of any contract and ensure the solutions are addressed in the contract terms and conditions.
• Strictly follow the provisions of the contract terms and conditions by mentioning the same in the correspondence.
• If you notice some points are missing in the contract terms and conditions, propose for new clauses and have discussions to finalize the terms and conditions with mutual consent to amend the contract.
• Please feel free to contact the Author for any further clarifications/requirements. All views or opinions or statements given in the Article are personal, which are in my knowledge/ information and do not represent those of my employer organization.