November 02, 2015

How Contractually Sophisticated Is Your Company?

Faegre Baker Daniels partner Mark Voigtmann authored the following article for the Control System Integrators Association in November 2015.

A lawyer can tell a lot about the sophistication of a CSI by its contracting strategy. What do I mean by contracting strategy? I mean, literally, the way in which a company processes the contractual terms that accompany each and every project that it implements.

I would divide the world into reactors, exchangers, reviewers and proactives.

At the least sophisticated end of the scale is the reactor. The reactor has given a lot of thought to the technology side of its business, probably has someone performing the role of a sales manager, and might even have a standard proposal template that it uses to propose an integration solution. However, the reactor probably has not really given attention to contract terms, until it must. This reaction, when it comes, might involve actually reading the terms that arrive in its inbox, but rarely involves negotiation. A reactor thinks (usually correctly, by the way) that if its work is excellent, the legal stuff will take care of itself.

Above the reactor on the scale is the exchanger. The exchanger has given attention to contract terms and has invested, perhaps several years ago, in a set of its own. The exchanger’s terms, typically embedded as a page or paragraph in the proposal, usually cross on the internet with the terms of the customer’s PO. The two sets of terms might be contradictory or there could be gaps, but these are rarely identified, unless at some point an unfortunate event forces such scrutiny. 

Above the exchanger is the reviewer. The reviewer has a policy for addressing contractual terms, and literally reads everything. Certain terms provoke its scrutiny above others, such as limitation of liability, warranties, intellectual property, indemnity and insurance. The reviewer is fully prepared to walk away from a project if a certain risk threshold is unacceptable. Negotiation of terms can occur on the important stuff if needed.

At the top of the scale, the proactive is the most contractually sophisticated. The proactive has a set of terms and conditions with a contrary terms killer provision. It might even have its own two-party contract form that it strives to use instead of an exchange of terms because it realizes that exchanges are prone to ambiguity and clarity is in everyone’s interest. The proactive has (proactively) established an actual written protocol for terms review, with certain terms (limitation of liability, warranties, intellectual property, indemnity and insurance) always getting full-fledged attention and more expanded review occurring on the largest projects. An attempted negotiation of important terms, with an exchange of redlined alternatives, always occurs, along with a commitment to walking away if the risk to the company is deemed unacceptable.

Where is your company on the contract management scale?

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