Balancing the commercial scales
Alex Ridout, general counsel & company secretary, Lamprell
Rigid company standard positions for all contract terms may not be in a business’ best interests
Having worked as an in-house lawyer for, and with, businesses in different sectors and of varying sizes, I’ve seen companies take very different approaches to handle standard positions vis-à-vis key commercial/contracting terms. At one end of the spectrum is the prescriptive contracts handbook which dictates the company’s opening position and the fallback permutations, through to the ‘golden/silver rules’ approach which limits only key principles and leave considerable flexibility to negotiators. The question to my mind is: is there a best practice approach for such matters?
As a starting point, it is a given that such company standards are a good idea. Companies without any contracting policies would be placing complete trust and power in the hands of its negotiators. This exposes the company to the absolute discretion (and skills) of the individuals, for better or for worse, and the individuals could be exposed if they acted ultra vires and accepted undue risk on behalf of their company. So let’s take it as read that the company has, or should have, some standards; the question then becomes, to what degree should the company prescribe what risks it is willing to accept and how much flexibility should it leave to its negotiators to resolve in the “heat of battle”?
The primary driver for company standards is to ensure consistency in its contracts with clients. Contract reviews broadly be the same and, regardless of the background, experience or qualifications of the negotiator, he or she will know what matters most to the business in its contracts. Above all else, where there are deviations from policy, the right people will be the making the decisions at the right level within the organisation. This is the bedrock of a strong risk management culture and good corporate governance, whether this is in the context of a listed company or otherwise.
Commercial contracts are by their nature a matter of negotiation: the counterparties are trying to create a structure which represents an appropriate level of risk and reward for the scope of works and the contract price. Unfortunately (from a company standards perspective), both the scope and the price will be different for every single contract and so “one size does not fit all”. An exaggerated but clear example derives comparative scopes of work: sale of 1,000 nuts & bolts entails a very different risk profile from the delivery of a full, turn-key construction project. If that is the case, is it appropriate for a company to dictate that both contracts should have the same terms? Typically, the company would be willing to take on far greater risk for the much larger reward. Even as between projects of a similar scope, a business’ stance on the commercial terms may vary if the client, value or location differs.
For this reason, a prescriptive approach to company standards could be limiting. Saying that, larger companies with many layers of management operating in jurisdictions across the world are going to struggle to handle the administrative burden and to manage its contract risks effectively, if there is a high degree of flexibility built into their contracting policies. Similarly, the company representatives will be on a sure footing as to what they can or cannot accept.
From a personal perspective and maybe that is my own prejudice, I am in the stable which favours the principles-based approach. While a firm believer in standard positions and recognising that horses are suited to courses, I believe that strict positions should only for be fixed for those issues which are critical to the company, not every detail of a contract which can and should be left to negotiators with a view to closing deals on balanced terms.
Columnist:
Alex Ridout, general counsel & company secretary, Lamprell
