Eric Evans

Developing Contracts That

Fit Your Needs:

The Commercial Framework

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• You can type your questions throughout the session

• Time will be allocated in the end for the speaker to address your

questions

2

Your Presenter

Eric Evans has held Director level positions in the automotive,

retail, fast moving consumer goods and healthcare sectors. He is

the author of three books on procurement and negotiation, and a

speaker on MBA programmes across Europe and the Gulf region

As a management consultant, he has delivered improvement

programmes in demand management and inventory management,

and has coached organisations as they implement collaborative

replenishment and customer-led approaches to demand

management.

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Why is this important?

A contract is a business

document that must be

written in a way which

makes it legally

enforceable.

It will contain legal

provisions, but must be

seen as a business

document

Don’t be

afraid of

Contracts

What drives the content of a contract?

The contract should be driven by

five things:

1.What is the contract trying to

achieve?

2.What risks and opportunities

do we want to manage?

3.What form of relationship do

we hope to have?

4.How will we manage the

business relationship?

5.What remedies do we want if

things go wrong

“A contracts simply says:

This is what you will do,

this is what we will do and

this is what happens if

things go wrong”

Examples

What are we trying to achieve?

A low price or a fixed price?

Our risk or their risk?

An outcome or following our instructions?

What risks and opportunities do we need to manage?

What could go wrong?

What further opportunities could arise?

What type of relationship do we want?

Adversarial?

Risk sharing?

Absolute certainty of outcome?

How will we manage the relationship?

Governance?

Coping with change?

Dispute resolution?

What happens if things go wrong?

The wrong way to start…….

Why is this important?

What the customer

wanted

What the supplier

understood

How it was

documented

What it actually did How it was

designed

How it was billed

by the supplier 8

Risks and Opportunities

A contract is, at its heart, a risk management tool

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Column1 Column2 Column3 Column4 Column5 Column6 Column7 Column8

Failure Mode and Effects Analysis (FMEA)

Risk Number Risk to be considered Probability Consequences Visibilty Risk Value Mitigation

1 Exchange rate changes 8 1 6 48 CR We buy in supplier currency and hedge

2 Industrial relations dispute 3 7 7 147 CC disallowing disputes as force majeure CC obliging supplier to advise on state of industrial relations

3 Ownership of supplier IPR 3 9 8 216 CC Supplier to warrant IPR ownership CC Supplier to indemnify us

4 Key man dependency 7 5 6 210 CC Supplier to agree long notice clause with key man

5 Late delivery 5 5 7 175 CC Liquidated damages, back to back

6 Unacceptable quality 2 9 8 144 CC Uncapped damages for poor quality

7 Supplier Bankrupcy 1 9 7 63 CR We take monthly credit checks

8 Takeover of company 3 7 9 189 CC Termination rights at our discretion

9 Design proved to be flawed

2 9 7 126 CC Uncapped damages for poor quality

10 Supplier breaches confidentiality

6 8 9 432 CC Liquidated damages

Notes

a) Risk values greater than 150 must have mitigation plans

b) Risk values less than 150: mitigation plans are optional

c) CC stands for "Contract Clause"

d) CR stands for "Commercial Remedy"

Risk Analysis

Brainstorm of

what could go

wrong

Likelihood of it

happening

(0 to 10)

Consequences if

it does

(0 to 10)

How much notice

we will get

(0 to 10)

Risk X

Consequences X

Visibility

Actions we could

take

What type of relationship do we want?

The Relationship Continuum

Adversarial Collaborative

Managing the Relationship:

the key role of Governance

The Commercial Framework: The Point of the Deal

The Commercial Framework is the first step in in preparation for contract drafting. It should define clearly what we want to achieve and the risks we want to avoid. This step should be done before we consider drafting the contract. This is the business proposition which will be embedded in the contract

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Why do we need a “Commercial Framework”?

The Commercial Framework serves two main

purposes:

1. It establishes the priorities – in terms of issues

and clauses - for the commercial negotiations to

take place.

This ensures that the negotiating team

prioritise the issues which are important.

2. It provides the mandate for the negotiating team

by agreeing what the team have a remit to

accept on each issue, during the negotiations.

By defining the Most Desirable Outcome (MDO) we

agree what we are aiming to achieve; by

defining the Least Acceptable Alternative (LAA)

, we agree the minimum we can accept.

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The Framework sets out deal principles &

objectives

What We want from

the deal

Commercial Priorities:

• Meet business needs • Value for money, end to end, by exploiting

value to maximise profitability • Security against risk & commercial

assurance/contractual protection • No surprises • Managing contracts and relationships

throughout the term and beyond

Balance Risk & Opportunity:

• Both parties to be upfront about risk

allocation and the ‘value/price’ of risk

allocation.

• Increases awareness of risk

• Focus on understanding

risks/opportunities for a given

contract/relationship

Relationship Priorities:

• Commercially sensible relationship.

• ‘Necessary’ contractual depth to

support relationship and capture risk

allocation

• Focus on contract/delivery

management

• Continuity of personnel in order to

retain knowledge and relationships

Principles of conduct:

• Treat other party as a seamless extension of ourselves (the “extended enterprise”)

• Relationship premised on ‘What can we do for each other’

• Senior stakeholder engagement & access

• Build a mature, trusted relationships at all management levels to embed a commercial relationship

3

1 4

2

Commercial Priorities:

A word about: “Understanding the Deal”

Before we can start drafting the

contact, we must have absolute

clarity over what the business

need is. This means

understanding outcomes and

deliverables, risks,

dependencies, and the

commercial and contract

strategies which underpin the

contract

The Framework shapes the deal -early Overview of dimensions included:

Services Remuneration Asset &

Business

Protection

Governance Termination Technical

Legal

Requirements

Contract

Management

• Statement of business requirements

• Technical requirements

• Resource input & dependencies

• Staff expertise

• Term

• Knowledge transfer & embedding

• Co. policies

• Sub-contractor & Third Party

• Charging mechanisms

• Incentives

• Payment schedule

• Currency

• Bench-marking

• Liability limitation

• Subsidiary/ Parent exposure

• Warranties & indemnities

• IPR

• Data protection/ System security

• Disaster recovery

• Insurance requirements

• Employee Protection

• Governance Structure

• Dispute escalation & resolution

• Supplier performance evaluation

• Change control procedure

• Tendering for new work

• Customer termination rights

• Our termination rights

• Payments upon termination

• Exit management

• Tax

• Regulatory requirements

• Confidentiality

• Fraud

• Assignment & novation

• Change of control

• Divestment of

• General ‘boilerplate’ provisions

• Pre-contract activities

• Contract management activities

• Close-out/post contract activities

Tie

r 2

T

ier

1

Tie

r 0

Commercial Framework

Statement of commercial & contract

principles

Contract types supported by

Commercial Framework

Commercial Focus for various contract

categories

Note: Applied where relevant and to the extent relevant considering deal size/significance.

An example of Commercial

Priorities Focus for contract dimensions related to Commercial Priorities

Lower Commercial Focus

• Business objectives (3.1.1)

• Service Level requirements (3.1.2)

• Technical requirements (3.2.1)

• Charging Mechanisms (e.g. Types of Charges (4.1.1-4.1.6), Service Credits (4.1.9), Currency (4.4.1), Rebates (4.1.7), Expenses (4.1.8)

• Knowledge transfer (3.6.1)

• Flexibility in volumes & services (6.4.1)

• System & technical changes during contract (3.2.2)

• Benchmarking (4.5.1)

• Developed IPR & Licenses (5.4.1-2)

• Removal of services (6.4.4)

• Contract Term (3.5.1)

• Extension of term (3.5.2)

• Gain Share (4.2.1)

High Commercial Focus Medium Commercial Focus

Co

mm

erc

ial F

ocu

s

Contract dimension in the CF

Low

Med.

High

Knowledge Transfer

Developed IPR & Licenses

Technical changes during contract

Removal of Services/License

Technical Req.

Charging Mechanisms & IP Licenses

Service Level Req.

Business Req.

Volume flexibility

Term & extension

Benchmark Gain Share

Using a Precedent or Template

• Time can be saved by basing a contract on a precedent or template. This is a more efficient way of drafting a contract, and as long as the precedent is a good pone, it reduces the potential for drafting errors

• It is helpful to: – Choose a precedent for the same type of transaction

– Choose a precedent where you started from a strong negotiating position – based on spend, the relationship with the supplier, the desirability fo doing business with your company etc

– Use a starting agreement rather than an executed agreement

Key Drafting Principles

1. Be consistent with the front end

• Check the front end and definitions schedule

• Use definitions consistently

• Don’t cover provisions that are covered in the front end (e.g. extra limits on liability, indemnities)

• Don’t include extra obligations

• Say if you think the front end/definitions are wrong

2. Use technical terms carefully

• Technical terms with a well-understood meaning are okay (e.g. Ethernet, anti-virus,)

• Explain/define ambiguous technical terms (e.g. IAM, CoS class 1)

3. Think about structure, and be comprehensive and clear

• Structure

• Clarity

• Comprehensiveness

4. Points to avoid

• No new customer obligations or joint obligations

• No liability or indemnity provisions

• No assumptions

• No agreements to agree

• No charges (except in the charges schedule)

• No repetition

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Checklist: Good to Go?

1. Are the correct parties named in the contract?

2. Are the recitals accurate – what would the effect be if they were

published in a lawsuit?

3. Do the definitions work each time a provision is used?

4. Are the obligations in the “Actions” section clearly defined?

5. Are the representations and warranties that we are making

accurate?

6. Has the other party made warranties and representations which

are strong enough?

7. Were representations made pre-contract which we need to

capture or exclude?

8. Can we control our covenants?

9. Has the other party made sufficient covenants?

10. Are we able to control our dependencies to their covenants?

11. Could I misinterpret the scope if I tried?

12. Have we carried out a risk analysis?

13. Have we defined “completion” clearly enough?

14. Are acceptance procedures fully defined?

15. Are delivery dates clearly defined?

16. What happens if delivery dates are missed?

17. Have we explicitly defined “dependencies”?

18. When and how is payment triggered?

19. Are we comfortable with the cash flow throughout the contract?

20. When can the one party terminate, and what compensation does

the other party get?

21. What are our liabilities and how are they limited?

22. Who owns foreground and background IP?

23. Are IP licensing terms clearly understood?

24. Are there clear and agreed processes for change management?

25. What assumptions have we made?

26. Have we considered the things we need to exclude from the

contract?

27. Have we been clear on what warranty does and does not cover?

28. Are the representations and warranties that we are making

accurate?

29. Has the other party made warranties and representations which

are strong enough?

30. How will we resolve disputes?

Questions?