Recognizing_Contract_Risk_and_Opportunities_Memo

Recognizing Contract Risk and Opportunities Memo TO:                   Citizen - Schwarz AG (C-S) FROM:             Project Manager, Span Systems DATE:              April 28, 2011 SUBJECT:       Recognizing Contract Risk and Opportunities CC:                   Span Systems Board of Directors Purpose: In today’s markets, businesses need methods by which to identify contractual risks, insure liabilities are lessened, and remedies to these threats exploited. Using information from the week-3 contract creation and management simulation, an outlined memo is presented. The author will identify the legal risk and opportunities of Span Systems (Span) and Citizens-Schwarz (C-S) regarding a business contract entered into by the two parties. This memo will also address how our managers can avoid contract risk, minimize liabilities, benefit from opportunities, and weigh alternatives presented to resolve these issues. This method will be employed as a means to save the contracted business relationship and improve the current contract by incorporating the necessary amendments that will satisfy both businesses. Explanation of problem: Span currently holds a one-year contract, valued at six million dollars with C-S, but is engaged in a heated dispute that threatens the contract. Additionally, Span is seeking to secure a larger contract with C-S that hinges on their performance on the current contract. Legal Risks and Opportunities: Whenever businesses agree to enter into a bilateral contract, potential legal risks to both parties exist.   The primary dispute between our company Span, and C-S in this situation involves product quality and the schedules of deliverables.   The legal risks occurred from the original contract between Span and C-S.   The contract clauses that follow identify an obvious breach of the contract:  Substantial Performance of Contract, Internal Escalation Procedure for Disputes, Requirements Change, and Communication and Reporting.   The nature of contracts clauses specifies an amount of compromise and responsibility to both parties, regarding substantial performance. Based upon the simulation, Span is behind schedule of deliverables and the quality of its product is substandard.   Regarding the clause for Internal Escalation Procedure for Disputes, C-S failed to abide by its contractual agreement.   The clause clearly specifies, “prior to the filing of any formal proceedings with respect to a dispute, the party believing itself to be aggrieved shall call for progressive management involvement in the dispute negotiation by written notice to the other party” (University of Phoenix, 2009, para.).  Regarding requirements change, the ambiguous wording written into the contract for this clause holds both parties at fault for failing to clarify their exact expectations.   Project management structure changes at C-S as well as delays in its turnaround times will put C-S firmly at fault for breach of Communications and Reporting.   Although contractual violations have occurred in this relationship, opportunity still exist to improve this partnership by learning from past mistakes and managing the legal risks that occurred from this unexpected situation. Going forward, it is critical for both parties to consider arbitration, negotiation, and mediation as viable means of reconciliation in an effort to continue working together in good faith. Avoiding Contract Risks: Contracts written with Ambiguities are a major risk that create failed business relationships and may result in litigation among the involved parties. The risk Span and C-S should avoid in this case is the use of ambiguous terms such as “ordinary requirements change”. “The use of certain language in contacts, are often the reason for disagreements between parties. Contracts inundated with ambiguous wording and inadequate details will eventually be misunderstood by one side and eventually may have to be addressed in court, if not corrected (University of Phoenix, 2009, para.).   Therefore, the author stresses that eliminating ambiguity is the easiest and best course of action in avoiding legal issues when dealing with contracts.  Other methods for mitigating risks include: 1) Use of clear language in short simple contracts. 2) Looking out for unconscionable protections. (Be weary that some disclaimers may become invalid from one country to the next.) Minimize Liabilities: To minimize liabilities, businesses can take a number of precautionary measures. A requirement when operating a business is to carry some form of liability insurance. Some companies can protect themselves from liability by having on staff legal representatives thoroughly review and examine contracts when conducting business affairs.   Regarding the contract between Spans and C-S, it is always important to understand the conditions that govern the performance of contracts.   On the one hand, there is a valid case that C-S has against Span involving quality issues and schedule of deliverables.   While on the other hand, Span is correct in alleging that due to changes in structural management by C-S, this directly contributed to the delay in turnaround time for final approvals.  To avoid future problems in this regard, Span and C-S can collectively negotiate and reach clearly defined agreements to specific changes in the original contract (Contract Management, 2011).  This method will alleviate any ambiguity in the writing of the first contract, and incorporate the necessary amendments that will benefit both Span and C-S. Benefit
from opportunities: Businesses can greatly benefit from opportunities that arise when corrective measures are sought outside of court. A significant benefit that might be gained by salvaging the original contract is that both companies are spared lengthy litigation and substantial fees by agreeing upon alternative resolutions to disputes. The key to going forward at this point is to reach a satisfactory compromise.  When performance is due in terms of the contract, According to Contract Management (2011) “there is an exchange of benefits at the same time. One party is willing to perform, because the other party does” (Contract Mgt., para. 4).   In repairing the obvious dilemma created by the current contract, Span could benefit substantially by obtaining the next big contract with C-S. Legal Principles: Span and C-S freely agreed to enter a bilateral contact and abide by the legal principles to comply with the amendments to the following contract clauses.   Under the amendment for the contract clause of 
Performance, C-S may terminate the contract for any reason, but payment is due to Span for work completed.   This is an obvious benefit for C-S because C-S will be entitled to receive all work products in progress or completed, while Span would have received all payments.   The contract clause for Change Control implements a Change Control Board made up from staff of the two companies; a project manager from Span and a lead software engineer from C-S. Under the amendments, both companies will have the ability to make determinations on the impact of changes.  Regarding the contract clause for Communications and Reporting, C-S may be incurring an extra expense to place a project manager at Span, but they will have a direct line to Span.   In the alignment with both organizations, the contract clause for Project Structure will provide Span to “scale up the team size by at least ten (10) additional programmers within (10) days of the effective date of the contract.” (University of Phoenix, 2009, para.). Evaluation of Alternatives: In the event of contract breaches, businesses must meet in good faith to evaluate the alternatives and find acceptable contract solutions.   In some cases, organizations may place compensatory damages for contractual breaches if such a clause is written into the agreement in the original contract. Additionally, other damages that may be collected by a non-breaching party can include: incidental, liquidated, punitive, and consequential.  Conversely, if one party is not in agreement with the other party’s interpretation of the contract, then both may agree to allow the courts to decide.   However, contract litigation in the courts is both expensive and lengthy to those parties involved.   Therefore, businesses facing contractual issues should either go through the negotiation, mediation, or arbitration process.   In the dispute between Span and C-S, the best alternative approach was found to be negotiation.   The author believes this to be true because Span was given the opportunity to provide specific measures to C-S to satisfy their end of the contract.   Conclusion: In today’s markets, businesses need methods by which to identify contract risks, insure liabilities are lessened, and find ways to correct these threats. This paper has presented Span Systems (Span) and Citizens-Schwarz (C-S), two contractually connected businesses entities undergoing issues that, due to ambiguities in the language of their contract clauses, issues developed which resulted in confusion and threatened their business relationship. A memo was created to outline the legal risks and opportunities for the businesses, as well as giving alternatives to resolve these issues. The objective of the memo was to save the contracted business relationship of Span and C-S and improve the current contract by incorporating the necessary amendments that would satisfy both parties. References University of Phoenix. ( 2009). Week-3 Simulation. Retrieved from University of Phoenix, Law-531 website. Contract Management. (2011). Contract Management. Retrieved from http://www.contracts-managements.com/