By Marion Lagrange, Clara Marco, Alizée Moretti, and Lara Vuillequey, University of Montpellier, Centre du Droit de l'Entreprise, Program of Master 2 "Droit du Commerce International"
Overview
Contract management may be defined as the process of controlling « contract (...) for maximizing operational and financial performance and minimizing risk». This QuickCounsel aims at identifying possible steps for effective contract management for the benefit of a contracting party. Beyond legal issues, it may be useful to consider business risk management matters linked to a contract, from its negotiation, through its performance and to its end.
Managing the Negotiation of the Contract
Contract management will affect both pre-contractual (1) and drafting (2) matters.
1 - Pre-contractual activities Preparing the business case to get the management approval may be necessary (1) before auditing the risks (2) and negotiating a pre-contractual agreement (3).
1.1 - Preparing the business case
A business case intends to convince key decision-makers of the merits of a projected contract. In order to prepare an efficient business case, the scope of the business transaction and the purpose of the contract for each party have to be identified. It shall take the form of a short document containing an analysis of the business needs and outcomes and presenting the possible options, followed by recommendations. The launching of the contracting process shall be decided after assessing both financial and non-financial benefits, as well as costs and delays. Accounting aspects may be important to consider as provisions of a contract may impact the way the assets are accounted for. For example, a contract dealing with shareholders' rights and duties may affect the status of these assets on the balance sheet.
1.2 - Auditing the risks
Firstly, the risks have to be identified through a simple form, for instance a mere list or a more complex one such as a risk register. Risks include, for example, delays in the contract performance, failure to comply with the budget, bankruptcy of the contracting party or even adverse weather conditions. In dealing with the form, an interesting aspect is to be noticed. Since there is no legal privilege for in-house counsel in France (CJUE, September 14, 2010, Akzo Nobel Chemicals case), the risk analysis made in-house and registered falls under ordinary evidence law. Therefore, in case of litigation, these documents can be used against the company, as it was aware of the risks. Secondly, the balance between the likelihood of occurrence and the importance of the impact of the risks has to be evaluated. Indeed, the bigger is the likelihood of occurrence, the more effort shall be put into managing and reducing these risks. Thirdly, this assessment shall enable mitigating the risks by allocating the responsibilities among the contracting parties. Under French legislation, the force majeure deals with transfer of risks in article 1148 of the Civil Code but the parties can always derogate from this rule. As well, establishing fair compensation mechanisms and providing insurance clause may contribute to mitigating the risks.
1.3 - Negotiating a pre-contractual agreement
At this stage, the parties may develop a joint strategy to determine how the contract will work once drafted. This may be achieved through a term sheet, a letter of intent or a memorandum of understanding. These designate mutual agreements serving as templates preceding detailed legal documents. They set forth the basic terms of a potential transaction by identifying the contracting parties, the subject matter and purposes of the agreement, and summarizing the essential terms of the contract.
2 - Assisting the drafting Contract management may be helpful to the persons in charge of drafting, by providing model forms of contract beforehand as well as reviewing the contract once drafted, according to the information provided by the business case study. The final draft has to tend to the outcomes and benefits mentioned in the business case, taking into account the risk audit and the accounting issues. The clauses shall be drafted to be opportune, valid and efficient. With respect to efficiency, clauses creating obligations shall answer the following questions: Who? To whom? What? Where? When? How? Why? What if? Their precision will provide legal certainty to the parties but they may still decide to add a closing memorandum for interpreting the intent behind the wording of the contract.
Managing the Performance of the Contract
During the lifetime of the contract, three main aspects have to be managed by the contracting parties: key deadlines (1), quality of the performance (2) and continuity of the performance (3).
1 - Listing key deadlines Respecting time limits is often crucial. For instance, regarding commercial leases, failure of the tenants to give written notice to the landlords that they are exercising their right to the renewal option within a specified period of time leads to the loss of the option. Representations and warranties, in share purchase agreements for example, are often subject to "survival clauses" which limit the time during which claims may be brought for breaches. These clauses must be negotiated in light of the applicable statutes of limitations as, in general, the survival clause may shorten the default statute of limitations for breach of contract but may not extend survival beyond it. As a consequence, failure to consider the deadline may leave the unwary contracting party without recourse for breach of representations and warranty after the expiration of the time limit. Therefore, a detailed schedule of the deadlines to be aware of may be established.
2 - Managing the quality of performance Management of contract performance aims at insuring that the contractual obligations are respected in accordance with the terms agreed by the parties (1), that the value of money does not decrease over time (2) and finally, that this performance aims at improving (3).
2.1 - Respect of the contractual obligations
The quality of the services has to be measured in order to make sure that it is adapted to the parties' expectations and agreement. Describing the level and characteristics of the expected quality in a formal document may then be useful. Moreover the quality of services will have to be measured regularly through methods such as the Balance Scorecard for instance.
2.2 - Value of money
The value of money is equal to the ratio of the combined effectiveness, efficiency and economy of the services, over the cost, which is the price paid for them. The aim is to evaluate the quality and the opportunity of the contractual investment.
2.3 - Improvement
Prospection for mutual improvement is an important aspect of contract management. Two kinds of incentives may be considered for that purpose: rewards and penalties. Rewards aim at motivating the contracting parties to improve their services. For instance, profit sharing will motivate the counter-party to improve the value of the services and indirectly the benefits to get a higher financial return. Otherwise, a clause may provide that the prices shall decrease through time, as the counter-party shall have improved its experience and efficiency and therefore be able to perform for lower costs.
3 - Managing the continuity of performance Continuity of performance has to be insured in case of disorders damaging the performance (1) as well as in case of dispute (2).
3.1 - Continuity of performance in case of disorders
Peculiar circumstances may interrupt the performance of the contract and hence trigger important losses. Therefore, the provisions of a document such as a Contingency plan, stating how to react in case of disorders damaging the performance, may be of great utility. This question is independent from the question of responsibility as its main goal is to keep performing and save the contractual relationship at stake.
3.2 - Continuity of performance in case of dispute
Disputes shall be avoided through the incentive of a peaceful atmosphere of work: senior level support for each party has to be insured at any time of the discussion, as well as structures of communication that would ideally provide for direct peer-to-peer communications.
Managing the Ending of the Contract
The last step is about measures to be taken concerning the exit from the contract (1) and post-contractual activities to conduct so as to insure an effective contract management until the very end (2).
1 - Managing the exit from the contract A contract may be satisfactorily fulfilled in accordance with its terms (1) but circumstances may arise and lead to an early termination of the contract (2).
1.1 - Normal end of the contract
A contract will end in accordance with its terms, once the obligations have been fulfilled. In this case, there is a need for evidence that the contract has been completed to the satisfaction of all parties. This shall be carried out internally, by verifying that there are no outstanding matters to be dealt with, and externally, by securing that the contract has reached all objectives through an additional agreement between the parties recording that the obligations have been fulfilled as they shall be.
2.1 - Early end of the contract
The situation of early termination involves the need to develop a contract exit strategy. To do so, it is important to identify the circumstances under which early contract exit may be required, through a risk audit as aforementioned. The parties may prefer either to immediately rescind the contract for the future, in case of substantial modifications of the contract environment for example, or to retroactively terminate the contract upon realization or no-realization of an uncertain event. In both cases, some clauses shall provide for these possibilities to terminate the contract in early stages, and give the right to one, several or all the parties to exit the contract in accordance with its terms. 2 - Managing consequences of the contract ending
2.1 - Keeping records
Recording full and accurate information of the contract and related transactions will be important for purposes of proof, in case of accounting and tax control or in case of litigation. For instance, within the European Union, Directive 2005/60/EC sets requirements, for credit and financial institutions among others, to keep any document related to customer due diligence and business relationships in case of money laundering investigation. Minimal periods for keeping commercial documents are determined by laws and complemented by statutes of limitations in force in the country of each contracting party. In France the statute of limitations for commercial matters is 5 years pursuant to article L110-4 of the Code de Commerce. However, accounting documents and invoices shall be kept for 10 years, in accordance with article L123-22 of the same Code.
2.2 Analyzing
Once the contract has ended, preparing a post-contractual analysis may be the last step of an effective contract management. It shall permit to assess the business case benefits, their potential improvement, the possibility to reduce risks and costs. Once set, this analysis shall be stored in the form of a report and used as a reference to improve any other contract life cycle management.
Conclusion
The need for an effective contract life cycle management has been highlighted from the pre-contractual activities to the termination of the contract. Transversal skills are needed as legal and business aspects may be equally important.
Additional Resources
NAO Marketing & Communications Team, "Good practice contract management framework", National Audit Office, December 2008.
"Contract management guidelines", Office of Government Commerce.
A. BRUNET, F. CESAR, "Le contract management - performance contractuelle, renégociations, claims: comment sauvegarder et accroître les marges", Editions Eyrolles, November 2013
G. LEVEAU, "Pratique du contract management: optimisez la gestion du cycle de vie contractuel", Gualino éditeur, Extenso Editions, 2013
H. Bouthinon-Dumas, A. MASSON, "Stratégies juridiques des acteurs économiques", Larcier Editions, October 2012