Wednesday, July 05, 2006

Contractual Perambulations

Another business scenario for you. As always details and individuals are changed to protect the guilty, including myself. This particular one is done, dusted and closed, but I’m intrigued by your responses, so will stop at an appropriate point to see what you might think.

I have a supplier I’m dealing with at the moment. We currently have placed about £400K in work with them. Not enormous, but substantial enough. The big carrot is in the next phases of work. Having selected this company as a partner, there is the potential of a good million or two more being placed with them.

Now we placed a separate project with them, not related to our main streams of work. They won it competitively, despite it having tight budgets and impossible time lines. It more than equals all the other work they've done with us. They were keen to do it. Because of the deadlines we had started work with them, and though they had a valid purchase order (PO), no contract had yet been signed.

These days Sarbanes Oxley is raised as the spectre of many hauntings. For those unfamiliar with SOx, it is a piece of US legislation, passed after the Enron collapse, which places extraordinarily tight financial and audit controls on all companies headquartered in the US. Like any legislation, it is open to interpretation, and having now been involved in four companies implementation of the new rules, I’ve been astonished at the differing ways companies bend themselves around the rules.

In this case, our supplier had the bizarre guideline that if a contract had not been signed three weeks after work commencing they had to “down tools” and stop work. Though I can somewhat understand the reasoning, there are many ways of assuring legally binding payment for work, and a PO has traditionally been one of them. A PO is a binding document that obliges the issuer to pay for the work and goods listed (assuming they are delivered in good order).

Now, we as the buyer had been told of this deadline, and I’d run up against it before in the first placements of work. This time though, we did not receive the draft contract until business day 7 of the 15. To compound the error the document was light, and didn’t adequately reflect the nature of work, though it did provide all sorts of legal cover for the supplier.

Negotiations commenced. We put in new terms, the other side modified those terms, we modified their modifications, and the days slipped by. The other side’s deadline approached. There was no malice on either side, but some important points, such as software warrantee, and the sequence of transfer of ownership of intellectual property (the legal term covering such things as software code) where being hotly debated.

Last Friday being the deadline, both of the three weeks, and our supplier’s quarter end (so they can recognise the revenue) came. We debated on and off throughout the day. I was taking the boys camping, so had to leave the office. Arguing contract terms while on the train is not something I even remotely like doing, but I did. I get off the train, continue the debate while I drive home, while I pack the car, while I get two boys ready (though LL was marvelous in helping). Tempers are very heated on both sides of the conference call (there being a VP and lawyer on their side, me and our lawyer on ours).

We both concede points and seem to get close to agreement. However, all this has been verbal. The document has yet to be marked up and changed. You have a choice. Remember, its 8:30pm. You haven’t had dinner, its already past the boys bedtime, you still have to drive and set up camp. Its been a long long week.
  1. You get a faxed copy of the document and sign immediately. Note, you don’t have full authority to sign. However, they would accept it, and frankly the worse you’d get would be a slapped wrist.
  2. You delay taking your boys camping, get a faxed copy and properly read it before signing, but this will likely take you up to the 12pm deadline.
  3. You defer until Monday morning. That allows you to actually read the document, ensure yourself and your lawyer are comfortable with the final wording, and it can get signed by the appropriate senior officer of the company (one of our SOx terms, the negotiator is not supposed to sign).
The consequences of 1 – your supplier is happy, but you have to live with signing a contract you haven’t read. With 2 your supplier is happy, but you have two very unhappy boys. With 3, your supplier may actually carry out its threat of downing tools and thus jeopardising the project. Goodwill might also be irrevocably broken between the two parties, and you might have to terminate all contracts, thus putting all your projects at jeopardy, not only this one.

What do you do?


Fascinating, I love seeing how people think. If you're enjoying these I'll try to keep actual case studies more frequent. None of you were far off, but the reasoning wasn’t always the same. I went for 3, but for a large balance of factors:
  1. I was tired, so was R, our lawyer. To do a rushed review of a contract is to miss things, and the law is often in the detail. We both agreed we just wouldn’t do a good job of it right then.
  2. Personal ethics, I can not sign a contract I haven’t read. Has aggravated salesmen no end in my life. Even if signing a minor retail sales purchase I’ll go over the small print and ask awkward questions.
  3. Making a point. Contractual partnerships are supposed to be that. Looming threats loose goodwill, we felt it important to be clear we were working in good faith, but would also follow our own internal guidelines.
  4. The kids. I do agree with Geena’s point that kids have to realise the priorities of the wider world. I don’t make all their school events, nor does LL, but we always try to make sure one is there, and talk to them about why we can’t come when we can’t. There is one overriding principle I try very hard not to break though, I keep my promises. If I can’t come to something, or can’t do something with them, they know in advance. If I’ve told them I will do something, that’s a bond. I want them to understand how vital a promise is.
So, we didn’t sign that night. Our supplier was livid, though he kept this side of polite thankfully. I suspect some personal bonus targets where missed by our not signing. It was a good thing, when we reviewed the contract on Sunday we found a few agreed items missed, and some wording we didn’t agree with. Nothing major, but these things matter.

However, when we got in Monday morning ready to sign, our supplier still downed tools. This very nearly blew up. We came very close to a nuclear option of terminating both this and all other contracts with them. However, our own deadlines loom, and we just pressed ahead with signing. Thankfully, on my making clear how poorly their actions had been taken, our supplier sent staff back on site, prior to getting a signed contract, so tempers were mollified and the work went on.


<< Home