Published in the proceedings of the 2013 IACCM Academic Forum on Integrating Law and Contract Management: Proactive, Preventive and Strategic Approaches Phoenix (AZ), USA, October 8, 2013 The International Association for Contract and Commercial Management, Ridgefield, CT 2013, pp 152–165 Capturing the Business Deal in the Contract Document: Do your Terms and Conditions Capture the Value of the Business Deal? By: Milva Finnegan Outline Abstract Introduction The Contract Document – At the Heart of Contract Management Who writes the Contract Document? Establishing the Contract Drafting Process Examples of Contract Drafting Tools 5.1 Guidance checklist 5.2 Visualization of Contract Terms 5.3 Leveraging the Proposal Final Responsibility Lies with the Organizations Contract Drafters Conclusion Abstract Does the signed final contract document the business deal that was negotiated and understood by all parties involved? When it is time to document the final business deal and who should be responsible? The contract specialists, contract managers, business managers, legal counsel, or whoever has the responsibility for drafting the contract document in the organization, collectively the “contract drafters”, are most often left as a one- man show to write the entire business deal in a legally binding document Where did all the people go? Is the above picture familiar in your organization? Once the Statement of Work ( SOW), Specifications, Logistics, schedule and other specifics of the deal have been negotiated and finalized, the team members move on to the next business deal Contract drafters are left asking, “What are the agreed-to business deal terms? Is it realistic to assume that the contract drafters know all the specifics of the deal? The key element in capturing all the agreed-to terms and conditions of the business deal is the involvement of every person part of defining and finalizing the deal This paper will show from a practitioner’s perspective different tools, techniques, and methods which have proven successful in achieving participation from non-contract drafters in the contract drafting process Included are actions contract drafters can take in order to assure the contract document captures and protects all aspects of the business deal In organizations that have successfully implemented a contract drafting process where all stakes holders participate, the result is a contract document that translates into value for the business The focus is on the contract document and the goal is to assure the business deal is captured 1.0 Introduction Does everyone participate in drafting the agreement and read the contract to assure the wording exactly depicts the agreed-to business deal? Those of us who are practitioners in the field can attest that the answer is no The most common complaint we exclaim is, “No one reads the contract document!” This is where the challenges lie for the contract drafter when tasked to write the contract document The solution is to engage the entire organization – both the deal makers and the implementers –to draft and review a contract document that captures the business deal, protects the business deal, and brings value to the business It is time for all stakeholders to participate in the contract drafting process Each function agreed to specifics of the deal; both business and legal terms must be negotiated and agreed upon Only as a team is the organization able to write a good, solid, readable, and, most importantly, a usable contract document The challenges that organizations face when drafting the contract document are many, to name a few: • Different people negotiate the deal than write the contract document • Contracts tend to be the black and white text and more heavily focused on legal terms than on business terms • Final contract review is left to contract and legal teams – the large team that compiled and negotiated the deal does not read the contract document before it is finalized This paper will show different best practices, industry trends, and visualization tools that can be useful during contract drafting to overcome some of the challenges outlined above The goal is for contract drafters to start translating the negotiated deal into value for a business by involving all stake holders to assure every aspect of the agreed- to deal is captured 2.0 The Contract Document – At the heart of Contract Management The contract document drafting phase is the most critical step in contract management because it creates the governing reference point of the agreed- to business deal The contract document consists of the terms and conditions the parties agreed to Throughout contract execution, both contracting parties utilize the contract document as the single point of reference In business and contract management especially, we refer to the contract more as a general overarching term that encompasses the entire contract life-cycle When talking about Contract Management and the Contract Life-Cycle, the depiction most often used is a circle Contract Lifecycle Management (CLM) is the proactive, methodical management of a contract from initiation through award, compliance, and renewal i Every step of effective contract management, however, has the contractual document at the heart of it, Figure Contract Lifecycle, shows this relationship Figure Contract Life-Cycle Maybe Contract Management shouldn’t focus so much on the circle but more on what is in the center of it all, the actual contract document The arrows in the above-pictured Contract LifeCycle picture flow toward the contract document and from the contract document Acquisition phase or pre-contract phase activities create the contract document, while the Execution phase or post-contract phase is governed by the contract document Perhaps the contract life cycle should be depicted as a sequential process with the acquisition phase activities “feeding” the contract document and the contract document in turn “feeding” the implementation activities, as depicted in Figure 2., Contract Document Life-Cycle Figure Contract Document Life-Cycle The arrows also go in the reverse direction due to factors such as already existing contract terms that should be considered during the acquisition phase Examples are: request for proposal requirements, existing laws governing the business transaction, and other types of terms that could add cost or alter the business deal On the other hand, during contract execution, the parties might agree to additional scope or changes to the original business deal and therefore amend the contract document 3.0 Who writes the Contract Document If the contract document is the most important part of every business deal, who makes sure it depicts exactly the business deal that the company negotiated? Usually this responsibility lies with the organization’s “Contract Drafters,” who, as earlier indicated, could be a Contracts Specialist, a Contract Manager, a Business Manager, a lawyer, or other person responsible for writing the contract document The size and organization structure varies, however, its common that various functions of the organization are part of structuring and finalizing the business deal Figure 3., The Contract Puzzle (Siedel & Haapio, 2011) ii shows the integrated relationship of all different parts of the contract document Figure The Contract Puzzle The Contract Puzzle Performance & Delivery Technical & Contextual Project & Contract Management Business & Financial Legal & Risk Management George Siedel & Helena Haapio: Proactive Law for Managers – A Hidden Source of Competitive Advantage (Gower 2011) Used with permission 4.0 Establishing the contract drafting process Now that we are convinced that all stakeholders should be involved in drafting the contract document, the question becomes, ”How we get everyone involved?” This seems like a daunting task because, in reality, few people besides the contract drafters read the actual contract document One great method to involve the organization is to establish a contract drafting process A set process standardizes the activities and brings consistency The process should define the tools, templates, and organizational flow used during the contract drafting phase When communicating and “training” the organization on the process, it is important to use visuals Taking the contract document and then breaking the terms into “buckets” tends to depict a more manageable task The Goal is to remove the feeling of an overwhelming and timeconsuming task Figure 4, below, shows an example of contract terms (clauses) divided into four types of terms Depicting the actual process as a flow chart is a great visual tool Figure Four types of Terms Stake holders involved with making the business deal should be familiar with their business’ contract document and have a general understanding of the contract terms and conditions surrounding their functional responsibility This would allow the documentation of the finalized business deal to be a team effort, resulting in a well-detailed document Often negotiations are ongoing for months, but those discussions are never documented in detailed language structured to allow for easy transfer to the contract document Negotiations are most frequently documented via high level meeting minutes and the actual language desired in the contract is drafted later, usually after the deal is agreed to Above Figure depicts in an easy- to- understand visual what the sections (clauses) are that should be included in a contract There are several parts to an agreement for which various disciplines and stake holders have responsibility When drafting contracts, the drafters justifiably focus on the terms upon which the agreement is based However, to ignore the standard elements of any agreement can lead to the unnecessary risk of unsavory long-term commitments or worse, litigation (Brian Ritchey, April 26, 2013) iii The business deal terms such as price, delivery, and scope are negotiated with the business manager, technical team, and others that are directly involved with the product or service offered Contract specific terms are usually drafted by the contract drafters covering areas such as the term, termination, confidentiality, warranty, and the mechanics of how the parties intend to achieve a successful implementation There might be unique terms specific to that business deal that must be included Examples are: industry standards and regulations, government imposed requirements, unique contract type, or other less frequently used contract terms Finally, there are legal terms that should be drafted and/or reviewed by a legal counsel, for example, the entity signing the agreement, indemnity, choice of law, and disputes, among others All sections are interrelated and impact other terms (clauses) The key is to have every part of the contract drafted and reviewed by each stakeholder as one entire document and not as separate standalone pieces With each stakeholder having a general understanding how their specific terms are structured and documented 5.0 Contract Drafting Tools In today’s world of easy access to any type of data, few people sit down with a blank piece of paper and start drafting the contract document Using a template from a previous similar type business deal is a likely starting point However, this truly should just be a starting point and a reference guide not the final contract document signed Governing laws, standard industry terms, trade practices, and the like are common and should be considered when drafting the contract document It is important to understand that some terms govern, even if those terms aren’t included in the contract document One such example would be the Uniform Commercial Code (UCC) in United States (except in Louisiana) The UCC is a comprehensive set of laws governing commercial transactions between U.S states and territories These transactions include borrowing money, leases, contracts, and the sale of goods (U.S Small Business Administration, 2013)iv Industry best practices or general guidelines are becoming more common In Finland, the Ministry of Finance, has published “JYSE 2009 SERVICES” (Finland Ministry of Finance, 2009) v, a document outlining General Terms of Public Procurement The outlined General Terms of Public Procurement shall be adhered to in service contracts, if not otherwise agreed Not a law, but rather a guidance, contracting parties can choose to exclude JYSE 2009 terms in their contract document In a transactions involving the UCC or JYSE a document drafted around such a transaction is useful as a starting point for the contract document Whether the source to obtain a template is a lawyer, contract specialist, or a business that sells templates is outside the scope of this paper The key is to assure that both business and legal terms are outlined in the template as they are equally important After all, the contract is a legally binding document The contract document and template should be a living document Every disputed term and additional scope creep drives updates to the contract document Avoiding the re-invention of the wheel each time a new deal is negotiated should be an area of focus for the organization Each contract is different with its own unique elements and therefore must be written and reviewed in the context of the specific business deal 5.1 Guidance Checklist Creating and providing the organization with a guidance checklist is a great tool to show what should be included in the contract document Strive for short, user friendly explanations and a bullet format to accomplish an easy, quick, and readable document Time is scarce and long contract documents are often left unread due to time constraints A one- page checklist gives the message that the task at hand is easy and does not require much time to look over Provide specific guidance such as “what are the payment terms,” “What is the start date,” etc and state where attachments could be used The goal of the checklist is to involve the stakeholders in documenting the business deal Following the section (clause) structure of the contract document helps organizations to standardize the contract templates and documents Further, dividing the checklist into recommended business terms and legal terms encourages noncontract drafters to engage in writing part of the contract document Most non-contract drafters not feel comfortable editing or writing any part of the contract document because they are worried they would “mess” it up Free form writing allows for writing in any style and dismisses the concerns of formal language, legalese, and other common contract document characteristics Additional steps would be to add the organization’s contract template with highlights where to insert scope, Statement Of Work (SOW), performance standards, pricing, the start and end date, etc to encourage contract drafting by non-contracts drafters Consistently requiring each stakeholder to use a checklist for contract drafting and during the review cycle drives consistency in contracting 5.2 Visualization of Contract Terms During the proposal phase, a lot of data is created, analyzed and documented This data outlines the offer and is used to evaluate whether or not the business deal adds value and if the company should pursue the deal The types of data are: the written proposal, Statements of Work (SOW), Specifications, Services, Pricing, Delivery Schedules, Past Performance, Performance Matrices, Financial Analysis, etc The format of the data can be; text, tables, graphs, numbers, pictures, blueprints, flow charts, etc The Majority of proposals consists of more than just black and white text and are authored by several stake holders in the organization Should there maybe be a move toward a more user- friendly, easier (and quicker) to read and standardized contract document that is similar to the proposal document? What about the information documented when the business deal was summarized? Should we analyze to determine if the business deal was beneficial to the business? If the organization is not capitalizing on the proposal document, they are missing the opportunity to use existing data Even though the proposal phase takes place before the business deal and contract negotiations, there is a lot of data and knowledge that is useful when drafting the contract document Figure Sample Proposal Evaluation Scope is a standard clause in all contracts, the ”what” of the deal So is schedule, the “when,” and price, the “how much” Figure 5, Sample Proposal Evaluation, shows an example of a summary from a company’s evaluation process to select a sub-contractor Documenting the specific performance, schedule, and price from the proposal in the contract document is critical to assure the implementation phase achieves the expected outcome Another illustration is shown below Figure 6., Milestone Delivery Schedule, was the delivery schedule from the proposal Including the proposal delivery schedule as an Attachment in the contract document, rather than writing the delivery milestones in the contract text, allows the entire team to comprehend in seconds all key delivery milestones It also assures delivery is planned as was expected when the business deal was signed The picture additionally shows the contract period of performance and the flow of the deliverables This can be printed and shared with both contracting parties and used throughout contract execution Figure Milestone Delivery Schedule If included, would the above delivery picture replace the contract language? The answer is no; the contract would still include written language in regards to the contract term and deliveries, but could be simplified per below example: 10 Term & Termination: This Agreement shall commence on the 14 th day of August, 2013 and, unless sooner terminated in accordance with the terms hereof, shall remain in effect until the 14th day of May, 2014 Delivery Schedule: Delivery of the manufactured 10 units of widgets shall be as outlined in Attachment A, Schedule, and incorporated herein and may be amended from time to time per mutual agreement of the parties Delivery shall be FOB per INCOTERMS 2010 The parties agree to hold Specifications Review and Pre-Delivery Inspection (PDI )meetings at Customers facility per Attachment A, Schedule The intent of contract simplification and improving contract readability is not to change the content of a contract Rather, it is to assure that the negotiated business deal is documented as the parties intended Both contracts and legal terms tied to the deal need to be included to ensure successful implementation and to protect the deal Furthermore, the contract document should be written and structured so all stake holder can read and use it during implementation With the critical deliverable milestones shown in a way that every team member can quickly comprehend and the goal of contract readability and usability is achieved 5.3 Visualization of Contract Terms The future holds even more simplified and user- friendly communication of contract documents introducing icons, pictures and drawing Contract documents are written in a certain style, stated well by Helena Haapio in her article, Designing Readable Contracts: Goodbye to legal writing – welcome to information design and visualization, “As regards style, most contracts resemble laws, with all their dense text, paragraphs, and internal references They are structured in a peculiar way and use language that non-experts often find overly complicated and hard to understand” (Haapio, 2012)vi Contract documents need to be simplified through the use of more visual tools such as pictures, drawings, graphs, flow charts, matrices, etc Time has become more and more scarce and few people in today’s business world have time to review a contract document that can be anywhere from a few pages to hundreds of pages Contract drafters must find a different way to communicate the contract content to stakeholders or decision makers who will never read the actual contract document In Finland, a team from Aalto University, SIM-lab group and Kuntaliitto developed a guide to the standard JYSE terms (Aalto University, SIM-Lab group and Kuntaliitto, 2013) vii to help users understand the content and the intent of each term incorporating visuals along with the JYSE guidance terms A few simple visuals used throughout the document, such as showing the Service provider as one party as the blue person, and the buyer as the other party, the green person The green and blue persons are used throughout the document allowing the reader to scroll quickly to their side of the requirements An example is below Figure “Firm Fixed Price and Price Changes” (" ©2013 Aalto University & Suomen Kuntaliitto ry, pg.15") viii shows the requirements and contract process for each party Payments terms, such as Net 30 day 11 payment, are standard terms in most contract documents, so why not use a simple symbol? There are several terms with similar language that occur in contract documents across industries and contract types Maybe those should be simplified and depicted as icons or pictures Figure Firm Fixed Price and Price Changes " ©2013 Aalto University & Suomen Kuntaliitto ry." Used with permission 6.0 Final Responsibility Lies with the Contract Drafter Contract drafters (as previously defined as the contract specialist, contract manager, business managers, lawyers, and others responsible for the contract document in the organization) have the responsibility of the final document Their key responsibility is to assure an executable contract document that also brings value to the business Contract drafters collect, track, summarize different data, and “calculate” the total value of the deal Failure to achieve the expected value from a business deal is usually caused by unanticipated events not considered during the acquisition phase and covered in the contract document A pro-active approach to cover potential unanticipated events in the contract document is critical It is impossible to protect against all unknown potential events, however, discussions and analysis of risk and opportunity must be conducted during review of the deal This is the type information that should drive terms to protect the deal Below Figure 8, Risk Cube, is an example of a risk and opportunity analysis summary done prior to accepting the business deal In this sample business deal the aggressive period of performance (PoP) was high risk The contract drafter should include terms that allow for flexibility in the schedule to mitigate the potential risk For example 12 adding language stating: “Delivery shall be within plus or minus (+/-) two (2) weeks and the contract period of performance shall be extended accordingly should delivery fall outside stated period of performance” A two-week grace period for delivery mitigates contract default if delivery is delayed for less than two weeks Discussion and inclusion of mutually acceptable terms between contracting parties about potential risks is an effective pro-active approach to avoid default and disputes Even adding monetary payments for late delivery based on reasonable damages to the other party can be beneficial to the organization to avoid a dispute and further performance delays Figure Risk Cube Contract drafters review and finalize the contract document and are responsible for making sure the business deal is captured If important performance specifications are missing, a termination for default for non- performance provision in the contract document is not enforceable Terms are interrelated and the contract drafter must assure all the agreed to terms are included The final legal review is important and should not be left solely to the contract drafters (unless a lawyer was the drafter) Contracts are legally binding documents and always include legal provisions Those are often written in “legalese” and include terms of art that are common practice in contract law Therefore, having the contract document go through a legal review is to the organization’s benefit 5.0 Conclusion The contract document is at the heart of the business deal It guides implementation and therefore is where the business deal must be captured However, capturing the business deal in the contract document isn’t an easy feat Drafting the contract document has it challenge which is most often left for the contract drafters to overcome Most common challenge is not having 13 the involvement of all stakeholders in the process Some solutions to engage the stakeholders are simple, such as implementing a contract drafting and review process Another solution is to introduce a standardized template and guidance document to engage stakeholders in understanding contract document structure and type of sections (clauses) included Simple solutions can be very powerful and extremely useful in today’s world of tight schedules and deadlines Other methods for organizations with existing processes and templates are to leverage the proposal and business analysis information developed as part assessing if to engage in the business deal Simplifying and complementing contract language through the use of graphs, tables, pictures, flow charts, etc and incorporated in the contract document translates the contract document into a more readable document In order to capture the business deal there must be a move toward a more integrated process that is forward looking to allow for changes during implementation Moving from “no one reads the contract document” and ”where did all the people go” to a process with all stakeholders involved as depicted in below picture, sets the organization up for success The change that has occurred from the previous picture - the contract document drafting started earlier and all “the people” are engaged throughout the process This is how the organization can capture the business deal in the contract document 14 REFERENCES 15 i Villanova University, "The Benefits of Contract Lifecycle Management/CLM" Available at: http://www.villanovau.com/contract-lifecycle-management-benefits/ Villanova University Retrieved June, 8, 2012 ii George Siedel & Helena Haapio, 2011 “Proactive Law for Managers – A Hidden Source of Competitive Advantage” (Gower 2011) iii Brian Ritchey, 2013 ““Breaking Down The Elements Of A Contract” Available at: http://kmstandards.com/wpblog/index.php/2013/04/breaking-down-the-elements-of-a-contract/ Posted April 26, 2013 iv US Small Business Administration, Uniform Commerical Code Available at: Sba.org Retrived June 24, 2013 v Finland Ministary of Finance, 2009, “JYSE 2009 Services; General Terms of Public Procurement in service contracts” Available at: http://www.vm.fi/vm/en/04_publications_and_documents/01_publications/08_other_publications/20100217Genera/JYSE _2009_services.pdf Retrieved June, 23, 2013 vi Helena Haapio, 2013 “Designing Readable Contracts: Goodbye To Legal Writing – Welcome To Information Design and Visualization” vii Aalto University, SIM-Lab group and Kuntaliitto, 2013 “JYSEn kayttaja opas” Available at: http://www.kunnat.net/fi/tietopankit/uutisia/2013/20130606pro2actjulkistamisseminaari/PRO2ACT_JYSE_2009_PALVELU T_kayttaamisopas.pdf viii " ©2013 Aalto University & Suomen Kuntaliitto ry." Used with permission