A Disciplined Contract Process

Questions to ask when deciding if a contract is necessary and what the terms should be.
A Disciplined Contract Process - Articles
A Disciplined Contract Process

Pre-Pre-Contract Situation: Is There a Need to Contract?

The present situation requires some type of change. Something is needed.
Questions to ask and action to take includes:

  • How can the change occur?
  • How can the needed item be acquired?
  • Can the person who needs the item build it or raise it herself?
  • Would it be cost effective to do so?
  • Evaluating the choices and options that are available to the person who needs the item

Following this evaluation the conclusion is reached that what is needed cannot be built, or built economically by the person who needs it. The person will have to go Aoutside@ to acquire it from someone who can provide it.

"What" is Needed?

Before exploring the market place for the item that is needed, the person who wants to acquire needed items should first establish these things:

  1. A clear understanding of what is needed? How is the item described? What are its key or essential characteristics? How will the item be used?
  2. What quality or performance criteria must the item meet?
  3. What are the key quality indicators for goods of this type?
  4. When must the person who needs the item have it in hand?
  5. How will the item be transported to the person who needs it? Who is responsible for the cost of transport? If damage occurs while in transit, who is/should be responsible for any damage or loss that occurs?
  6. How much is the person who needs the item willing to pay for it? If there is a cost level at which the person can build or raise the item economically, how does the price she is willing to pay compare to this cost?

Pre-Contract Formation Stage:

Identifying the "Market"

Armed with an understanding of what is needed, as well as essential information about the desired items, the person who wants the item first identifies the markets in which sellers of such goods offer their products for sale.

  • Where does someone go to identify the markets where goods of a particular type are regularly sold?
  • How many sellers are in the market?
  • How do their goods compare to what is needed?

The prospective buyer should evaluate the "offered" goods by comparing them to all of the desired characteristics that the goods must meet to fill the need. Will all/some/none of the offered goods fill the needs of the person who wants them?

Contract Formation Stage:

Contacting Sellers in Their Market

Once available goods that meet the needs are identified, the person who needs them will contact those who may have them available for sale. In some cases those who sell goods extend offers to sell their goods to anyone who is interested in buying them, i.e. equipment, machinery etc. In other cases interested sellers and interested buyers might meet in an open bidding market to set acceptable prices for the sale and purchase of goods. Open market arrangements require some understanding of how the market operates and any particularly important terms, conditions or peculiar requirements applicable there. Bidding on goods only makes sense if the buyer who is bidding is certain that the goods satisfy
her needs. This requires the buyer to investigate the goods before making any decision to bid on the goods.

If the seller of these goods is not actively offering to sell the goods to interested buyers, the potential buyer must contact the seller to inquire if goods are available for sale and about the terms on which the goods can be purchased. Once the seller responds the parties will likely enter into a period of negotiation to settle the final terms of the agreement to sell/buy the desired items.

Contract Negotiation: Comparison of Negotiating Positions

What are a person's negotiation strengths and weaknesses? A negotiation strength is something that gives a party an opportunity to use the strength to benefit her interests. This decision may also consider the impact that using the strength has on the other party to the contract. A negotiation weakness recognizes absence of a strength. It identifies that one party has an advantage over the other party. The comparison of relative strength and weakness may also conclude that neither side has an advantage over the other and each side is in about the same situation as the other.

Bargaining Power

Another aspect of negotiation strategy involves the concept of bargaining power. This refers to a party's ability to influence the terms of a contract to benefit themselves rather than the other party. The most extreme example of this type of bargaining power is where one party to a negotiation refuses to even discuss the terms of an agreement and insists that all of its proposed terms be accepted. Bargaining power can be achieved in many ways, such as through acquisition of wealth and political or military power. Having bargaining power requires consideration of how it is used. Is the power exercised solely for purposes of individual gain without regard to the situation or position in which the other party to the contract finds herself?

Improving a Negotiating Position

  • How can these negotiation strengths be enhanced?
  • How can negotiation weaknesses be overcome?
  • How can a person improve her bargaining position?
  • What can a person do to avoid making a mistake negotiating this agreement?

If a person has thought through their own situation in terms of what they need, what characteristics the needed item must have, and the price they are willing to pay for the item in order for this transaction to make economic sense, the chances of making a bad bargain are reduced. Avoiding mistakes requires some additional effort that addresses some of the less obvious issues that involve contracts. The following list describes these questions in a very general way.

Questions to consider in most any type of contract:

  1. Are the obligations of the contract clear to all parties?
  2. Between the time that the agreement is reached and the goods are delivered what can go wrong that would affect the ability of the seller to deliver the goods? How have these things been addressed in the agreement?
  3. What if the seller is unable to deliver the goods on time? How will delay in the delivery of the goods affect the buyer?
  4. What can excuse a party's failure to perform or fulfilling the contract? Do the parties understand how these excuses can be used and how they will impact on the contract?
  5. Can a party transfer or assign the obligation of the contract to someone else?
  6. If goods will be shipped from the seller to the buyer who is responsible for the transportation? Who pays the cost? Who provides insurance against damage or loss while being transported?
  7. When are parties to the contract expected to perform? Are dates for performance of any contract obligation clearly spelled out?
  8. Has the seller of the goods made any express or implied warranties or guarantees concerning the product or its ability to perform for the buyer?
  9. If the parties to the contract have a dispute of some sort, how will such disputes be resolved? Court resolution is a traditional means of doing so, but there are other means. Are the parties willing to use these other means, such as arbitration or mediation? Do the parties understand how these alternatives work?
  10. Key guidance: Don't sign any agreement until you understand all of its provisions and you know how the provisions will affect your interests.

Monitoring Performance of the Contract

Once the contract negotiation stage ends and the parties agree to terms that are embodied in a written document, key contract terms that come into play are those that describe the performance obligations of the parties. Assuming that each party has fully performed her obligations, the contract will be fully performed and the transaction completed. Some aspects of the agreement, however, such as warranties or guarantees, may survive into the future.

If during the course of the contract a problem arises that was anticipated by the parties, contract provisions addressing that problem will be applied. If the problem was not one the parties anticipated, the nature of the problem may cause the parties to evaluate their respective positions under the contract. For example, if a seller is unable to perform all obligations of the contract and there is no recognized excuse for the non-performance, the other party to the contract has several options to consider. A party can offer to adjust contract obligations according to what the other party can fully perform. If the other party agrees, this process will result in an amendment to the original contract and a new set of obligations described in the amended contract. A party who does not receive the full performance that she bargained for in the contract has her own contract obligations affected by the other party's failure to perform. In addition, the party can seek legal remedies for losses or damage suffered because of the failure to perform. These damages are measured in terms of added costs to acquire replacements goods for those specified under the contract that was not performed. If the item being obtained is unique, unusual remedies may also be available to the disappointed party that may result in forcing the non-performing party to fulfill contract obligations.

Authors

John C. Becker