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Basic Contract Law for PMs webinar Part 2: Building a contract, 6 March 2018

Basic Contract Law for project managers webinar series: Part 2: Building a contracts
Tuesday 6 March 2018
APM Contracts and Procurement Specific Interest Group (SIG)

presented by Sarah Schütte, Schutte Consulting Limited
hosted by Dr Jon Broome, Contracts and Procurement SIG Deputy Chair

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Basic Contract Law for PMs webinar Part 2: Building a contract, 6 March 2018

  1. 1. Basic Contract Law for Project Managers Webinar 2 of 3: Building a contract by Sarah Schütte of Schutte Consulting Limited For APM March 2018 © 2018 Schutte Consulting Limited 1
  2. 2. Webinar 2 topics Today we are going to talk about:  Components of a contract;  ‘Boiler plate’ & negotiated clauses;  Risk allocation;  Who should be involved; and  Project managing a contract’s development. © 2018 Schutte Consulting Limited 2
  3. 3. Background to the webinar series SCL’s core belief is centred on the reality of using law in practice, applying it to your project, as it develops and delivers outputs (“realises benefits”)!  PMs are central to the smooth running of a project  PMs have to juggle many things and be multi-skilled  Parties to a project depend on the PM to administer and manage the contract, and to give direction  Why should PMs learn about contracts?  2 main risks:  The project at risk and/ or sub-par delivery  Yourself and your organisation at risk  NB get the basics, but know your limitations and seek legal advice © 2018 Schutte Consulting Limited 3
  4. 4. Background to this webinar  In Webinar 1 we looked at the foundations of a contract, and the essential features to make it legally binding  In this Webinar 2, we are going to look at the key terms to look out for in 2 situations:  Drafting a contract; or  Reviewing a proposed contract from your client or supplier  There will be certain terms which  You will want to include (and avoid the risk of implied terms (Webinar 1))  Are more risky, but commercially acceptable (how to manage the risk becomes the important thing)  Are unacceptable to your organisation as a matter of policy (so you have to walk away from the deal) © 2018 Schutte Consulting Limited 4
  5. 5. Components of a contract Date: This contract/deed is made on XXXXXXXXX Parties: Between (1) AAAAA and (2) BBBBBBBB Recitals: A description of the background and why the parties are making the contract Consideration: value of the contract works or services. If nil value (e.g. framework or collateral warranty) insert “in consideration of £1 being paid by A to B” Terms: conditions, conditions precedent, warranties, undertakings, indemnities, ordinary terms Authorised persons: Signature / execution blocks © 2018 Schutte Consulting Limited 5
  6. 6. Components of a contract Date: the last part to be completed, triggering performance Parties: accurate name and registered office Recitals: set out a full description of the “story” leading to this moment, avoiding commercially sensitive minutiae Consideration: one of the elements which makes the legally binding (Webinar 1) Terms: see over Authorised persons: authority to bind the named party © 2018 Schutte Consulting Limited 6
  7. 7. Components of a contract Terms: 3 types, each has different impact (introduced in Webinar 1). Quick run-down: 1. Conditions – go to the heart of the contract. Breach or failure to comply = significant (“repudiatory”) and entitles the other party to terminate and claim damages. Include:  Conditions precedent – must be complied with before something else can happen. Non-compliance means the something else cannot occur 2. Warranties - promises, usually secondary assurances. Breach is not repudiatory and does not entitle termination, but damages only. Include:  Undertakings, - promise which is legally binding without the need for the other party to do anything  Indemnities – promise without need for proof of breach/ loss by the other party 3. Innominate (ordinary) terms – any term which is not one of the above. Breach gives remedy proportionate to the seriousness of the breach. Test = Is the innocent party “deprived of substantially the whole of the benefit” © 2018 Schutte Consulting Limited 7
  8. 8. Components of a contract Tips on terms  Take advice on drafting of content and categorisation  Ensure that the term has the effect you want it to have  Most terminations which fail do so because the basis for termination was insufficient  In any dispute or attempted termination which is challenged, the Court will determine the type of term and evidence required to satisfy it.  The “face” of the term  Its intended purpose  Its centrality to the contract  Plus any statutory rules, …………..are all factors to consider © 2018 Schutte Consulting Limited 8
  9. 9. “Boilerplate”  Describes a series of terms which are usually found in a contract – not the content but the subject matter  Be careful to avoid a cursory glance as they may look familiar. Everyone drafts them slightly differently!  They serve to better define the parties’ relationship i.e. the balance of risk and how risk is allocated  They also change the underlying (default) legal position (i.e. implied term – Webinar 1)  Use my sample SCL Boilerplate Bingo © as a checklist © 2018 Schutte Consulting Limited 9
  10. 10. “Boilerplate”   Boilerplate missing? Raise it with the other party and suggest the content i.e. your organisation’s standard version  Unhappy with proposed boilerplate? Explain why to the other party and suggest your organisation’s standard version  Take advice on in these scenarios as changes will affect the risk balance, and may impact on other clauses (e.g. terms which are not cross-referenced) or legal norms (i.e. implied terms) © 2018 Schutte Consulting Limited 10 SCL Boilerplate bingo © Law and jurisdiction IP/ Title Dispute resolution Confidentiality Insurance Definitions Entire agreement / Representations Force majeure Construction/ order of precedence Termination Notices 3rd party rights Assignment Severability Others…
  11. 11. Negotiated clauses  These are terms which are individually negotiated by the parties  How to approach?  Organisation’s standard term/ policy = starting point  Authority to negotiate or to bind (or both)? Check organisation’s protocol/ thresholds  Skill in negotiation  Translation of agreed commercial position into suitable words  Take advice to nail the drafting • Certainty and confidence in document underpinning the project, and that it gives PM what he/ she needs • Contra proferentum “against the proposer” © 2018 Schutte Consulting Limited 11
  12. 12. Risk allocation  A contract is an agreement whereby the parties share the risks of the venture/ objective  The terms of the contract allocate the risk between the parties  Some risks are unacceptable, e.g. against company policy  Some risks are acceptable i.e. within the company norm  Some risks start off as unacceptable, and the parties manage to agree a position which suits them both  How to decide which category a risk falls into?  What is the organisational norm (policy)?  Can the risk be avoided, managed or insured?  Which party is best placed to do this?  What is your exposure if you take on a risk, but are uninsured? © 2018 Schutte Consulting Limited 12 What if?
  13. 13. Risk allocation  Development of industry standard forms of contract  They set out the market acceptability of certain terms (or do they?)  Start with a standard form  Take care with “special” or “additional” clauses which change* the standard terms!  They change the risk balance!  What is the other party trying to achieve?  If they are voluminous / significant, think carefully about whether you want to enter into contract at all  Specific industry codes of practice etc. * “change” encompasses not only changes to the standard form’s existing words, but the addition of new bespoke clauses, and any party’s “standard terms” © 2018 Schutte Consulting Limited 13 Why?
  14. 14. Risk allocation Lots of ways to allocate risk  Risk can sit outright with one party or the other “ X shall…”  Risk can be shared jointly “the parties together shall”  Sharing the risk in the outcome can be done via incentives e.g. NEC “pain-gain” in Options C and D  One party takes the risk up to a certain level, and then the other takes over  “C shall issue a CEN for any event listed in this clause, but if he does not do so with X weeks he is time barred from pursuing it, unless the CEN results from events (1) and (2), when he shall not”  Always tie in risk consideration to the organisation’s policies and insurance to make sure you are covered if the risk is borne by you, then it happens…  Take advice from specialist risk manager as well as technical advice on the subject matter of the risk in question (e.g. probability of occurrence etc.) and legal advice on the drafting © 2018 Schutte Consulting Limited 14
  15. 15. Who should be involved  I am often surprised at the lack of thought and time allocated given to contract negotiation given how important it is!  Contract value ≠ intrinsic indicator of risk or of potential liability  Try to avoid giving to lawyer at the last minute for a “quick look”!  Check organisation protocols: seniority = authority to bind and corporate visibility  Include key project people (i.e. delivery team leads and PM)!  Each needs to know what is expected of them i.e. the obligations (terms) to be performed by their discipline/ function and how the terms impact on the way they “usually” do their job, constraints, ways of working etc.  How can you “give” a contract to a team, and expect excellent performance?  Same for the PM – expected to run the project according to the contract  Encourage the right people to contribute – and if you think you should be at the table, then make your voice heard! © 2018 Schutte Consulting Limited 15
  16. 16. Project managing a contract’s development  I like to think of the contract negotiation (or pre-contract) phase as a “project”  It is temporary: contract will be signed or not  It has a defined purpose: to agree the terms of business  There should be a strategic plan and timetable (linked to the underlying project)  There are certain things which should be achieved before you can move on the next thing (don’t start works before signing…or enter into LoI (Webinar 1))  I advocate the intended/ proposed PM should be involved.. The “face of the project”  In developing the contract, some clauses will be agreed quicker than others  Be careful about “trade-offs” – think about why the clause is important to you, and why  Get the framework in place first i.e. agree the principles. I find it is much easier for the detail to then fall into place.  Keep the principles in mind in every part of the negotiation – check back and take legal advice to ensure consistency  Crystal-balling: machine learning and AI are encroaching on this area e.g. check proposed clauses against organisational norms, BUT there is no substitute for the human brain and your ability to contextualise the project © 2018 Schutte Consulting Limited 16
  17. 17. Summary of this webinar • Take care when building your contract, or when reviewing a proposed contract • The terms of a contract relate to risk allocation • Boilerplate looks familiar, but is not universally the same… • Negotiated clauses are all about which party risk sits with • Take advice on the type of term because each has a different legal consequence • Pitch in to the conversation about the contract: you are the PM running the project whose foundation is the contract! • Next time, Webinar 3: What to do when things go wrong, or the unexpected happens  Do join us  Please give feedback  Any questions? © 2018 Schutte Consulting Limited 17
  18. 18. Contact: Phone: +44(0)7970101188 Email: sarah@schutteconsulting.co.uk Website: www.schutteconsulting.co.uk Linked In: Sarah Schutte and Schutte Consulting Limited Twitter: @sarahschutte1 and @schutteconsulting #SCLGlobal #SCLatSW11 #AskSarahs Skype: Sarah Schutte Sharp © 2018 Schutte Consulting Limited 18
  19. 19. This presentation was delivered at an APM webinar To find out more about upcoming events please visit our website www.apm.org.uk/events

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