The Contract Analysis. A wild thing?
Tips for the structured identification of contractual obligations and rights and related risks and opportunities in project contracts.
2016-02-26. Besides identifying the mutual performances that the parties are obliged to render to each other, it is important to identify what rights and obligations one’s own company has under the contract and what opportunities and risks arise from them. In the case of project contracts consisting of numerous documents, this can involve varying degrees of difficulty. A structured approach can be a great help. This article describes what such an approach might look like.
1. Understand the architecture of the contract
The multiple contract documents mentioned in the above introduction usually do not stand in isolation in the context of the contract. There is interplay between them and they are hierarchically arranged in an order of priority, which is established in the main contract document. Look out for a section entitled “Precedence of documents”, “Priority of documents” or the like. The main contract document is usually designated the “Agreement”, “Contract Agreement” or “Contract” etc. It is usually the top priority contract document. If that document is located in the contract documents, it is advisable to prepare a table in which the contract documents are listed in order of priority. For the purpose of carrying out the contract analysis, it is helpful to have that table at hand alongside the contract documents, printed out on a separate sheet of paper. A typical priority order for documents in a project contract may be as follows:
Precedence of documents
- The Contract
- Acts, regulations and standard requirements
- Special Terms and Conditions
- General Terms and Conditions
- Technical Specifications & Test Programme
- Contract time schedule
- Guarantee forms
- Contractor’s offer
Why is it common practice to have such an order of priority in contract documents? The answer is quite simple – for example, it may be because a standard for such a contract exists and is usually applied at the Employer for the project. That standard is represented by the “General Terms and Conditions” at rank 4 in the above list. It is either a “company standard” developed by the Employer itself or it is one of the popular international contractual models such as the FIDIC Silver Book/ Red Book or NEC3, IChemE, etc. The project-specific adjustments are then carried out in the contract document “Special Terms and Conditions”, one rank higher. Only those contractual paragraphs which the parties deem to be unsuitable will appear in the “Special Terms and Conditions”. All other paragraphs will be marked “unchanged”. Here again it becomes clear why the contract documents should be understood hierarchically. In the event of a dispute, a provision in a higher ranked contract document “overwrites” a provision in a lower ranked contract document. A further reason is that the drafting and negotiation of contracts spans different technical disciplines. The formulation of a contract is a team task. Because not everyone in the team can have a good understanding of all aspects of the contract, there must be an arrangement in place in the event of a contradiction, i.e. the “priority order of the contract documents”.
2. Identify the mutual performances provided for in the contract
Contracts should therefore be analysed “top down” – if one takes only one document from the contract and assumes that the content is the “be-all and end-all”, misinterpretations are highly likely to occur. If a design engineer takes only one document – “Technical Specifications & Test Programme” (rank 5) – as the basis for his design work, he would undoubtedly design his part of the installation contrary to the contract, as both higher ranking technical requirements from the document “Acts, regulations and standard requirements” (rank 3) and lower ranking requirements from the document “Contractor’s offer” (rank 10) would escape his attention.
IMPORTANT: The parties’ mutual obligations under the contract include technology, money and time. The manner of reading the contract presented above therefore also applies for the aspects of money and time.
3. It never turns out the way you expect; contractual handling of amendments, disruptions and deviations in the project
The reality of project execution is characterised by continually changing framework conditions. The Employer may recognise that some of the features of the installation that it originally desired (and defined in the contract) do not fit after all; components with a longer procurement time may be excessively delayed or access roads to the building site that the Employer was supposed to prepare may not be ready. A lot can happen to make life for the parties difficult in the project and give rise to disputes regarding the issue of remuneration. The contract should contain unequivocal provisions in this respect. In the contract documents, look out (“top down”) for paragraphs which establish the handling of such uncertainties between the parties. Key words could be “changes”, “change order”, “variations”, “variation order”, “extension of time” or “compensation”. If the contract contains such provisions, be stoical in your efforts to adhere to that contractual approach. If you fail to do so, your company may suffer disadvantages due to a breach of notice period or formal requirements. If the contract does not contain such provisions but is already legally valid, try to agree an appropriate addendum to the contract with your contract partner in writing, whose rank within the contract documents should be as high as possible. The statement “we will agree” is easy to say, but if there is no corresponding contractual instrument supporting that statement, it quickly becomes worthless.
4. Things get “wild”. Quickly understand all aspects of the contract
Now, that the subject of the contract and the handling of amendments, deviations and disruptions have been clarified on the basis of the above procedure, we can divide the content of the contract into four main aspects, which are of particular interest for the analysis of the project contract:
- W = Warranty
- I = Indemnity
- L = Liability
- D = Delays
If one now puts on (metaphorically speaking) polarised glasses, beginning with the “W” glasses, and reads the contract from top to bottom in the order of the contract documents with regard to the warranty issues, one quickly gains a clear idea of the requirements of the contract in this respect (and any gaps/omissions). After that come the “I”, “L” and “D” glasses in the analysis of the contract with regard to these issues.
To ensure that the knowledge obtained from the reading described above is also at hand and efficiently manageable during the project execution, appropriate accompanying documentation of the “Wild” analysis is recommended. A table drawn up in popular table calculation software has proved to be useful for this, as it is also electronically searchable. It is recommended that that table be structured horizontally according to the “Wild” criteria and vertically according to the contract documents. It is then possible to assign contractual contradictions and relationships within a table cell to one of the “Wild” aspects and keep a careful eye on them. This table should be filled in along with the analysis.
Contract analyses are a “wild” thing if you carry them out in a structured manner using this approach, but this structure enables you to quickly and comprehensively gain an overview of a number of interacting aspects within a complex project contract. At first glance, it certainly involves more effort than the familiar coloured stickers stuck to “interesting” places in the contract document, but it is far more efficient.
(Author: Jürgen Hahn)