Recognizing_Contract_Risk_and_Opportunities

Memo To: Senior Management, Span Systems From: John Smith Re: Recognizing Contract Risk and Opportunities Date: October, 19 2008 This memo is designed to highlight the situation between our company Span Systems and Citizen- Schwartz AG (C-S), German bank. We are facing some difficulties in our relationship with C-S. As you know, eight months ago we signed a one-year contract of C-S’s e- CRM order. Contract is a binding agreement made and accepted between two or more parties with certain obligations and under specific terms and conditions. Now the contract is in jeopardy, because Span’s deliverables are two months behind the schedule and major bugs being detected in the deliverables, which is unaccepted. Leon Ther, the IT Outsourcing Director of C-S, is furious. They cannot afford schedule slips and need to release the quality software in the market on time. Our CEO ordered to settle this dispute immediately before any legal issues may arise, which could lead to litigation, damaged reputation, and financial losses. We are going to look at the contract clauses and figure out is there are any breaches occurred. Breach of contract is a violation of any obligations or terms described in the contract. By reviewing this contract we are going to highlight any legal risks and opportunities, how to avoid those risks, minimize the liabilities, and benefit from the opportunities. The original contract has five clauses that would constitute a breach. The first Breach of Contract under substantial performance of contract. By the contract neither of the companies may cancel the contract when 50% of the work is done. Since more than 50% of the project was done, Ther’s threats to rescind the contract are invalid. Definitely, Span Systems still needs to improve the quality of work and deliver the completed work in agreed time frame. The second Breach of Contract under Internal Escalation Procedure for Disputes. This clause right now is not the biggest issue, since Ther apologized in not following the escalation provisions and would like to address the issue to schedule slips and quality issues. The third Breach of Contract under Requirements Change. Original design of the project has been expended from 940 function points to 1015 as per Metrics dashboard. Ordinary changes can be explained as replacing of agreed requirements to improve functionality. Though, it is clear that adding function points to the existing requirements will make it difficult for meeting deadlines that are set in the original contract. The fourth Breach of Contract under Communications and Reporting. The Communication and Reporting clause of the contract explains how often, what time and place the meetings between Span Systems and C-S will take place. Due to changes in C-S’s project management structure delayed the delivery of the project product and feedback. This breach of contract can be proved, if Span Systems will be able to show the evidence of delay in C-S turnaround time reviewing the deliverables. The fifth and last Breach of Contract under Intellectual Property Rights. “Intellectual property is a product of the intellect that has commercial value, including copyrighted property such as literary or artistic works, and ideational property, such as patents, appellations of origin, business methods, and industrial processes” The Free Dictionary (2009). Span Systems have intellectual property rights of the project until they receive full payment from C-S. Ther requested all unfinished codes to be delivered to C-S. This act proves a breach of contract. In any situation Span Systems are not able to deliver the codes due to outstanding payments. All these issue liabilities, between Span Systems and Citizen-Schwartz AG could be avoided or at least minimized before they even started. Span Systems and C-S came to the conclusion that ambiguities are still present in the agreement. The reason of our disagreement is the phrasing and wording used in the contract. Words like “ordinary requirements change” should be avoided in the contract. In order for the contract to be successful it is essential to review and understand the contract before signing it. Both parties agreed to add following amendments to the original contract: 1. Performance. “Citizen-Schwartz AG may terminate this Agreement in whole…” Scenario (2008). The payment to Span Systems is due for the work completed and contract can be terminated at this point. 2. Change Control. “Any changes to the user and system requirements originally agreed…” Scenario (2008). The Change Control Board (CCB) will monitor the changes and decide to accept or reject these changes. 3. Communications and Reporting. “Project status reports, in the form of minutes of meetings and tracked…” Scenario (2008). A C-S project manager is going to be present at the Span Systems offices in California to monitor defects and determine remedies. 4. Project Structure. “In order to meet software delivery schedule originally agreed…” Scenario (2008). Span Systems will increase the team size to 10 additional programmers in the next 10 days of the effective contract. Resumes of new team members will be sent to C-S in the next five days of the effective contract. I believe the best alternative approach is increasing out team size with new and experienced professionals. It will expedite the job and help us to finish the work in timely manner. Besides that, C-S will be able to monitor and suggest any changes to the formation of the team. It is essential to understand the “conditions” that regulate performance of the contract. Span Systems brought significant performance of the contract situated on time elapsed, while C-S were concerned about quality and delivery delay. In this case, sufficient quality and delivery in timely manner were conditions to Span System’s demand of satisfactory performance. The best way not to look for legal enforcement is to use arbitration, mediation, negotiation instead. Negotiation was the best way of resolving dispute between both parties. Legal enforcement would negatively impact Span Systems because C-S would be never dealing with us again and we cannot allow Span Systems to lose one of the biggest clients. Avoiding legal enforcement will preserve business relationship with the partner in the long run. Besides that, litigation is expensive, time consumed, and stressful. References Farlex Inc.. (2009). The Free Dictionary. Retrieved from http://www.thefreedictionary.com/intellectual+property Simulation: Contract Creation and Management. Retrieved October 15, 2009, from University of Phoenix, Week Three, LAW/531-Business Law Course Web site.