Looking at Contracting Risk Holistically (live from IACCM)
This is a live blog post from the International Association for Contracting & Commercial Professionals (IACCM) Americas Forum. [Please forgiven any typos or misunderstandings in meaning.]
This session is Breaking Out of the Box: Looking at Risk Holistically with
- Rod Wade, Vice President, Contract Management, MedImpact Healthcare Systems, Inc.
- Jason Bernstein, Partner, Intellectual Property Group, Barnes & Thornburg LLP
At the end of this post I have written some questions and comments about what I hear during the session. These are my views and are not a report on the session but rather the questions / comments I have about what I hear.
Trends to focus on are risks: data, limitation of liability, indemnification. Rod reports that stakeholders have different senses of risk. Sales tends not to see any risks; in contrast, legal sees the risks and want ironclad contracts. All this has to be blended together to come up with a contract acceptable to all internal stakeholders – and the counter party.
When to Involve Lawyers
Managing internal stakeholders’ views / expectations internally takes work. IT, risk, procurement, and legal all have different points of views. Jason advises clients NOT to start with the contract. Rather, start with an issues matrix.
In big or sophisticated deals, you know there will be a lot of bargaining. It’s better to start negotiating business terms without too much legal involvement. But bringing in the lawyers at the last minute is a bad idea. Business teams need to negotiate terms and bring in lawyers at the appropriate point. Lawyers should be involved in a light-weight way early but it’s better for business teams to do some rounds of negotiating key terms first.
An audience member – a lawyer – suggests that lawyers can help avoid mis-communication that can occur across business terms. Jason agrees but points out that key business terms should be worked out first.
Rod’s view on when to bring in lawyers… it depends on specific terms, having judgment of which terms will raise big issues. He reports that lawyers are increasingly involved in term discussions. Points out a difference between in-house lawyers, who know the business, versus outside counsel, who may not know the business as well. The issues matrix can drive when to bring in lawyers.
An audience member who runs contracting – big corporation – says his company brings in lawyers early to come up with a negotiation strategy in advance.
Jason advises knowing in advance who owns the decision. [RF: in general, I find that most organizations are bad at explicitly defining “decision rights”, that is, which person owns the final decision on any given issue. I understand Jason to say be clear on decision rights per issue at the outset.]
General issues… There are two sides to each issue. Make a list of issues, prioritize what you need, want, and would like, learn the other side’s fears and past problems. Use carve-out language to limit the scope of a provision.
Specific Legal Issues
Data: Customer wants protection against use, disclosure, monetization. Vendor wants to use data to advance its business. Compromises include agree on allowable uses and rights to proceeds of monetization. Rod reports it’s increasingly hard to focus on data ownership – it’s easier to focus on and negotiate on use. In his company – healthcare – HIPAA is a big constraint. Contracts must address privacy, security, and breaches. For breaches, allocate responsibility and costs for communication and remediation. Another issue is what happens when equipment records data and that equipment is sold or transferred.
Limitations on Liability: Customer wants no limitation on vendor liability; vendor wants caps. Parties need to drill down and get to more detailed circumstances of liability. Consider caps on fees paid. For failures to meet SLA, use long period to average and limit cap to prorated months. Define where caps apply – and where they don’t.
Indemnification: Customer wants protections against vendor acts and omissions. Vendor want to provide indemnification for its negligence and misconduct. There is a trust issue if a party leads with an unbalanced indemnification clause.
Product and Service Warranties: Customer wants to maximize warranty period and use the latest date possible (acceptance). Vendor wants to minimize warranty period to end obligation and start from earliest date possible (delivery).
[Q&A not captured]
My Comments and Questions: Can We Apply Big Data Analytics to Characterize Risks More Systematically
In this section, I raise some questions and comments about what I hear in this session. This portion is NOT a report from the session.
- The terms discussed in this session – data, liability, and indemnification – give rise to real-money issues. I wonder how (if?) the positions companies take in contract negotiation is data-driven. Historic data would illustrate both the likelihood of an event occurring and then, if the event occurs, what the cost may be.
- Is there an opportunity, with big data analysis, to limit legal costs in contract negotiations? That is, in a data driven system that can empirically identify probability of risk and costs, it might become clearer where lawyers’ attention is most required.
- What is the role of insurance in addressing these issues? An underwriting approach to these risks would be inherently data-driven. How often does insurance bridge the gap between parties?
- I can see that in many one-off contracts or very large value contracts, that the key contract terms discussed today are hugely difficult to negotiate. And rightly so. At the same time, however, I wonder in what percent of contracts these issues do or should loom so large. That is, do lawyers sometimes unnecessarily introduce negotiation complications in contracts where, if an issue arises, either the parties will negotiate amicably OR the stakes are low enough to not worry so much in advance. Again, this could be data driven to avoid the lawyer “parade of horrors” to focus on more likely outcomes.
- What role can technology play in addressing these issues? Many tools are available to analyze contracts and compare terms across contracts. Would companies improve their process and outcomes if they were to more systematically analyze agreements into which they enter. And then standardize language, or at least identify the range of language they use. More standardized terms do not solve the problems of allocating risk and reward but perhaps would allow more focus on who bears what risk, right, and obligation as an economic matter rather than worrying about language.
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