One practically inevitable fact of life is that when drafting contract terms for complex projects and services, the less clear your understanding is of the requirements of the project, the greater the chance of poor contractor performance behaviours.
Two cases that best illustrate the importance of clear and unambiguous contract terms are:
- De Beers v Atos Origin
- Amey Birmingham Highways Limited v Birmingham City Council
In this article on how to avoid contract term misunderstandings, we will discuss:
- A couple of examples of the impact of ambiguous contract terms in complex, high-risk projects and services;
- How lawyers provided with the opportunity to gain greater clarity about a project’s services and how they will be delivered are likely to create much clearer contract terms by providing less written detail (the holy grail of contract drafting and yet, heresy to some of the less specialist legal fraternity);
- What a fit for purpose contract drafting team looks like; and
- The most effective process of governance in contract drafting to assure you have a fit-for-purpose contract that drives the right behaviours between you and your strategic supplier partner so as to avoid contract terms misunderstandings.
Case Law Examples of Contract Terms Misunderstandings
Ambiguous Clauses in De Beers v Atos Origin
The De Beers v Atos Origin case was a dispute between a client and a contractor over a large IT project. The client, De Beers, claimed that the contractor, Atos Origin, had failed to deliver the project according to the agreed contract terms and had caused significant delays and additional costs.
The case centred on the clarity of the contract terms, which the court found were unclear and ambiguous, leading to misunderstandings and disagreements between the parties.
It highlighted the importance of clear and unambiguous contract terms for complex projects and services, and the need for legal firms to work closely with operational teams to ensure that terms are truly aligned with the project requirements. A couple of examples of terms that led to the problems faced on this project were:
- Clause 12.1 – This clause required Atos to produce a project plan that met De Beers’ requirements. However, the court found that the clause was ambiguous and did not specify what the project plan should contain. As a result, Atos did not provide a detailed project plan and this led to delays and misunderstandings between the parties.
- Clause 13.1 – This clause required Atos to produce a design specification that met De Beers’ requirements. However, the court found that the clause was ambiguous and did not specify what the design specification should contain. As a result, Atos produced a design specification that was incomplete and contained errors.
Ambiguous Clauses in Amey Birmingham Highways Limited v Birmingham City Council
The Amey Birmingham Highways Limited v Birmingham City Council case was a dispute between a contractor and a local authority over a highways maintenance contract. The contractor, Amey, claimed that the local authority had not properly interpreted the contract terms, resulting in additional costs and work outside of the scope of the contract.
The case centred on the ambiguity of the contract terms, with the court once again finding that the contract terms on this project were unclear and ambiguous, leading to misunderstandings and disagreements between the parties.
A couple of examples of where this caused problems for the parties are:
- Clause 3.3 – This clause required Amey to keep the highway network in a ‘well-maintained condition.’ However, the court found that the clause was ambiguous and did not specify what constituted a ‘well-maintained condition’. As a result, Amey did not meet the performance standards expected by the council.
- Clause 4.1 – This clause required Amey to provide ‘adequate resources’ to maintain the highway network. However, the court found that the clause was ambiguous and did not specify what constituted ‘adequate resources’. As a result, Amey did not allocate sufficient resources to the project, leading to delays and poor performance.
Reasons for Ambiguities in the Contract Terms
In both cases we have been informed that the contracts were drafted by reputable, sizable legal firms who specialise in complex and high-risk IT, PFI, and highways contracts.
Despite this, the judgments in both De Beers and Amey highlighted material ambiguities in those contract terms.
Part of our work involves providing expert witness opinion to the High Court regarding evidence of poor project and service performance from both contractors and clients. We also provide opinion on the degree to which the drafting of particular contract terms have contributed to poor operational behaviours between the client and contractor.
Some of the key evidence in these cases highlights why these ambiguities arise and what the legal firms and their clients could have done differently to prevent them. These include:
- Legal Firm’s Lack of Understanding of the Operational Requirements: We often help legal firms draft fit for purpose contracts, especially when they have not been given (or asked for) the opportunity to sit with the client organisation’s operational teams to appropriately appraise the financial and operational impact that the successful implementation of the project or service will have on the client organisation. Legal firms might not see the relevance of doing this and conversely, clients might not want to invest in ‘training’ legal firms to better understand their business. Collectively, they may not see the operational connection between the ‘contract terms’ and how the project and/or service delivery teams on the ground relate. And it’s the ambiguity that results and the misalignment this creates between the contract terms and the business outcomes that needs to be addressed. To prevent this, legal firms should work closely with operational teams to ensure that the contract terms are reverse engineered directly from the project requirements.
- Lack of Clarity in the Contract Terms: Contract terms are often too vague in complex projects or complex outsourced services. As already mentioned, unless they are reverse engineered directly from the project outcomes, they may be ‘woolly’ and difficult to understand. This is a problem once the client’s contract manager has to start using them to monitor and collaboratively support the contractor in delivering better performance and increasing value for money on an on-going basis. Ambiguity helps no one and, operationally, will usually lead to significant misunderstandings and disagreements between the client and contractor. To prevent this, legal firms should ensure that contract terms are drafted using plain English, increasing the likelihood of them being clear and specific in defining the scope of work, deliverables, timelines, resources, and payment terms.
- Too Much Detail in the Contract Terms: In some contracts, we see onerous levels of detail that make it unnecessarily challenging for contract managers to help their contractor improve its performance. In our experience, while it takes a lot of hard, upfront thinking to provide the clarity required to ensure that your contract terms help drive the right behaviours for a successful client and contractor relationship that achieves great outcomes for both, it is worth the time and effort. Too much practically inappropriate detail in contracts can easily lead to misunderstandings, delays and significant additional project and service costs. To prevent this, legal firms should ensure that the contract terms they create are operationally ‘use case’ tested, to ensure they provide the right balance between operational simplicity, and clarity (which is not the same as more detail) to achieve a successful project and service outcome.
- Failure to Specify an Appropriate Dispute Resolution Process: Poorly drafted KPIs can easily lead to disagreements between clients and contractors. These disagreements may well be operationally resolvable, but if your contract contains poorly structured generic dispute resolution processes this can prevent them from doing so without undermining the contractual protections in place. To avoid this issue, legal firms should ensure that the contract terms they produce include a clear dispute resolution process that is tested against appropriate operational use cases and that is agreed upon by both parties.
Using Flowcharts to Prevent Ambiguities in Contract Terms:
In addition to the steps mentioned above, we find that the most effective way to provide clarity when drafting contract terms is to use flowcharts (and/or use cases) to explain the key operational activities of how the service or project is supposed to work. These flowcharts will cross-reference to the related contract terms and should be attached as schedules to the contract. We find this helps to prevent ambiguities in the interpretation of contract terms and hugely improves overall understanding of the project requirements for the lawyers and client contract managers.
Here are some ways in which we have found flowcharts to be helpful:
- Visual Representation of Operational Requirements: Flowcharts (structured well) provide a visual representation of the operational requirements of the project, which can make it easier to understand how the project will work and how different parts of the project are related to one another. Cross-referencing these in the contract terms and attaching as schedules to the contract helps prevent misunderstandings and disagreements between client and contractor about the terms of the contract.
- Clear Definition of Roles and Responsibilities: Flowcharts can help define the roles and responsibilities of the client and the contractor, making it clear who is responsible for what tasks and deliverables and at what stage of the project. It helps to prevent confusion and disagreements about responsibilities and ensures that the project or service progresses more smoothly.
- Easy to Update: Flowcharts can be updated easily as the project or service evolves, allowing both client and contractor to stay up to date with any changes to the project requirements or deliverables. Just make sure that any changes and cross-references are appropriately reflected in the contract terms themselves. Again, it helps to prevent delays and misunderstandings.
- Cross-Referenced to Contract Terms: By attaching flowcharts as schedules to the contract terms, both parties can contractually rely on the operational requirements outlined in the flowcharts. This can help prevent ambiguities in the contract terms and ensure that both parties are aligned on the project requirements.
Lessons Learned from the Judgments
The De Beers and Amey judgments highlight the importance of clear and unambiguous contract terms for complex projects and services. Lessons learned for both legal firms and their clients are:
- Terms that align with the project outcomes and requirements. Work closely with operational teams to ensure that the contract terms are reverse engineered from the outcomes of the project and aligned with the project requirements. Those terms should be drafted using plain English that is both clear and specific in defining the scope of work, deliverables, timelines, resources, and payment terms.
- Clarity in dispute resolution. In addition legal firms should include a clear dispute resolution process linked to, and operationally tested against use cases. This should be agreed upon by both parties.
- Flowcharts add clarity. Flowcharts can also be helpful in preventing ambiguities in contract terms and improving overall understanding of the project requirements. By using flowcharts, legal firms can provide a visual representation of the operational requirements of the project, clarify roles and responsibilities, and make it easy to update the project plan as the project evolves. Flowcharts can be cross-referenced to the contract terms, allowing both parties to legally rely on the operational requirements outlined in the flowcharts.
- Operational teams are a core part of the contract drafting process. When drafting contract terms for complex projects and services, it is important to involve operational teams in the drafting process, set out clear performance standards, specify the resources required, and include a detailed payment mechanism and payment schedule. By following these steps, legal firms can ensure that their contract terms are fit for purpose and will drive the right behaviours between the client and contractor.
What does a great contract drafting team consist of?
For complex and high commercial risk projects your contract drafting team should consist of the following roles, along with the specific skills, expertise and experience:
- Legal Counsel – responsible for reviewing and drafting the contract terms, ensuring compliance with legal and regulatory requirements, and providing legal advice and guidance to the project team. Legal counsel should have extensive experience in drafting contracts in a collaborative operating team environment, with the relevant subject matter project area of law and relevant regulatory frameworks.
- Project Manager – responsible for managing the project and overseeing the drafting of the contract terms, ensuring that the project requirements are clearly defined and the contract terms are aligned with those project requirements. The project manager should have appropriate experience in project management, stakeholder management and risk management.
- Subject Matter Expert(s) – responsible for providing day-to-day operational process as well as technical expertise and guidance on the project requirements, ensuring that the contract terms accurately capture the technical specifications and operational requirements of the project. A subject matter expert should have relevant technical expertise and day-to-day operational experience in the specific domain.
- Commercial and Contract Manager – responsible for ensuring that the contract terms are commercially sound, fair, and reasonable, and that the pricing and payment terms are aligned with industry standards and market rates. The commercial manager should have experience in commercial and financial management, contract negotiation, and risk management and be able to test the validity of the contract terms against day-to-day operational use cases. This is to make sure the terms can operate in a practical manner to drive the right behaviours between contractor and client for a successful project and/or service outcome.
What is the governance process to draft fit for purpose (unambiguous and clear) contract terms?
The contract drafting team should include the following steps in their governance process:
- Develop a contract drafting plan – This plan should outline the key milestones, deliverables, and timelines for the contract drafting process. It should also identify the roles and responsibilities of each team member and establish a governance framework for managing the drafting process.
- Conduct a requirements analysis – This analysis should define the project requirements, use cases and technical specifications, as well as identifying any risks or issues that need to be addressed in the contract terms.
- Draft the contract terms – The contract drafting team should work collaboratively to draft the contract terms, ensuring that the terms are reverse engineered from the project outcomes and accurately reflect the project requirements and technical specifications, and that they are aligned with legal, regulatory and commercial requirements.
- Review and revise the contract terms – The contract terms should be reviewed and revised by the legal counsel, project manager, subject matter expert(s) and commercial manager, to ensure that they are legally sound, technically accurate, commercially reasonable and aligned with the project requirements. Test the operational aspects of the contract terms and dispute resolution process against the day-to-day use cases to assure efficacy in supporting performance management.
- Obtain stakeholder approval – The contract terms should be reviewed and approved by all relevant stakeholders, including the client, the contractor, and any other key stakeholders. Where appropriate, summarise the evidence of how the terms align to the use cases tested against, to support that they are workable and practical for the contract managers to manage the relationship.
- Finalise the contract – Once the contract terms have been approved, they should be finalised and executed by both parties.
- Monitor and manage the contract – The appropriate operational stakeholders involved in the drafting should monitor and manage the contract throughout the project lifecycle, ensuring that the contract terms are being adhered to and that any issues or disputes are addressed promptly and effectively.
By following these steps and having a robust governance framework in place the contract drafting team can ensure that the contract terms are fit for purpose and will drive the right behaviours between the client and contractor, mitigating any potential risks and ensuring the success of the project.
Clear and unambiguous contract terms are crucial for the success of complex projects and services. By working closely with operational teams and following the steps outlined in this article, legal firms can prevent ambiguities in contract terms and ensure that these terms drive the right behaviours between client and contractor. Flowcharts can also be helpful in improving overall understanding of the project requirements and preventing misunderstandings and delays. By taking these steps, both parties can ensure that the project progresses smoothly and meets the desired outcomes. If you would like an informal discussion on how we can help you avoid contract terms misunderstandings for your complex project, please get in touch.