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:
“Weaknesses in contract management cost the average company 9.2% of annual
revenue.”
Ref: International Association for Commercial & Contract Management (IACCM) survey Feb 2012
Contracts Management
• Introduction
• Contracts Management
• Terms and Conditions
• Case Studies• Hotel Georgia vs. Condo Purchasers• SNC-Lavalin Inc.
• Concluding Remarks
Contracts Management
What is Contracts Management?
“The process of systematically and efficiently managing contract creation, execution and analysis for the purpose of maximizing financial and operational performance and minimizing risk.”
Ref: Wikipedia
Contracts Management
Managing terms and conditions
Contracts Management- Terms and Conditions
1. Active, passive, and active and passive
2. Active clauses:- Require resources, process, managed
eg. Payment terms, delivery, warranty
3. Passive clauses:- Invoked as a consequence of an action or inaction
eg. Indemnity, force majeure
4. Active and passive clauses: eg. ethics
Contracts Management- Top 10 Terms and Conditions
1. Limit of Liability
2. Indemnification
3. Price/Charge/Price Changes
4. Scope and Goals
5. Liquidated Damages
6. Payment
7. Data Protection/Security
8. Intellection Property
9. Service Levels and Warranties
10. WarrantyRef: “2012 Top Terms in Negotiation”, International Association for Commercial & Contract Management
Contracts Management- Case Study Take Aways
1. Impact of badly managed terms. Both sides lose.
2. Lessons learned - so we do not fall victim of badly managing these terms.
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
Case #1: Hotel Georgia vs. Condo Buyers
“Hotel Georgia condo buyer launches class action ” – Business in Vancouver, May 24, 2012
Case #1: Hotel Georgia vs. Condo Buyers
Mismanagement of an active clause will likely cost the developer millions of dollars.
What went wrong?
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
Case #1: Hotel Georgia vs. Condo Buyers
If Georgia Properties Partnership loses, the plaintiffs could walk away from their purchasing contracts
Case #1: Hotel Georgia vs. Condo Buyers- Buyer Costs
1. Time- spent in the process
Note: The opportunity cost due to late delivery is a
motivator/trigger.
2. Legal costs
- at least in the short-term
Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs
1. Lost reputation- costs: loss in business?
Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs
2. Loss in Profit
- Assumptions:i. Ten suing purchasers win and
all opt to get deposits backii. Average condo price: $2M
iii. Market prices drop by 10%
Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs
2. Loss in Profit
- Results:Item Value
Lost sales $20M
New sales $18M
Loss (or “cost”) to developer
$2M
Case #1: Hotel Georgia vs. Condo Buyers- Developer Costs
3. Legal Costs- Not insignificant
Case #1: Hotel Georgia vs. Condo Buyers- Summary of CostsParty Costs
Buyer (each) Time and legal costs (at least short-term)
Seller (GPP) $2M plus legal costs
Case #1: Hotel Georgia vs. Condo Buyers- Lessons Learned
1. Be aware of local laws
2. Do your paperwork. Mismanaging a simple active clause cost dearly
3. Do not assume that the other party is not sophisticated
4. Get advice from lawyer and/or contract management professional
Case #2: SNC-Lavalin Inc.
Major world player in design and build of infrastructure project
Fiscal year 2011 stats:Revenue $7.2BNet income: $379M
Case #2: SNC-Lavalin Inc.
“RCMP and Swiss widen SNC payments probe”
– CBC News, November 29, 2012
Case #2: SNC-Lavalin Inc.
Mismanagement of a clause that has both active and passive elements has cost billions.
What went wrong?
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 Duhaime resigned amid issues swirling about a prison construction for Gaddafi
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”
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
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.
Case #2: SNC-Lavalin Inc.- Employee Costs
1. Lost jobs. Four so far
2. JailI. Cynthia Vanier is in jailII. Pierre Duhaime is not far behind
Case #2: SNC-Lavalin Inc.- Company Costs
1. Lost reputationA no brainer
Or is it?
This week, an SNC-Lavalin lead group was awarded the contract to build the Evergreen Line
Case #2: SNC-Lavalin Inc.- Company Costs
2. 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”
Case #2: SNC-Lavalin Inc.- Company Costs
Item Estimated Costs
Class action law suits (there are two)
$100M to $260M
Corruption of Foreign Public Officials Act (1998)
$100M
Total $360M
Share price drop is behind the class action law suits
Case #2: SNC-Lavalin Inc. - Lost Market Capitalization
$
Date
$45.13 Jan 24/13
Feb 28/12 SNC announces probe. Share price drops 20% from $48.37 to $38.43
$62.07, Jan 24/11
Share Price:- Jan 2011 to Jan 2013
$35 Sep 4/12, recent low
Case #2: SNC-Lavalin Inc.- Lost Market Capitalization
Date Share Price
Comment
Jan 24, 2011 $62.07 Public not aware of the events
Feb 28, 2012 $38.43 SNC announces an internal investigation into inaccurate payments
Sep 4, 2012 $35.00 A few days before police raid the McGill University Health Centre
Jan 24, 2013 $45.13 Share price rising as SNC announces projects eg. a significant project for Goldcorp Inc. in northeastern Quebec
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!
Case #2: SNC-Lavalin Inc.Summary
Nobody unscathed:Employee livelihoods were lostCompany 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?
Case #2: SNC-Lavalin Inc.- Lessons Learned
1. Ensure company culture and governance are aligned with that of the other party.
2. Implement controls to ensure that your staff follow your policies.
3. Do not accept gifts or make bribes.
Contracts Management- Conclusions
Summary of Costs:Case Company
costBuyer / Employee cost
Other
Georgia Hotel vs. Condo Buyers
$2M and legal
time and legal
SNC-Lavalin Inc.
$360M loss jobs and jail
$2.6B off market cap
Contracts Management- Conclusions
Terms and conditions:
1. Understand all clauses.2. Meet their demands.3. Make sure the other side does too.4. Get advice from a lawyer or a contract
management professional.
Thank you.
Brig Henry
www.BrigHenry.com