Contract Risk and Opportunities
July 12, 2010Contract Risk and Opportunities Unfortunately for many businesses, contracts are often shrouded in a veil of ambiguity. An excellent example of the ambiguity contracts can contain was given in the University of Phoenix simulation, Legal Environment of Business: Contract Creation and Management. The simulation outlines contract disagreements between Span Systems, a banking software manufacturer, and Citizen-Schwarz AG (C-S), a German bank. Throughout the simulation, the student is asked to play the role of a project manager with Span Systems whose primary goal is to save and improve upon the current contract existing between the two organizations.
As a project manager for Span Systems, the student chose three specific areas of contract re-negotiation based upon failure of the initial contract. These areas were the internal escalation procedure for disputes, requirements change, and communications and reporting. In these three specific areas, the student believed that both Span Systems and C-S would gain the greatest benefit for additional specifics and definitions.
Internal Escalation Procedure for Disputes
The initial contract between Span Systems and C-S indicated that if either party became aggrieved, that party had the obligation to follow a specific internal grievance system. Citizen-Schwarz, when requesting complete rescission of the contract, was in full violation of this clause. Therefore, Span Systems requested that C-S rescind the request for dismissal of the contract based upon this obvious breach. Citizen-Schwarz, apologized for the breach, but argued that this is not the root of the problem. Although C-S has a valid point, this has bought Span Systems additional time to save and properly revise the contract.
The initial contract between Span Systems and C-S allowed only ordinary, minor changes to be requested by C-S. The changes in recent months, however, were anything but ordinary, according to Span Systems. Span Systems argued that many of the delays and decreased quality output is due to extraordinary change requests by C-S and requested that this portion of the contract be revised to better compensate and describe the requirements of both parties. Although C-S did not agree to the basis of this argument, this portion of the contract is permitted to be renegotiated. The different viewpoints of the requirements change from both parties seem to be irreconcilable; however, there are hopes that the contract revisions will provide additional clarity and fairness for both sides.
Communications and Reporting
The original contract required regularly scheduled and documented communications between Span Systems and C-S. The minutes of the communications were to be utilized as project status reports. This communication, however, was sporadic from the beginning. Therefore, Span Systems strongly requested this portion of the contract be renegotiated. While C-S has not fully admitted that there has been a break-down in communication, the organization agreed to renegotiate this portion of the contract with hopes that future communication, timelines, and quality will improve.
In order to address the three areas of concern from the original contract, Span Systems has made some specific suggestions. First, Span Systems requests daily communication via uploads to the company??™s extranet for review by Citizen-Schwarz. Secondly, Span Systems will increase the number of programmers working on the C-S banking software account. Finally, Span Systems has invited the project manager from C-S to temporarily work out of Span Systems location and ensure acceptable quality levels. With the suggestion of these specific changes, the contract between Span Systems and C-S was salvaged.
The final stage to the contract renegotiation was the rewriting of the previously agreed upon sections of contract. Span Systems suggested specific writing for the contract to ensure that both parties were receiving fair and equitable treatment through the contract enforcement. As a result, C-S accepted all the contract changes.
Contract law, being based upon what a reasonable person would conclude from a contract, is an ever-changing body of law. Therefore, it is critical for businesses to conduct proper initial contract negotiations and remove as much ambiguity as possible. As shown in the University of Phoenix simulation, contracts can be easily misinterpreted by either party, resulting in confusion and lack of performance. In these instances, it is beneficial for all parties to work together to preserve the integrity of a contract.References
Cheeseman, H. R. (2010). Business Law: Legal Environment, Online Commerce, Business Ethics, and International Issues (7th ed.). Pearson Education, Inc.
University of Phoenix (2002). Interactive Simulation. Legal Environment of Business: Contract Creation and Management. Retrieved July 11, 2010, from LAW 531 Business Law website.
Contract Risk and Opportunities