Understanding_Contract_Risks

Running head: UNDERSTANDING CONTRACT RISKS AND OPPORTUNITIES Understanding Contract Risks and Opportunities LaBreda L. Gray University of Phoenix Online Main Understanding Contract Risks and Opportunities Contracts are entered into voluntarily by related or non-related parties. The provisions of a contract are then converted to private law between said parties (University of Phoenix, p.2, 2010). “A contract is an enforceable agreement by a court of law or equity. According to the Restatement (Second) of contracts: A contract is a promise or a set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes a duty” (University of Phoenix, 2010). In the business world it is to the detriment of an organization to ensure new or existing contracts avoid risks, minimize liabilities, and benefit from opportunities resulting from any disputes. After conducting the Contract Simulation for Span Systems (SS), a California-based custom e-banking software developer and Citizen-Schwartz (AG), a German banking giant it was evident that this contract was created in a hurry and future issues were predicted by both parties. The contract was worth six billion dollars and Span Systems could have landed a bigger job for Citizen-Schwartz contingent upon its performance with this job. The contract was poorly created and worded in a very ambiguous manner. The vague provisions of the contract eventually led to a dispute between the two companies over quality and schedule of deliverables among other things. Contractual disputes can prove to be a corporations Achilles heel. They can also deliver a devastating blow to any corporation resulting in damaged reputations, financial losses, and litigation. The need for a contract free of ambiguity was more than obvious in this situation. Poorly defined obligations and commitments in the initial contract put both companies at high risk of conflict and disputes. Because both SS and C-S disagreed on the provisions of the contract an argument ensued between both groups. There were no distinct methods to facilitate the collaboration and communication, which is detrimental to the overall success of the contract being formed. Another incidence of poor judgment was the lack of compliance to the terms of the contract agreed upon by the two corporations. Subsequent issues of Breach of Contract and other legalities followed as a result. The law of contract a breach of contract occurs when at least one party does not perform his obligations under the contract (Breach, 2006). This provided confusion in dictating and interpreting the terms of agreements and impaired Span System’s, ability to provide mutually satisfactory services. This memo serves to identify the key areas of a contract that should undoubtedly be held to a high standard to ensure a positive outcome for both sides. After the offerors’ and offerees’ positively have identified the requirements and risks of forming a contract, it is then that a contract is can be created. Overall management of contractual relationships can best be achieved in the context of a contract risk and compliance program (Zechnich, Lee 2009). Contract compliance and vendor management should be broadened to tackle a wide range of business risks. The inclusion of a program such as this induces greater control on contracting rather than a program that’s solely compliance-oriented while increasing the collaboration efforts of both organizations. Although no such plan was in place the two organizations were able to manage the situation. In the midst of the confusion, Leon Ther, Citizen-Schwarz AG’s chief prominent but, impatient, negotiator warned Span with a promise to rescind the flawed contract because he considered it to be of unacceptable quality. Negotiations followed this threat and to both companies’ satisfaction, amendments were made by SS to select clauses in the contract. This was no doubt a small victory for both sides because neither wanted to end operations and more importantly neither of them wanted to endure the pains of a court battle. Settling this dispute in a court would have cost the companies time, money, and potential blows to their reputations. The project managers of both firms did a great job of bringing the issues to the attention of both parties with the purpose of addressing the conflicting views to agree on some sort of contract that would please both parties and completely avoid or reduce liabilities in the future. Formal proceedings would have come about had the negotiations been unsuccessful. Therefore, in an effort to minimize liabilities, the next step in the contract would then have been mediation, followed by binding arbitration, as an alternative solution. Salvaging the business relationship relied heavily upon negotiations. A positive outcome for both parties was created by the additional provisions for arbitration and mediation, by cutting costs and time of what could have been a long-drawn-out process. Luckily, CS and SS were able to settle their differences through firm negotiations, which produced amendments that both parties were able to benefit from. Evaluations of those alternative measures to resolve the dispute are as follows; 1. Restructure the performance clause. This change was good because the arbitrary 50% completion clause was removed, in lieu of allowing CS to terminate at any time and to receive all work in progress at the date of termination. SS shall receive full payments for percent of services completed, at termination. Furthermore, clear guidelines were present for termination notification, testing periods, defect removal, and record keeping are now present in the language. 2. Appoint a change control panel for project change requirements. This action was needed and now requires both parties to monitor and accept or reject changes. Additionally, SS is incrementally compensated for subsequent requirements changes, helping to defer the future costs. 3. Scale up the team of SS programmers. This measure is important to get the project back on track. Furthermore, clear guidelines were present for how many hires, who pay, when the hiring needs to be done, and who needs to be notified, was included in the language. 4. Station project manager in SS offices. A good move that allows CS oversight and direct interface with the project. Additionally, guidelines for project status reporting were clearly defined in the language. In conclusion, I believe the best alternative method that would serve both parties fairly is appointing a change control panel to review change requests. This is a great idea because; any issues that arise will be brought before mutual parties to fairly accept or decline any proposed amendments. This is an option that is fair in its nature and also serves to maintain the original budget of the project. Clarity of purpose is the hallmark of successful contracts (University of Phoenix, 2010). Unfortunately, when entering into a contract, regardless of the intentions unexpected circumstances can come in and threaten its very existence. Therefore, organizations must develop a clear process, free of ambiguity to successfully create a contract that avoids risk, minimizes liability, and provides future opportunities. References: Zechnich, D., & Lee, C... (2009, September). CONTRACT RISK and COMPLIANCE for All Economic Seasons. Financial Executive, 25(7), 32-33.  Retrieved June 2, 2010, from ABI/INFORM Complete. (Document ID: 1926931221). University of Phoenix. (2010). Legal environment of business – Contract Creation and Management. Retrieved June 2, 2010, from University of Phoenix, Week Three, and LAW531. breach of contract. (2006). In Collins Dictionary of Law. Retrieved from http://www.credoreference.com/entry/collinslaw/breach_of_contract