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Home » Awareness » Managing contracts » Costly disagreements: Part 4


Costly disagreements: Part 4

Communication breakdown

Communication breakdown can happen in any relationship but in a contractual relationship there are steps which can be taken to minimize the risk and the resultant fall-out.

Communication breakdown often occurs when there is lack of continuity. The person who you have been dealing with in the customer’s organisation leaves/retires/goes on maternity leave or whatever – somebody new takes over who wasn’t involved with the contract previously and that person may interpret aspects of the agreement differently. Also, the new person may well be trying to make their mark by trimming costs or otherwise moving the goalposts. Once again, before starting work it is a matter of thinking “what if” the customer changes and ensuring that the written specification of what is to be provided and all other aspects of the contract are up to scratch.

A common foundation for future communication issues is the tender scenario where the bid personnel on either side are not the same people as those who will be involved in running the programme/contract. From the supplier/contractor side, it is important that you have consistency between the people who ‘wooed’ the customer and those who are now delivering and managing this contractual relationship.

As with so many areas of potential costly disagreements, it is crucial to have a definitive, non-contentious specification of the agreement at the outset, followed by scrupulous documentation of all changes and developments as the contract progresses. This necessitates a capable and pro-active contracts management function on both sides.

Piggy in the middle

Many disputes involve subcontracting and the ‘flow down’ of contractual obligations. Businesses of all shapes and sizes are increasingly getting involved in subcontract situations.  Large contracts frequently involve a ‘cascade’ of subcontracts as work is parcelled out to other entities. If you are the ‘last tier’ subcontractor in  such a cascade, ie you are not subcontracting any work to any other party, life is relatively simple as your sole concern is  your contract with your customer, regardless of how many levels or tiers that customer is from the ‘ultimate’ customer.  Particular problems can arise however if you are subcontracting any work to others. You have your contract from the customer and then you have subcontract arrangements with these other parties. You are in the middle. You need to ensure that the contractual arrangements in each direction are ‘back to back’.

The most common area giving rise to problems here is where there is significant disparity between when you are getting paid and when you have to pay your subcontractors. Cash flow can be a real problem. You will not be able to simply say to your subcontractors ‘you get paid when we get paid’ because that would be too uncertain and may be enough to ‘void’ the contract. Better to negotiate a longer time period to pay your subcontractors than the timescales in which the customer must pay you.  Get advance and/or stage payments from the customer whenever possible.

If your subcontractor has been selected for you by the customer, make sure you have appropriate disclaimers in your contract. In any ‘flow-down’ situation, ensure that the subcontractor accepts his fair share of damages and liabilities for failure to perform where the failure is in turn going to affect your ability to perform expose you to claims from your customer. Other key matters to ensure are flowed-down might include confidentiality, change control, right to veto staff, inspection/quality control, termination (including your right to terminate if the customer contract is terminated).  And if a service contract includes  a duration extension option exercisable by the customer, ensure that the same option is in any subcontracts where you are dependent on the resource.

As a final tip, try not tie up your agreements with subcontractors before the customer and you have completed yours, and vice –versa. Carry out the negotiations in tandem. Be aware of your status as ‘piggy in the middle’!


Nothing in this awareness article is intended as legal advice. If you have a specific legal requirement or query you should consult a solicitor directly.