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Contracts Management why contract terms and conditions are so important

Contracts Management why contract terms and conditions are so important. By Brig Henry, PEng , CCMP, MBA For Writek Technologies January 31, 2013. Contracts Management. A recent survey on the value of contracts management revealed some shocking results:

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Contracts Management why contract terms and conditions are so important

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  1. Contracts Managementwhy contract terms and conditions are so important By Brig Henry, PEng, CCMP, MBA For Writek Technologies January 31, 2013

  2. Contracts Management A recent survey on the value of contracts management revealed some shocking results: “Weaknesses in contract management cost the average company 9.2% of annual revenue.” Ref: International Association for Commercial & Contract Management (IACCM) survey Feb 2012

  3. Contracts Management • Introduction • Contracts Management • Terms and Conditions • Case Studies • Hotel Georgia vs. Condo Purchasers • SNC-Lavalin Inc. • Concluding Remarks

  4. Contracts Management What is Contracts Management? “The process of systematically and efficiently managing contract creation, executionand analysis for the purpose of maximizing financial and operational performance and minimizing risk.” Ref: Wikipedia

  5. Contracts Management Managing terms and conditions

  6. Contracts Management- Terms and Conditions • Active, passive, and active and passive • Active clauses: • Require resources, process, managed eg. Payment terms, delivery, warranty • Passive clauses: • Invoked as a consequence of an action or inaction eg. Indemnity, force majeure • Active and passive clauses: eg. ethics

  7. Contracts Management- Top 10 Terms and Conditions • Limit of Liability • Indemnification • Price/Charge/Price Changes • Scope and Goals • Liquidated Damages • Payment • Data Protection/Security • Intellection Property • Service Levels and Warranties • Warranty Ref: “2012 Top Terms in Negotiation”, International Association for Commercial & Contract Management

  8. Contracts Management- Case Study Take Aways • Impact of badly managed terms. Both sides lose. • Lessons learned - so we do not fall victim of badly managing these terms.

  9. Case #1: Hotel Georgia vs. Condo Buyers Georgia Properties Partnership (“GPP”) was contracted to build condos adjacent to Hotel Georgia at the corner of West Georgia and Howe Streets

  10. Case #1: Hotel Georgia vs. Condo Buyers “Hotel Georgia condo buyer launches class action ” – Business in Vancouver, May 24, 2012

  11. Case #1: Hotel Georgia vs. Condo Buyers Mismanagement of an active clause will likely cost the developer millions of dollars. What went wrong?

  12. Case #1: Hotel Georgia vs. Condo Buyers The case: • Georgia Properties Partnership (“GPP”) has contracts to deliver finished condos • GPP decided that they needed another year • As per Real Estate Marketing Development Act (REDMA), developer must provide disclosure statement • Alleged that GPP did not amend the disclosure statement when condo delivery date was changed

  13. Case #1: Hotel Georgia vs. CondoBuyers If Georgia Properties Partnership loses, the plaintiffs could walk away from their purchasing contracts

  14. Case #1: Hotel Georgia vs. CondoBuyers- Buyer Costs • Time • spent in the process Note: The opportunity cost due to late delivery is a motivator/trigger. 2. Legal costs - at leastin the short-term

  15. Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs • Lost reputation • costs: loss in business?

  16. Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs • Loss in Profit - Assumptions: • Ten suing purchasers win and all opt to get deposits back • Average condo price: $2M • Market prices drop by 10%

  17. Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs Loss in Profit - Results:

  18. Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs • Legal Costs - Not insignificant

  19. Case #1: Hotel Georgia vs. Condo Buyers- Summary of Costs

  20. Case #1: Hotel Georgia vs. Condo Buyers- Lessons Learned • Be aware of local laws • Do your paperwork. Mismanaging a simple active clause cost dearly • Do not assume that the other partyis not sophisticated • Get advice from lawyer and/or contract management professional

  21. Case #2: SNC-Lavalin Inc. • Major world player in design and build of infrastructure project • Fiscal year 2011 stats: • Revenue $7.2B • Net income: $379M

  22. Case #2: SNC-Lavalin Inc. “RCMP and Swiss widen SNC payments probe” – CBC News, November 29, 2012

  23. Case #2: SNC-Lavalin Inc. Mismanagement of a clause that has both active and passive elementshas cost billions. What went wrong?

  24. Case #2: SNC-Lavalin Inc.- Timeline Summer/Fall 2011: Muammar Gaddafi’s regime fell in Libya November 2011: Cynthia Vanier, arrested in Mexico for allegedly trying to smuggle Saadi Gaddafi out of Libya February 28, 2012: SNC-Lavalin announces internal probe into inaccurate payments March 26, 2012: SNC-Lavalin CEO Pierre Duhaimeresigned amid issues swirling about a prison construction for Gaddafi

  25. Case #2: SNC-Lavalin Inc.- Timeline (continued) September 18, 2012: Police probe McGill hospital November 28, 2012: M. Pierre Duhaime arrested in Montreal, charged with fraud stemming from mega hospital McGill University Health Centre construction November 28, 2012: SNC-Lavalin issues press release: “every employee is obliged to sign and follow the Code of Ethics and Business Conduct” December 13, 2012: SNC-Lavalin suspends payments to former CEO Pierre Duhaime January 25, 2013: CBC News: “SNC Lavalin paid $160M in Libyan bribes, RCMP allege”

  26. Case #2: SNC-Lavalin Inc.- SNC Press Releases • Feb 28, 2012: internal probe regarding inaccurate payments • November 28, 2012: all staff must abide by high ethical standards • December 13th 2012: stopping of payments to Pierre Duhaime • January 25th, 2013: intention to cooperate with police, and commit to ethical behavior

  27. Case #2: SNC-Lavalin Inc. • Corporation said: “All staff must abide by high ethical standards.” • The standards are passive. The employees’ behavior is active. • Company may have had its policies in place, but the controls to implement these standards were not.

  28. Case #2: SNC-Lavalin Inc.- Employee Costs • Lost jobs. Four so far • Jail • Cynthia Vanier is in jail • Pierre Duhaime is not far behind

  29. Case #2: SNC-Lavalin Inc.-Company Costs • Lost reputation • A no brainer • Or is it? • This week, an SNC-Lavalin lead group was awarded the contract to build the Evergreen Line

  30. Case #2: SNC-Lavalin Inc.- Company Costs Legal costs. May 2012, Sun News Article: SNC investors filed $1.5-billion class action suit, alleging Duhaime authorized $56 million of improper payments to foreign agents January 10, 2013, The Financial Post: Article headline: “SNC-Lavalin will face criminal charges, analyst says, but buy it anyway”

  31. Case #2: SNC-Lavalin Inc.- Company Costs • Share price drop is behind the class action law suits

  32. Case #2: SNC-Lavalin Inc. - Lost Market Capitalization Share Price: - Jan 2011 to Jan 2013 $45.13 Jan 24/13 $35 Sep 4/12, recent low $ Date Feb 28/12 SNC announces probe. Share price drops 20% from $48.37 to $38.43 $62.07, Jan 24/11

  33. Case #2: SNC-Lavalin Inc.- Lost Market Capitalization

  34. Case #2: SNC-Lavalin Inc.- Lost Market Capitalization • Shares issued: 151,000,000 • Market capitalization drop of: $2.6B or 27% off as of January 24, 2013 • No wonder shareholders are suing!

  35. Case #2: SNC-Lavalin Inc.Summary • Nobody unscathed: • Employee livelihoods were lost • Company faces an estimated $360M in legal costs • Collateral damage: • Fortunes destroyed - $2.6B market cap loss • How badly did SNC-Lavalin Inc. really want to build that prison in Libya?

  36. Case #2: SNC-Lavalin Inc.- Lessons Learned • Ensure company culture and governance are aligned with that of the other party. • Implement controls to ensure that your staff follow your policies. • Do not accept gifts or make bribes.

  37. Contracts Management- Conclusions Summary of Costs:

  38. Contracts Management- Conclusions Terms and conditions: • Understand all clauses. • Meet their demands. • Make sure the other side does too. • Get advice from a lawyer or a contract management professional.

  39. Thank you. Brig Henry www.BrigHenry.com

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