April, 2016

The job of the lawyer/inhouse counsel is to anticipate and

deal with risk, not to deal with its consequences!

In our last blog we discussed the point that in the common law contracts really count and can be compared to a type of private law to which the parties agree to be bound. For this reason in the common law world contracts are considered to be one of the most important aspects of a business and consequently their in-house lawyer or contracts manager represents a key player in a company’s strategic team.

Why are contracts so important in the common law?

We have said a contract is important, but what is it that makes a contract so significant? Because common law jurisdictions operate on the basis of freedom of contract, the contract signed by the parties rather than any law will be used to establish the liability that will exist between them. For example contract provisions will be normally binding no matter how unfair the parties subsequently consider them to be. Thus it is the contract and the contract alone that decides:

• the warranties, indemnifications and exemptions of liability that will apply to the parties’ relationship;

• the scope of their respective duties;

• the term of performance;

• the applicable general terms and conditions;

• pricing, including applicable price escalation/reduction provisions;

• specifications;

• reporting;

• the applicable statement of work (SOW) etc.

The smart response

As a result, today smart companies are recognizing the strategic importance of putting in place a proactive contract management system, where each contractual clause in a company’s contracts has been the object of prior discussion within the company with the aim of putting in place:

• better contractual visibility;

• attainment of efficiencies both as regards the management of risk but also as regards the performance of the contract and resulting profit;

• financial risk minimization;

Indeed, the adoption of definitive negotiation positions prior to any actual negotiations has become essential. This might be new for some civil law lawyers, especially in-house lawyers, who for numerous reasons not worth going into, are sometimes given a reduced role to play in the contract formation process. The attitude of many companies coming from civil law jurisdictions appears to be to:

do the business first and to consider legal liability or other legal problems afterwards

Although such an approach in civil law jurisdictions, where the government has to a certain extent reduced the applicable reality of the notion of freedom of contract, may appear to be a feasible if a dangerous short-term policy approach to the question of risk. However, this is certainly not the case once the applicable law is the common law. In fact it is very dangerous.

Yes, getting a contract wrong in the common law world can kill your company. The Texaco v Pennzoil case should never be far from the mind of any lawyer. In this case, a negotiating document was considered by a US Court to have contractual effect leading to an initial award of $10 billion in damages, causing unsurprisingly the eventual bankruptcy of one of the companies involved. The message we are trying to get across here is that contracts count and so the question of contract management for any company dealing in the common law is of primordial importance.

So what is contract management?

In a normal business, contract management can be defined as:

the art of managing deliverables, deadlines, expectations and liability while at the same time ensuring the other party’s interests are sufficiently well respected so as to make them a potential future partner.

Contract management does not end when the contract is awarded but starts pre-award and continues to apply until the contract is filed away and performance over. Contract management is a profession that goes beyond being a lawyer and the contract management team should involve representatives involved in:

• manufacturing and supply management (production);

• risk management (legal department);

• finance (accounting);

• customer management and sales (sales).

You will notice that I left the area of sales at the end. This is because the job of a sales team is not to drive contract content, but to sell products in a contractual context that has already been developed. A product is sold in a context of risk, in which the notion of price goes beyond a unit cost profit analysis. If a sales team drives contract content, the result will be more sales but probably in the context of increased potential liability for the company. This is why a company’s contract should be negotiated in advance and explains why so may civil law lawyers find they cannot negotiate a contract with their common law counterparts, the common lawyer cannot negotiate because the contract has already been written back at his/her headquarters and his/her input in its development has occurred under the heading of risk management. Potential liability under the common law is too great to be decided on by legal and sales teams out in the field.