“I let my lawyers take care of my contracts”

By | 10 January 2019

The title above is a frequently heard observation about contracts & lawyers. Usually, this goes together with statements like “we negotiate the contracts and then file them immediately” or “contracts are only useful in case of conflicts”.

Reach of a contract

Are those statements really the right thing to do? Are we talking about the whole of the contract or just (part of ) the T&Cs (terms and conditions)?

To make a contract in the project business (infra, construction, turn-key equipment, power & renewable, oil & gas), the agreement on price + time + performance should be captured. The T&C’s are therefore “only” an important but supportive part.

Components of a contract

In my opinion (not based on theory but rather on decades of experience), the most important building blocks of a contract are as follows:

  1. A clear scope of works with clear roles & responsibilities to understand what is “in” and what is “out” and “who does what”. Vagueness will unavoidably lead to conflict. Lawyers usually don’t take an active role in defining the scope of works and accept it as a given. The Design / Engineering department plays the central role. The performances and warranties are essential KPIs of the quality of the project and this is reflected in the performance guarantees and defects liability period & conditions.
  2. An unambiguous agreement on the time frame(s): who does what “when”; this includes both Employer and Contractor milestones; with delay LDs in case a party doesn’t fulfill its engagements. Other than the proper formulation of the concept for delay liquidated damages, lawyers do not interfere with the programme, the critical path, the intermediate milestones and completion dates. The Schedulers are the masters of the game.
  3. Of course, the price, which depends on the scope of works, the quality requirements and the agreed time for completion. It is established by the Commercial Manager. Often, the contract price is the result of extensive price negotiations.
  4. The project execution processes establish how to get paid, how to obtain variation orders and extensions of time, what are the notice periods and the times to respond, act or correct. This is the realm of Project Managers, Contract Managers and Quantity Surveyors.
  5. The risk allocation: Contractor’s risk, Employer’s risk and risk transferred to third parties (including authorities, back-to-back subcontractors and insurers). An area for Logistics & Sourcing, Insurance Experts and also Commercial & Contract Mgrs.
  6. Explanations of what happens if and when things go wrong: suspension, termination, indemnities, limits of liability , dispute resolution etc. This is the area where where contracts & Lawyers come together. Lawyers are excellent at defining and defending these points. But also standard contracts (FIDIC, NEC, World Bank etc) cover these subject and can be adopted without significant modifications.
  7. The proper structuring of the contract for tax purposes: onshore/offshore split, transfer of ownership, who is the importer, VAT, import taxes etc. A subject to be dealt with by the Commercial Manager together with Tax Experts.

Commercial & Contract Manager

The coordinating person for all of the above aspects is the Commercial & Contract Manager (wording used in a broad sense as done by the IACCM). Before the contract award, this role is mostly fulfilled by Sales & Tendering Managers who then transfer the project and the coordination role to the Project Manager / Director and the Contract Manager during the project execution stage.

Internal Legal Advisers, with a good appetite for diverse subjects, can take care of several of above subjects. External Legal Counsel usually focuses on “subject 6” above.

In order to find win-win solutions for projects, “subject 6” should not draw too much energy from the parties. As mentioned above, standard contracts (FIDIC, NEC, World Bank templates etc) can provide adequate wording for these T&Cs.

Contracts & Lawyers – Conclusions

In the old-school view, “contracts” are entirely handled by lawyers. The reality is quite different. It is however still the case for some ancient laws (law n° 71-1130 of 31 December 1971 in France seems to reserve contract advice to lawyers and other legal professionals) or outdated practices (where projects were executed based on habit rather than contract).

A too narrow view about contracts makes people believe that they are something separate from the reality of the project and can be handled in an isolated way. For me, this is a recipe for failure.

Let us realize the full reach of a contract and the central role developed by the commercial & contract managers. At the same time, we will all appreciate the great knowledge and rigor of lawyers when it comes to the “sixth subject” above.

This blog has many publications related to tenders & contracts for the project businesses. We can, for example, recommend the following one: Contract negotiation team, setting-up a balanced team

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