Tuesday, August 30, 2011

Top Negotiated and Disputed Contract Terms (IACCM Survey)

The IACCM 10th Annual Survey, 2011 Top Terms in Negotiation, contains a wealth of information about the state of contracting. It reveals a clear difference between the top negotiated terms and the top terms subject to claims and disputes.

The authors see the disparity caused by a tension between negotiators and business managers. The survey reveals that negotiators focus on disputes and the consequences of claims; while business managers seek to manage the ongoing relationship between the parties. According to the survey, negotiators focus on “asset protection and the consequences of failure.” Business managers, on the other hand, seek “clarity over scope and goals and over the on-going governance and management procedures for the relationship.”

Top 10 Negotiated Terms
Top 10 Disputed Terms
1. Limitation of Liability
1. Delivery / Acceptance
2. Indemnity
2. Price / Charge / Price Changes
3. Price / Charge / Price Changes
3. Change Management
4. Intellectual Property
4. Invoices / Late Payment
5. Payment
5. Performance / Guarantees / Undertakings
6. Liquidated Damages
6. Service Levels and Warranties
7. Performance / Guarantees / Undertakings
7. Payment
8. Delivery / Acceptance
8. Responsibilities of the Parties
9. Applicable law / Jurisdiction
9. Liquidated Damages
10. Confidential Information / Non disclosure
10. Scope and Goals

Key points in the survey:
1. Effective contract negotiation requires a clear understanding of the differences between consequences and probabilities. Too often negotiators delve into all possible risks without assessing the likelihood that such outcomes will in fact occur.

2. Effective contract negotiation should focus more on reducing the probability of failure as opposed to addressing the consequences of failure.  The authors comment on the fact that acceptance / delivery tops the list of disputed terms, saying: “It is quite an indictment of our contract management processes if the first time we do anything serious about non-conformance is when it reaches the acceptance / delivery phase.”

3. The root cause of the divergence can be attributed to key disputed terms—change management together with scope and goals—that do not appear in the top negotiated terms. The authors assert that this is evidence that “the goals of the relationship are not clearly spelt out (or that changes are not adequately thought through); that the scope is therefore frequently misaligned with the goals (or itself badly written).”

4. The study concludes by stating that in the future: “[c]ontracts will become vehicles for defining and managing relationships as well as the tool through which transactions are undertaken.”
Reflecting on the survey, the unified contract structure should be revised to capture the importance of relationship management. The majority of contracts governing an ongoing relationship handle asset protection in the covenants section and consequences of failure in the events of default or termination provisions: they rarely contain relationship management terms. Drafters interested in including such terms can refer to governance language in master services agreements.

1 comment:

  1. Contract management is the administration of documents pertaining to contracts. These contracts can come in the form of employee contracts, contracts with employees, and contracts with distributors. Managing and organizing a huge chunk of documents is no easy feat. It takes too much of an employee's time and energy, at the same time it adds to a company's administrative expense.

    project contract management