Contracts Management why contract terms and conditions are so important By Brig Henry, PEng, CCMP,...

Contracts Management

why contract terms and conditions are so important

By Brig Henry, PEng, CCMP, MBA

For Writek Technologies

January 31, 2013


A recent survey on the value of contracts management revealed some shocking results:

“Weaknesses in contract management cost the average company 9.2% of annual

revenue.”

Ref: International Association for Commercial & Contract Management (IACCM) survey Feb 2012


• Introduction

• Contracts Management

• Terms and Conditions

• Case Studies• Hotel Georgia vs. Condo Purchasers• SNC-Lavalin Inc.

• Concluding Remarks


What is Contracts Management?

“The process of systematically and efficiently managing contract creation, execution and analysis for the purpose of maximizing financial and operational performance and minimizing risk.”

Ref: Wikipedia


Managing terms and conditions

Contracts Management- Terms and Conditions

1. Active, passive, and active and passive

2. Active clauses:- Require resources, process, managed

eg. Payment terms, delivery, warranty

3. Passive clauses:- Invoked as a consequence of an action or inaction

eg. Indemnity, force majeure

4. Active and passive clauses: eg. ethics

Contracts Management- Top 10 Terms and Conditions

1. Limit of Liability

2. Indemnification

3. Price/Charge/Price Changes

4. Scope and Goals

5. Liquidated Damages

6. Payment

7. Data Protection/Security

8. Intellection Property

9. Service Levels and Warranties

10. WarrantyRef: “2012 Top Terms in Negotiation”, International Association for Commercial & Contract Management

Contracts Management- Case Study Take Aways

1. Impact of badly managed terms. Both sides lose.

2. Lessons learned - so we do not fall victim of badly managing these terms.

Case #1: Hotel Georgia vs. Condo Buyers

Georgia Properties Partnership (“GPP”) was contracted to build condos adjacent to Hotel Georgia at the corner of West Georgia and Howe Streets


“Hotel Georgia condo buyer launches class action ” – Business in Vancouver, May 24, 2012


Mismanagement of an active clause will likely cost the developer millions of dollars.

What went wrong?


The case:- Georgia Properties Partnership (“GPP”) has

contracts to deliver finished condos

- GPP decided that they needed another year

- As per Real Estate Marketing Development Act (REDMA), developer must provide disclosure statement

- Alleged that GPP did not amend the disclosure statement when condo delivery date was changed


If Georgia Properties Partnership loses, the plaintiffs could walk away from their purchasing contracts

Case #1: Hotel Georgia vs. Condo Buyers- Buyer Costs

1. Time- spent in the process

Note: The opportunity cost due to late delivery is a

motivator/trigger.

2. Legal costs

- at least in the short-term

Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs

1. Lost reputation- costs: loss in business?


2. Loss in Profit

- Assumptions:i. Ten suing purchasers win and

all opt to get deposits backii. Average condo price: $2M

iii. Market prices drop by 10%


2. Loss in Profit

- Results:Item Value

Lost sales $20M

New sales $18M

Loss (or “cost”) to developer

$2M


3. Legal Costs- Not insignificant

Case #1: Hotel Georgia vs. Condo Buyers- Summary of CostsParty Costs

Buyer (each) Time and legal costs (at least short-term)

Seller (GPP) $2M plus legal costs

Case #1: Hotel Georgia vs. Condo Buyers- Lessons Learned

1. Be aware of local laws

2. Do your paperwork. Mismanaging a simple active clause cost dearly

3. Do not assume that the other party is not sophisticated

4. Get advice from lawyer and/or contract management professional

Case #2: SNC-Lavalin Inc.

Major world player in design and build of infrastructure project

Fiscal year 2011 stats:Revenue $7.2BNet income: $379M


“RCMP and Swiss widen SNC payments probe”

– CBC News, November 29, 2012


Mismanagement of a clause that has both active and passive elements has cost billions.

What went wrong?

Case #2: SNC-Lavalin Inc.- Timeline

Summer/Fall 2011: Muammar Gaddafi’s regime fell in Libya

November 2011: Cynthia Vanier, arrested in Mexico for allegedly trying to smuggle Saadi Gaddafi out of Libya

February 28, 2012: SNC-Lavalin announces internal probe into inaccurate payments

March 26, 2012: SNC-Lavalin CEO Pierre Duhaime resigned amid issues swirling about a prison construction for Gaddafi

Case #2: SNC-Lavalin Inc.- Timeline (continued)

September 18, 2012: Police probe McGill hospital

November 28, 2012: M. Pierre Duhaime arrested in Montreal, charged with fraud stemming from mega hospital McGill University Health Centre construction

November 28, 2012: SNC-Lavalin issues press release: “every employee is obliged to sign and follow the Code of Ethics and Business Conduct”

December 13, 2012: SNC-Lavalin suspends payments to former CEO Pierre Duhaime

January 25, 2013: CBC News: “SNC Lavalin paid $160M in Libyan bribes, RCMP allege”

Case #2: SNC-Lavalin Inc.- SNC Press Releases

Feb 28, 2012: internal probe regarding inaccurate payments

November 28, 2012: all staff must abide by high ethical standards

December 13th 2012: stopping of payments to Pierre Duhaime

January 25th, 2013: intention to cooperate with police, and commit to ethical behavior


Corporation said:

“All staff must abide by high ethical standards.”

The standards are passive. The employees’ behavior is active.

Company may have had its policies in place, but the controls to implement these standards were not.

Case #2: SNC-Lavalin Inc.- Employee Costs

1. Lost jobs. Four so far

2. JailI. Cynthia Vanier is in jailII. Pierre Duhaime is not far behind

Case #2: SNC-Lavalin Inc.- Company Costs

1. Lost reputationA no brainer

Or is it?

This week, an SNC-Lavalin lead group was awarded the contract to build the Evergreen Line


2. Legal costs.

May 2012, Sun News Article:

SNC investors filed $1.5-billion class action suit, alleging Duhaime authorized $56 million of improper payments to foreign agents

January 10, 2013, The Financial Post:

Article headline: “SNC-Lavalin will face criminal charges, analyst says, but buy it anyway”


Item Estimated Costs

Class action law suits (there are two)

$100M to $260M

Corruption of Foreign Public Officials Act (1998)

$100M

Total $360M

Share price drop is behind the class action law suits

Case #2: SNC-Lavalin Inc. - Lost Market Capitalization

$

Date

$45.13 Jan 24/13

Feb 28/12 SNC announces probe. Share price drops 20% from $48.37 to $38.43

$62.07, Jan 24/11

Share Price:- Jan 2011 to Jan 2013

$35 Sep 4/12, recent low

Case #2: SNC-Lavalin Inc.- Lost Market Capitalization

Date Share Price

Comment

Jan 24, 2011 $62.07 Public not aware of the events

Feb 28, 2012 $38.43 SNC announces an internal investigation into inaccurate payments

Sep 4, 2012 $35.00 A few days before police raid the McGill University Health Centre

Jan 24, 2013 $45.13 Share price rising as SNC announces projects eg. a significant project for Goldcorp Inc. in northeastern Quebec

Case #2: SNC-Lavalin Inc.- Lost Market Capitalization

Shares issued: 151,000,000

Market capitalization drop of:

$2.6B or 27% off as of January 24, 2013

No wonder shareholders are suing!

Case #2: SNC-Lavalin Inc.Summary

Nobody unscathed:Employee livelihoods were lostCompany faces an estimated $360M in legal costs

Collateral damage:Fortunes destroyed - $2.6B market cap loss

How badly did SNC-Lavalin Inc. really want to build that prison in Libya?

Case #2: SNC-Lavalin Inc.- Lessons Learned

1. Ensure company culture and governance are aligned with that of the other party.

2. Implement controls to ensure that your staff follow your policies.

3. Do not accept gifts or make bribes.

Contracts Management- Conclusions

Summary of Costs:Case Company

costBuyer / Employee cost

Other

Georgia Hotel vs. Condo Buyers

$2M and legal

time and legal

SNC-Lavalin Inc.

$360M loss jobs and jail

$2.6B off market cap

Contracts Management- Conclusions

Terms and conditions:

1. Understand all clauses.2. Meet their demands.3. Make sure the other side does too.4. Get advice from a lawyer or a contract

management professional.

Thank you.

Brig Henry

www.BrigHenry.com

Contracts Management why contract terms and conditions are so important By Brig Henry, PEng, CCMP,...

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