practitioner class 4 preparing the contract 04 july13

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Welcome to the

Practitioner Class 4 :

Preparing the Contract.

Housekeeping

� Fire procedures

� Toilets

� Focus : mobiles off etc.

Future Events� Practitioner Class 5 : Selecting the Right

Provider – Afternoon of 24th September – Tony Newberry – Here.

� Practitioner Class 6 : Managing the Contract –Afternoon of 29th October – John Lake (with me) -Here.

The Outer Circle (& beyond) : Receive Information via general APM publicity & word of mouth

The Middle Circle : Those on the C&P web mailing list.

The Inner Circle : Those who are willing to contribute when asked e.g. Talks, contributing & reviewing documents. Limited direct emails.

The Bulls Eye : Committee members & those who want to initiate ‘projects’ & pro-actively contribute. Copied in on most emails wrt SIG initiatives.Bi-monthly web / teleconferences.

2013 Contracts & Procurement SIG Structure

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Briefing the Professional Team

Alastair Greenan CEng FIMechE FIRM FAPM

email: [email protected]

Masterclass?� Mastery of anything (including contract preparation) only requires

you to do basic things well and consistently

� Effective contract preparation is not rocket science

� As individuals we easily enter, use, manage and exit contracts all the time

� Effective contract preparation is possible:

o 69 Contracts negotiated in parallel

o 200+ legacy issues

o 7 different existing contract forms

o Completed in under 12 months

Introduction� However good a contract strategy is, it can be completely

undermined by a poorly drafted conditions of contract and / or technical requirement documents which:

o do not reflect the contract strategy

o contain ambiguities and inconsistencies, both in the individual documents which make up the contract and between the documents

o contain errors or omissions, whether in terms of scope, constraints or the starting point

o are generally unclear and hard to navigate

� Effective contract preparation is actually a project within a project

The Good News: What it Requires

� Proper planning, and adequate, well briefed resources

� Clear definition of Benefits the contract must deliver

� Leadership, project management skills, and a clear understanding of Who, needs to do What, by When

� Management of multiple stakeholders to bring together a coherent whole within an agreed timeframe

� Identification and active management of risks and issues associated with the contract (with both content and creation)

� Getting it right is well within a Project Manager’s skill set

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Things to Consider before you Start:

� Consider Contract Structure – it will decide how and when you engage your professional team and define their scope of work

� Consider use of Main Body versus Annexes:

o Main Body for the overall agreement you’re putting in place and the rights and obligations you want to exist for the duration of the agreement

o Order of Precedence

o Annexes for information to be modified or updated over time

o Annexes work well for contracts with multiple contributors

o Often easier changing an annexe than the whole

Things to Consider before you Start:� Consider how you will run the ‘Project’

� What can you afford? Against your budget, decide what you will outsource versus do internally

� With external resources obtain an indication of rates and budget quotes for specific scopes of work

� Best use of resource - against unit cost, decide how you can best leverage the skills of the team whilst minimising spend so that you maximise the ‘value added’

� Decide who you want to write or lead which element

Things to Consider before you Start:� Understand interdependencies and who needs to be consulted in

preparation of each component (RACI useful)

� Understand the steps to bring it together in a coherent whole with a minimum of recycling (complete rough draft early is key)

� Decide how you want the team to work together (virtual or face to face, control of masters, information sharing)

� Allow sufficient time for internal review and compilation as well as external review and comment by the other Party

� Operate change control, so you don’t incur escalating professional fees

Briefing the Professional Team:

� Hold a kick off meeting

� Explain wider context and steps that preceded contract preparation (where you are now)

� Explain what you want the contract to deliver:

o The benefits you want from it

o The risks and issues it must address

o The unknowns and how they will be handled

o How you intend to operate the contract once in place

o What your risk appetite is

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Discuss how you plan to operate the contract and what your requirements are for:

� Uncertainty (now and at contract signing)

� Change/Flexibility and Change Management

� Operation of the contract – performance management, meeting your obligations

� Exit/Reversion – planned and unplanned

� Future business considerations (is this one of many)


� Explain anticipated team roles and how they will be involved over time

� Review/confirm the deliverables required and how they will fit in the overall contract structure

� Discuss and confirm the interdependencies between the team/deliverables

� Decide how the team will work together

� Explain the timeline and sequence of steps for creation of individual deliverables and compilation (1st Drafts & Finals)

General reminders for Professional Team:� The team will have different ways of working and writing

� Require them to say it once, in one place, and then refer –duplication will lead to contradiction

� Ensure that everyone understands the importance of the language being consistent and tight (£150,000 per word)

� Be specific and explicit in scope and obligations, but balance that with creating gaps in scope (including but not limited to..)

� Sanity check the ‘reasonableness’ of the provisions your team make and enforce a consistent risk appetite – you’ll have to negotiate it with the other Party

� Mandate a Clarification/Issues log and be relentless in its use

The Professional Team: BenefitsUsing any professional or professional team has benefits and limitations. Benefits include:

� They know their subject

� They understand the risks and issues associated with their scope and will bring experience and lessons learned you will not have

� They provide a ‘cold eyes’ review of where you’re at

� They’re great for a sanity check – if you can’t brief them well enough for them to make an effective start you’re probably not yet ready to put a meaningful contract together !

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The Professional Team: Issues� Most are fee driven and may be happy to work as mandate (even

if its not the most effective use of their time)

� Some may seek through the process to increase their scope/ contribution and therefore their fees

� The quality of their work is largely dependent on quality of briefing and how well their contribution is project managed (rubbish in = rubbish out)

� They will never have as much skin in the game as you (limited liability) and will manage their liability as much as yours

� They will often have conflicting drivers and views

� They typically will not know as much as you, or be as invested

Briefing The Professional Team: Summary� Plan the process properly before engaging them

� Be specific on the scope they are to deliver

� Have a quote against scope/deliverables including allowances for briefings, meetings etc.

� Have a clear plan up front to integrate the component parts and get a complete rough draft as soon as possible (providing one is a good way to go, using the professionals to edit)

� Have a plan to engage the other contract party’s professionals

� Don’t accept anything you can’t operate

� Don’t accept anything you don’t understand

Q&A’s

Preparing the contract

Doug Locke, Partner

Lawyers & Parliamentary Agents

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Contents

• Intellectual property

• Contract terms

• Change management

Collaborations

Collaborations

Please vote now using your keypads

Does a co-owner of intellectual property rights have the right to grant licences?

1. Yes

2. No

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Law and jurisdiction


If you granted a licence, do you have the right to grant sub-licences?

1. Yes

2. No

Exclusivity

• “Sole and exclusive”

• Dangerous for licensor without:

• clear obligations on licensee

• minimum royalties

• Licensee’s right to enforce

Warranties

• “Operating within the scope of the licence will not

infringe third party IP”

• “The Licensor warrants that the patent is valid”

• Obligation to inform

• Obligation to co-operate

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Payments

• Indexation

• Royalties based on revenue or profits?

• What does “revenue” mean?

• Information and audit rights

• Interest on late payments

Duty to act in good faith

Compass Group v Mid Essex NHS Trust


• Those deductions were “ absurd” and they were

repaid. But other deductions were valid.

• The contract gave the Trust the right to terminate

(and claim compensation) if deductions reached a

certain level.

• But could the caterers terminate (and claim

compensation) because the Trust had acted in

bad faith?


High Court:

• Trust’s breach of duty to act in good faith

constituted a serious breach of a long term

contract requiring co-operation.

• The caterers could terminate.

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Court of Appeal

• The Trust could terminate. In terminating, the

Trust had simply enforced the contract.

• No general duty to act in good faith.

• (But, an implied duty not to act capriciously

where a contract allows a party to make an

assessment, or choose from a range of options,

taking into account the interests of both parties.)

• Different in other jurisdictions.

Change management

• Big changes and small changes

• Changes requested by customer and changes

requested by contractor

• Changes in law

• Who pays for analysis and costing?

Termination

• If someone breaches an agreement, do you have

the right to terminate it?

• Serious breaches

• Repeated breaches

• Delays

Dispute resolution

• Escalation

• Mediation

• Expert determination

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Exclusions of liability

English law prohibits:

• the restriction of liability caused by negligence

unless the term is reasonable

• in contracts on a party’s written standard terms,

clauses which permit that party to restrict liability

for a breach of contract unless the term is

reasonable

Exclusions of liability

To be reasonable, a clause must be:

• “fair and reasonable having regard to the

circumstances which were, or ought

reasonably to have been, known to or in the

contemplation of the parties when the contract

was made.”

Reasonableness factors

• Bargaining strength

• Inducement

• Opportunity to avoid

• Knowledge

• Availability of insurance cover

Endeavours

• Best endeavours

• Reasonable endeavours

• All reasonable endeavours

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EndeavoursJet2 v Blackpool Airport


“All reasonable endeavours”?

1. More than “reasonable endeavours”, but less than “best endeavours”

2. The same as “best endeavours”

3. Meaningless

Jet2 v Blackpool Airport

“Jet2 and Blackpool Airport will use their best

endeavours to promote Jet2’s low cost services

from Blackpool Airport, and Blackpool Airport will

use all reasonable endeavours to provide a cost

base that will facilitate Jet2’s low cost pricing.”

Endeavours

• Jet2 operated flights outside Blackpool Airport’s

normal hours.

• Blackpool Airport made a loss on those flights.

• New management arrived at Blackpool Airport.

No more out-of-hours flights.

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Endeavours

“Jet2 and Blackpool Airport will use their best

endeavours to promote Jet2’s low cost services

from Blackpool Airport, and Blackpool Airport will

use all reasonable endeavours to provide a cost

base that will facilitate Jet2’s low cost pricing.”


Did Blackpool Airport have to stay open for the out of hours flights?

1. Yes

2. No

Endeavours

• “Endeavours” clauses rarely give a clear answer.

• If possible, be explicit in advance.

Summary

Plain English written agreements

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Doug Locke, Partner

[email protected] 0117 3145 602

Lawyers & Parliamentary Agents

What Makes A Good Contract?From a provider’s perspective

Robert Taylor BSc(Hons), MBA Const.& Real Estate, Dip.Proj.Man.(RICS)

National Commercial Manager

Interserve Construction Limited

Context

• What does a supplier want?

– A safe project

– A happy customer

– Long term relationships

– A ‘resonable’ return for commercial risk taken

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Context

A ‘reasonable’ return for the commercial risk taken?

What does that mean exactly?

Context

Return on Capital Employed

Financial Controls

Directors Responsibilities

Corporate Governance

Context

Internal Controls

• Group Internal Control Structure and Financial Risks

(Internal Controls)

• The Combined Code on Corporate Governance

requires the Board to “maintain a sound system of

internal control to safeguard shareholders’

investments and the company’s assets”.

Create and grow shareholder value

(Double headline Earnings per share by 2015)

Note: this is for Group (FM, Overseas, Equipment etc)

An Interserve Objective

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One of the ways

Interserve Plan to do it;

“Managing long-term client relationships

is…one of the key ingredients in… our

future workload”

Contracts in all their various forms are agreements that

stitch commerce together.

They set the balance of risk and reward.

Essential Ingredients of a Contract

• Offer

• Acceptance

• Consideration

• Intention

• Certainty

Still need to be properly considered

e.g. the issue of unintentional Counter Offer

Contract Ingredients

• Definitions

• Responsibilities

• Time

• Testing & Defects

• Payment

• Change Management

• Risk

• Dispute Resolution

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Maximising the Potential

• No matter how good or bad the contract, it is the

people working on the contract who make it a

success or not

• Whether the project is a success is up to the

individual

Tender Considerations Relating to

Potential Contract

• Assessing the Employer’s Financial Status

– Published company accounts (3 years)

– Dun & Bradstreet etc

– News items (power of Google)

Reviewing the Contract

• The Commercial Department

– Back Office

– Its all about the process

– Authority Levels

– Lessons Learnt

• Recommendations / Commercial Decision

• A ‘bad project’ can take significant future turnover to

make good the financial loss

• Sometimes better to decline the invitation

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Reviewing Contract Terms

• What is the Form of Contract?

• Employer Amendments to Standard Forms of

Contract

– It is arguable that for all such amendments that an

additional cost will arise from compliance with the

amended/added term.


• Entire Contracts

– The contract constitutes the whole agreement

– Non-reliance upon pre-contractual representations

– Sole Remedy


Contracts (Rights of Third Parties) Act 1999

The Act did no do away with the doctrine of privity of contract.

Rather, it created a specific carve-out from the doctrine by

defining a set of circumstances in which a third party may

enforce rights and/or benefits that are conferred on it by a

contract.

Contracts (Rights of Third Parties) Act

1999

It is therefore most common for contracts to be

entered into by Contractors etc, that the contract

contains an exemption provision from the Act.

e.g.

“No person or party who is not a party to this Contract

shall be entitled to enforce any of its terms for his own

benefit and the application of the Contracts (Rights of

Third Parties) Act 1999 to the terms of this Contract are

hereby expressly excluded.”

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Best Endeavours

In practice a ‘best endeavours’ undertaking means a

company must:

Take all actions which, having regard to costs and

degree of difficulty, are commercially practicable.

Best Endeavours

• You say ‘best endeavours’

• I say ‘reasonable endeavours’

• They say ‘all reasonable endeavours’

Assignment

When a benefit of a contract is assigned it makes it

harder for a Contractor to administer it’s obligations

and this fact is exacerbated if different benefits are

assigned to differing parties. It is therefore preferable

to maintain the status quo to be found in JCT standard

forms of contract such as:

JCT 2005, clause 7.1 “… neither the Employer nor the

Contractor shall without the written consent of the

other assign this Contract or any rights thereunder.”


• Indemnity Provisions

An analysis of a seemingly harmless wording that

could be encountered in any contract:

“The Contractor indemnifies the Employer against

all losses, damages, costs, expenses, liabilities,

claims, proceedings or actions resulting from any

act or omission by the Contractor in carrying out the

Services”

has some particularly deep pitfalls.

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Indemnity Provisions

• Firstly, an indemnity can allow an Employer to

recover damages that are far more remote than

would be the case under the laws of contract or

negligence, which require some element of

forseeability as a pre-requisite to recoverability of

loss.


• Secondly, although the case law in this area is a little

sketchy, the general view is that an indemnified party

does not have the obligation to mitigate his losses, as

is the general case in law


• Thirdly, this indemnity covers claims, proceedings or

actions resulting from an act or omission of the

Contractor.


• Fourthly, the limitation period with regard to an

indemnity begins to run from the date on which the

indemnified party suffers the loss.

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• Fifthly - the indemnity does not necessarily require

fault on behalf of the Contractor to trigger liability,

the no-fault events would not benefit from any form

of insurance cover.

Design Liability & Fitness for Purpose

• Implied warranties of fitness in respect of materials

and workmanship

• Extremely unlikely to obtain insurance against a

Fitness for Purpose claim

• Try getting a designer on FFP

Design Liability & Fitness for Purpose

• Reasonable Skill and Care

• Variations on a theme

• JCT2005 D&B CI 2.17.1

• NEC3 ECC X15

Limits of Liability

In relation to;

• Defects in design

• Indemnities

• Defective works

• Liquidated damages

• Consequential losses

Managing financial exposure

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Limits of Liability

Some standard contracts have limitation clauses

e.g.

JCT 2.17.3 for defects in design,

NEC3 clause X18

Novation of Consultants

Standard practice within the industry

However beware,

Blyth&Blyth vs Carillion Construction


Principle;

the contractor only has the same rights against a

novated consultant as the original Employer would

have had. As the original Employer had not suffered

any loss. the contractor could not claim against the

consultant.

Consequently, the wording of novation agreements

are now being changed to deal with the impact of

this case.


Consideration required to ensure;

• The scope of service is clearly defined and reflects

the Building Contract

• Consultant liability limitations reflect those of the

Building Contract

• The amount of PI is commensurate

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Collateral Warranties

Collateral Warranties

Need to consider;

• Warranty

• Liability

• Documents / IP Rights

• PI Insurance

• Materials

• Assignment

• Step-in Rights

Bonds

• There are various forms of bonds e.g. retention

bonds or advance payment bonds, the most

common of which is the performance bond.

Association of British Insurer’s (ABI) standard

wording

Bonds

• “on-demand” type bonds are understandably more

problematical.

• Third Party Rights – The warranty should contain a

clause which excludes the rights of third parties –

especially under the Contracts (Rights of Third

parties) Act 1999.

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Miscellaneous:

Freedom of Information Act

Remedies Directive

Nuclear Sites

Payment Terms

• A Contractor will assess the payment provisions to

identify if they are likely to result in a negative cash

flow.

• Monthly or stage payments?

• Payment Periods?

• Retention? Amount? Period?

Payment Terms

• OGC Fair Payment Charter – thumbs up!

• For ‘Actual Cost’ based contracts, what are the

conditions / definitions upon which ‘actual cost’ will

be paid?

Softer Issues

• The Employer’s Professional Team

Experience

Positive Culture

Proactive

Mutual Trust and Cooperation

Enjoyable working experience

practitioner class 4 preparing the contract 04 july13

Business

effective

reviewing

design liability

change management

payment terms

blackpool

contract structure

dont accept