Basic Contract Law for PMs webinar Part 2: Building a contract, 6 March 2018

Basic Contract Law
for Project Managers
Webinar 2 of 3:
Building a contract
by Sarah Schütte
of Schutte Consulting Limited
For APM
March 2018
© 2018 Schutte Consulting Limited
1

Webinar 2 topics
Today we are going to talk about:
 Components of a contract;
 ‘Boiler plate’ & negotiated clauses;
 Risk allocation;
 Who should be involved; and
 Project managing a contract’s development.
2

Background
to the webinar series
SCL’s core belief is centred on the reality of using law in practice, applying
it to your project, as it develops and delivers outputs (“realises benefits”)!
 PMs are central to the smooth running of a project
 PMs have to juggle many things and be multi-skilled
 Parties to a project depend on the PM to administer and manage the
contract, and to give direction
 Why should PMs learn about contracts?
 2 main risks:
 The project at risk and/ or sub-par delivery
 Yourself and your organisation at risk
 NB get the basics, but know your limitations and seek legal advice
3

Background
to this webinar
 In Webinar 1 we looked at the foundations of a contract,
and the essential features to make it legally binding
 In this Webinar 2, we are going to look at the key terms to
look out for in 2 situations:
 Drafting a contract; or
 Reviewing a proposed contract from your client or supplier
 There will be certain terms which
 You will want to include (and avoid the risk of implied terms
(Webinar 1))
 Are more risky, but commercially acceptable (how to manage
the risk becomes the important thing)
 Are unacceptable to your organisation as a matter of policy (so
you have to walk away from the deal)
4

Components of a contract
Date: This contract/deed is made on XXXXXXXXX
Parties: Between (1) AAAAA and (2) BBBBBBBB
Recitals: A description of the background and why the parties are
making the contract
Consideration: value of the contract works or services. If nil value
(e.g. framework or collateral warranty) insert “in consideration of
£1 being paid by A to B”
Terms: conditions, conditions precedent, warranties, undertakings,
indemnities, ordinary terms
Authorised persons: Signature / execution blocks
5

Date: the last part to be completed, triggering performance
Parties: accurate name and registered office
Recitals: set out a full description of the “story” leading to
this moment, avoiding commercially sensitive minutiae
Consideration: one of the elements which makes the legally
binding (Webinar 1)
Terms: see over
Authorised persons: authority to bind the named party
6

Terms: 3 types, each has different impact (introduced in Webinar 1). Quick
run-down:
1. Conditions – go to the heart of the contract. Breach or failure to comply =
significant (“repudiatory”) and entitles the other party to terminate and
claim damages. Include:
 Conditions precedent – must be complied with before something else can happen.
Non-compliance means the something else cannot occur
2. Warranties - promises, usually secondary assurances. Breach is not
repudiatory and does not entitle termination, but damages only. Include:
 Undertakings, - promise which is legally binding without the need for the other
party to do anything
 Indemnities – promise without need for proof of breach/ loss by the other party
3. Innominate (ordinary) terms – any term which is not one of the above.
Breach gives remedy proportionate to the seriousness of the breach. Test =
Is the innocent party “deprived of substantially the whole of the benefit”
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Tips on terms
 Take advice on drafting of content and categorisation
 Ensure that the term has the effect you want it to have
 Most terminations which fail do so because the basis for termination
was insufficient
 In any dispute or attempted termination which is challenged, the
Court will determine the type of term and evidence required to
satisfy it.
 The “face” of the term
 Its intended purpose
 Its centrality to the contract
 Plus any statutory rules, …………..are all factors to consider
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“Boilerplate”
 Describes a series of terms which are usually found in a
contract – not the content but the subject matter
 Be careful to avoid a cursory glance as they may look
familiar. Everyone drafts them slightly differently!
 They serve to better define the parties’ relationship i.e.
the balance of risk and how risk is allocated
 They also change the underlying (default) legal position
(i.e. implied term – Webinar 1)
 Use my sample SCL Boilerplate Bingo © as a checklist
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“Boilerplate”

 Boilerplate missing? Raise it with the other party and suggest the content i.e. your
organisation’s standard version
 Unhappy with proposed boilerplate? Explain why to the other party and suggest your
organisation’s standard version
 Take advice on in these scenarios as changes will affect the risk balance, and may impact on
other clauses (e.g. terms which are not cross-referenced) or legal norms (i.e. implied terms)
10
SCL Boilerplate bingo ©
Law and jurisdiction IP/ Title Dispute resolution
Confidentiality Insurance Definitions
Entire agreement /
Representations
Force majeure Construction/ order of
precedence
Termination Notices 3rd party rights
Assignment Severability Others…

Negotiated clauses
 These are terms which are individually negotiated by the parties
 How to approach?
 Organisation’s standard term/ policy = starting point
 Authority to negotiate or to bind (or both)? Check organisation’s
protocol/ thresholds
 Skill in negotiation
 Translation of agreed commercial position into suitable words
 Take advice to nail the drafting
• Certainty and confidence in document underpinning the project, and
that it gives PM what he/ she needs
• Contra proferentum “against the proposer”
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Risk allocation
 A contract is an agreement whereby the parties share the risks of the venture/
objective
 The terms of the contract allocate the risk between the parties
 Some risks are unacceptable, e.g. against company policy
 Some risks are acceptable i.e. within the company norm
 Some risks start off as unacceptable, and the parties manage to agree a position which
suits them both
 How to decide which category a risk falls into?
 What is the organisational norm (policy)?
 Can the risk be avoided, managed or insured?
 Which party is best placed to do this?
 What is your exposure if you take on a risk, but are uninsured?
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What if?

Risk allocation
 Development of industry standard forms of contract
 They set out the market acceptability of certain terms (or do they?)
 Start with a standard form
 Take care with “special” or “additional” clauses which change* the standard
terms!
 They change the risk balance!
 What is the other party trying to achieve?
 If they are voluminous / significant, think carefully about
whether you want to enter into contract at all
 Specific industry codes of practice etc.
* “change” encompasses not only changes to the standard form’s existing words,
but the addition of new bespoke clauses, and any party’s “standard terms”
13
Why?

Risk allocation
Lots of ways to allocate risk
 Risk can sit outright with one party or the other “ X shall…”
 Risk can be shared jointly “the parties together shall”
 Sharing the risk in the outcome can be done via incentives e.g. NEC “pain-gain” in Options C
and D
 One party takes the risk up to a certain level, and then the other takes over
 “C shall issue a CEN for any event listed in this clause, but if he does not do so with X weeks he
is time barred from pursuing it, unless the CEN results from events (1) and (2), when he shall
not”
 Always tie in risk consideration to the organisation’s policies and insurance to make sure you
are covered if the risk is borne by you, then it happens…
 Take advice from specialist risk manager as well as technical advice on the subject matter of
the risk in question (e.g. probability of occurrence etc.) and legal advice on the drafting
14

Who should be involved
 I am often surprised at the lack of thought and time allocated given to contract
negotiation given how important it is!
 Contract value ≠ intrinsic indicator of risk or of potential liability
 Try to avoid giving to lawyer at the last minute for a “quick look”!
 Check organisation protocols: seniority = authority to bind and corporate visibility
 Include key project people (i.e. delivery team leads and PM)!
 Each needs to know what is expected of them i.e. the obligations (terms) to be
performed by their discipline/ function and how the terms impact on the way they
“usually” do their job, constraints, ways of working etc.
 How can you “give” a contract to a team, and expect excellent performance?
 Same for the PM – expected to run the project according to the contract
 Encourage the right people to contribute – and if you think you should be at the table,
then make your voice heard!
15

Project managing a
contract’s development
 I like to think of the contract negotiation (or pre-contract) phase as a “project”
 It is temporary: contract will be signed or not
 It has a defined purpose: to agree the terms of business
 There should be a strategic plan and timetable (linked to the underlying project)
 There are certain things which should be achieved before you can move on the next thing (don’t
start works before signing…or enter into LoI (Webinar 1))
 I advocate the intended/ proposed PM should be involved.. The “face of the project”
 In developing the contract, some clauses will be agreed quicker than others
 Be careful about “trade-offs” – think about why the clause is important to you, and why
 Get the framework in place first i.e. agree the principles. I find it is much easier for the detail
to then fall into place.
 Keep the principles in mind in every part of the negotiation – check back and take legal advice
to ensure consistency
 Crystal-balling: machine learning and AI are encroaching on this area e.g. check proposed
clauses against organisational norms, BUT there is no substitute for the human brain and
your ability to contextualise the project
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Summary of this webinar
• Take care when building your contract, or when reviewing a proposed contract
• The terms of a contract relate to risk allocation
• Boilerplate looks familiar, but is not universally the same…
• Negotiated clauses are all about which party risk sits with
• Take advice on the type of term because each has a different legal consequence
• Pitch in to the conversation about the contract: you are the PM running the project
whose foundation is the contract!
• Next time, Webinar 3: What to do when things go wrong, or the unexpected happens
 Do join us
 Please give feedback
 Any questions?
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Contact:
Phone: +44(0)7970101188
Email: sarah@schutteconsulting.co.uk
Website: www.schutteconsulting.co.uk
Linked In: Sarah Schutte and Schutte Consulting Limited
Twitter: @sarahschutte1 and @schutteconsulting
#SCLGlobal #SCLatSW11 #AskSarahs
Skype: Sarah Schutte Sharp
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This presentation was delivered
at an APM webinar
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upcoming events please visit our
website www.apm.org.uk/events

Basic Contract Law for PMs webinar Part 2: Building a contract, 6 March 2018

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Basic Contract Law for PMs webinar Part 2: Building a contract, 6 March 2018