From talking with several IR practitioners, the
execution of contracts is often left to others to
complete (i.e., Legal or Procurement). Having
a contract background, I can honestly say this
is not uncommon in any business, as many
departments go to either the legal or procurement
groups for help with this sometimes
complicated and time consuming activity.
There is a lost opportunity here for IR practitioners
to both develop in their role as well
as provide a higher level of value than they
already bring to their business. Investment
recovery deals with contracts constantly; from
a simple purchase order or sales agreement
to more complex dismantling, demolition,
or broker consignment agreements. For this
reason alone, IR practitioners need to be more
engaged in the process. Who better to know
what terms and conditions should be applicable
to a deal than the person(s) who put
the deal together!
The primary purpose of a contract is to
identify the terms of any agreement between
two or more parties, as well as managing the
risk associated with the agreement. Once a
contract is being considered, the price or cost
associated with the deal are likely already
known. We are really determining who’s
responsible for what, and putting in place
a mechanism (contract) to ensure that the
responsible parties fulfill their respective
obligations. With simple equipment sales
the terms may be very straightforward and
refer to the fact that ownership of the item
transfers to the buyer upon payment and the
buyer is responsible to pick up the item “AS IS
WHERE IS”.
SCOPE OF WORK
Not all agreements are simple and may
require “work” to be distributed between parties
within the contract. Now we are addressing
risk management, the primary purpose we
put the contract together in the first place. A
key contribution and critical part of any such
contract is the “Scope of Work”.
The IR practitioner should be
the primary point person in
Scope of Work development, as
terms and conditions applicable
to any contract are determined
by the Scope of Work. A
detailed Scope of Work not only
specifies who is responsible for
what, but also helps identify
the risk associated with the
work and appropriate terms
and conditions to effectively
manage the risk. This should
also provide a mechanism to
ensure that the Scope of Work
is effectively executed.
Developing a good Scope of
Work is knowing what you
want, and clearly articulating
this in the contract. Things to
consider include:
4 Work to be done/not
to be done
4 Location
4 Equipment required/provided
4 Schedule (milestones)
4 Acceptable standards
(i.e., industry standards)
4 Acceptable criteria (buyers acceptance)
4 Pricing terms/cost breakdown
4 Exclusions/exceptions
4 Specific personnel (skill sets)
4 Drawing, data sheets, specifications
applicable to scope
All items need to be considered to ensure that
the Scope of Work is clear for all parties to any
contract. This will prevent “scope creep” and
unexpected surprises. A clear Scope of Work
also takes some of the risk out of any deal.
RISK MANAGE MENT
How do we determine who manages what
risk? This is usually the basis for negotiation,
as both sides need to effectively manage the
risk associated with any activity. Risk would
normally lie with the party best able to manage
the risk or more willing to take it. Risk or liability
transfer can come with a cost. If the cost can be
identified it is easier for each party to decide
on who should carry the risk. Risks can include
but are not limited to liability risk, financial risk,
environmental risk and default risk.
I have had more challenging discussions
around “Indemnity” with counterparties than
price, or any other clauses in most contracts.
Indemnity allocates responsibility and can
expose a party in the contract to a third party
claim; therefore, it is critical for all parties to
understand what the risk may be and the
comfort level of managing that risk. Not to
say that you should avoid providing Indemnification
where necessary, as the offsetting
benefits to the deal may far outweigh the
risk, but understand the risk before doing
so. Indemnification becomes a much larger
issue when environmental liabilities are put
into the mix. With “cradle to grave “and “deep
pockets” rules in place around environmental
liabilities, passing liability to another party is
not as simple as building it into a contract.
Environmental liabilities may be present and
can apply to equipment sales, demolition
and dismantlement contracts and certainly to
land sales. Environmental liability is present
in everything from process fluids in equipment,
asbestos and lead paint in structures, to
contaminated structures and soil. Even if you
receive Indemnification from another party,
you may be found liable for any environmental
liability arising from anything which
originated with you. Always get legal advice
when dealing with transferring environmental
liability to another party.
Now that we have an understanding of
the risk and who is responsible to manage
the risk on a contract, how is the
responsible party covered for the risk?
Through Insurance? Maybe not. Insurance,
specifically general liability coverage
has several exemptions, which may
provide little to no coverage to support
the risk taken by the Insured party.
Typical exemptions may include:
4 Damage to property in care,
custody and control of contractor
4 Damage to property that is
being worked on
4 Damage caused by asbestos,
lead, silica or mold
4 Fitness, quality or performance
of products or work warranted
or represented
4 Damages arising from
professional engineering services
Remember, you agreed to take on the
risk, not your Insurance provider. Just
think of the last time you reviewed your
own auto insurance coverage. Did you
clearly understand what coverage you
actually have or don’t have? Do you
today?
CONT RACT
ADMINI STRATION
Contract Administration is more than filing.
Administration of contracts is taking
ownership of the contract and managing
it from conception to conclusion.
4 Build contract templates and have
them pre-approved by the relevant
departments within your company
(including legal.) This can be a huge
time saver when you are looking
at executing a contract.
4 Build your templates into your
procedures/best practices.
4 All “material” changes to template
contracts should go through legal
for review and approval.
4 Ensure proper legal entities are
identified on the contracts.
4 Create contract files/database
(hard and soft copies).
4 Maintain the files/database.
Contracts can be complicated and
difficult to understand—sometimes
very much so—which is why it is critical
to have legal reviews and approvals
before signing them.
CON CLU SION
IR practitioners have an important role
to play in the contract development
process; from Scope of Work development,
assessing the potential risks,
negotiating the terms to effective
contract administration. By taking a
stronger role of the contracting process
and fully understanding the contract
documents, you have the opportunity
to add additional value to your
organization.

 

Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 3, 2011

© The Investment Recovery Association

 

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