The Purpose of a Contract

What purpose does a contract serve? And what purpose should it serve?\r
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A legal dictionary contains the following brief definition: 'The purpose of a contract is to establish the agreement that the parties have made and to fix their rights and duties in accordance with that agreement'. It is a view similar to that expressed on the Sourcing Innovation blog: 'The purpose of a contract is to define both parties' responsibilities with respect to a desired scenario outcome to the level of detail necessary to make both parties comfortable with respect to the relationship'.\r
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Few of us would disagree that a contract serves as a record of agreement. Where opinions start to diverge is when we consider the scope of that record or whether there is a broader purpose - for example, as a medium of communication.\r
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And it was with this issue in mind that the following article was written. \r
'Today I attended a presentation on 'quality by design', delivered by Rebecca Vangenechten of Siemens Life Sciences.\r
The session got me thinking about how we would embed quality by design principles into contracting. And I realized that there is no consensus on what 'quality' means in terms of a contract. Is it to do with design and layout? Completeness? Legibility and clarity? Its effectiveness in protecting the drafter? The extent to which it generates successful results? And without knowing quite why we are doing it, how can we be sure that what we are doing is of real value and quality?\r
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So I have a challenge for you. Without any sense of what is 'good', we cannot determine whether a contract - or the contracting process - is 'fit for purpose'. And that seems to me a serious omission. It also explains why we struggle to demonstrate and describe the value of the contracting process.\r
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It is time for the contracts community - contract managers. lawyers, sourcing professionals - to define what 'quality by design' means when it is applied to contracts. To get us started, I posed the following question to some of IACCM's senior members:\r
'I am listening to a presentation on quality by design and it strikes me that it would be very helpful to apply that concept to contracts.\r
However, to do so we must define what we mean by 'quality' in the context of a contract. In most cases, quality is determined in the context of outcomes or outputs. What do you think these are in respect of a contract; for example, the avoidance of unpleasant consequences? The enablement of a successful trading relationship? .....If we can agree quality indicators, we will be able to determine appropriate measurements that in turn could drive benchmarks and improvement.\r
So what are the quality indicators for a contract, in your mind?'\r
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I received several answers and they illustrate why this should be a key issue for us. I share these inputs with you - but please add your comments so that we can consolidate the thoughts of our community and develop an answer to the very important question 'What is the purpose of a contract?'\r
'Quality contracting results in no surprises for either party. The customer requirements and vendor commitments are fully aligned and both parties have one and same expectation of what contract compliance or fulfilment looks like. The outcomes or deliverables for the contract (flowing both ways) are objective and measurable. There is no grey area or white space to be debated at a later time. New players coming into the engagement mid-stream can read the contract and understand clearly what the obligations and expectations of the parties were at signing and are going forward.'\r
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'Well over 80% of the disputes and disconnects I see are due to poor scope language. And that is not just referring to the SOW, for scope requirements can be in any number of documents. The standard I use is a six sigma concept (at least that is where I was introduced to it) of goals or deliverables being SMART. SMART stands for deliverables that are:\r
• Specific criteria for success or compliance - not vague, but focused and clear\r
• Measurable - measures that result in any 3rd party, not familiar or close to the deal, can determine objectively whether a requirement has been met or not\r
• Aggressive but achievable\r
• Relevant to the strategy or goal\r
• Time-bounded (there is a due date)\r
Certainly, most contracts have these characteristics embedded. The biggest issues, in my experience, are around S and M of the acronym. '\r
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In a recent survey of sales people in a large consumer goods company, the universal view was that contracts serve no purpose at all, except as a driver of commission payments. \r
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So to conclude, here is a list of possible purposes. Should it do all of these things or just some of them? And does the answer vary depending on the nature of the transaction? I share this list because perhaps it is a helpful checklist to use when assessing whether the agreements you use or prepare truly will be 'fit for purpose'.\r
• An effective communication tool for all with a 'need to know'\r
• Risk apportionment\r
• Risk management\r
• Recording of rights, obligations and responsibilities\r
• Generating financial benefit\r
• Supporting a business relationship\r
• Providing operational guidance\r
• Providing protection and remedies in the event of a dispute\r
• Governance and performance management\r
• Demonstrating brand and corporate values\r
• Framework for successful business outcome