Why do organisations ignore their contractual obligations?

Last night, a contract lawyer asked on Twitter:

Various people, including IP Draughts, came up with suggestions. The most depressing was this one from another lawyer who is prominent on Twitter, @LegalBizzle, who wrote: “All of them. Not even joking.”

Why do lawyers and commercial executives spend large amounts of time and emotional energy negotiating detailed contract terms, only for their operational colleagues to ignore them?

It so happens that IP Draughts has encountered this issue most often in IT contracts between large organisations. The contract specifies a procedure, e.g. on how to escalate or resolve a dispute over performance. The operational teams of both parties work to a completely different procedure, or to none. There are plenty of email communications but none that clearly identifies what the issue is, when it was first identified, what action is expected and when the issue must be resolved. No-one, it seems, is using the contract as an operational manual.

If and when the dispute reaches the attention of the parties’ lawyers, they may reach for the contract and taken into account its procedures when communicating with the other party. Or they may just resort to bluster and, again, ignore the terms of the contract.

If the dispute ever gets to court, the parties’ advocates and witnesses will likely be forced to justify their actions through the prism of the contract terms. The judge is likely to use those terms as the starting point for determining whether the contract has been performed.

In other words, as the dispute becomes more and more “legal”, the terms of the contract will come into sharp focus. But at an operational level, there may be much less interest in what the contract actually says.

Why is this? Several theories occur to IP Draughts:

  1. The contract is off-putting to the operational managers in its style and content, and too difficult for them to use. If this is the only reason, then senior management and the legal department are to blame for not providing simple, user-friendly procedures, based on the contract, for them to use, and periodically reinforcing the message that they must follow these procedures.
  2. Nobody in the company, including the senior managers, cares what the contract says. Perhaps the in-house lawyers care, but they don’t have much influence. Perhaps all that senior management cares about is revenue-generation, and contract terms are regarded as something remote, like an insurance policy: recognised as important in principle, but not really cared about in practice. It is not difficult to decide who is to blame in this scenario for the failure to follow the contract’s procedures.
  3. The operational and commercial managers are temperamentally incapable of following detailed written procedures as set out in the contract. If this is the case, they need a process manager (who could be a lawyer, but need not be) to keep them on the straight and narrow. But perhaps senior management doesn’t realise or recognise that such a person is needed.
  4. Team dynamics result in a different way of working. The operational teams of both parties work together during the implementation of a project, and they get used to working in a particular way, that may or may not bear any resemblance to how their colleagues responsible for negotiating the contract have agreed that they will work. In this case, either they need guidance on how they should work in compliance with the terms of the contract, or the parties negotiating the contract should have taken account of the operational work-process when agreeing the contract terms. Either way, there has been poor communication within the company.

Why does any of this matter? As long as the project is working well, perhaps it doesn’t. But contracts are partly there to govern the parties’ conduct if the project isn’t working well, and to determine whether one party is liable to the other for breach of contract. Having a mis-match between how the parties behave and how they are supposed to behave, as laid down in the contract, can make it very difficult to advise on contractual rights and remedies.

This topic also reminds IP Draughts that many contracts are far too long and complex, and this fact reduces the likelihood of their being used at an operational level. An extreme example that came across IP Draughts’ desk last week was a government contract that included large numbers of clauses that seemed to be cut-and-pasted from a clause bank, as well as cross-references to the identifying names and numbers of dozens of standard government contract terms. It is easy to dismiss this as the approach of a government bureacracy, but IP Draughts has seen plenty of examples of B2B contracts that are far too long and complex.

Occasionally, IP Draughts comes across organisations that have taken a conscious decisions to simplify both the language and content of their standard contracts. He applauds such decisions and wishes more organisations, including governments, would take this approach.

If this could be combined with a determination on the part of senior management that contract terms should either be followed at an operational level, or if this is not workable the terms should be scrapped, the whole process of negotiating, and operating under, contracts would become much more streamlined and efficient.

 

2 Comments

Filed under General Commercial

2 responses to “Why do organisations ignore their contractual obligations?

  1. Paul, agreed. Point 6 comes down to education and procedures within the company. Point 5 is understandable but a very real danger is that the carefully-crafted, but ignored, contract procedures are considered to have been waived by the parties, particularly if the operational activity doesn’t resolve the issue successfully or their activity goes on for some time. It should be possible for parties to agree a first-level procedure that is kept within the operational team, with subsequent escalation to other parts of the organisation if this doesn’t resolve the matter.

  2. Paul Maclennan

    A 5th reason may be a fear that referencing the contract (however accessible it may be) or following a specific escalation process immediately sets in motion a train of events that would be considered to be a ‘formal dispute’ – the operational teams (on both sides) may be incentivised to delay classifying an issue this way for as long as possible whilst they try to resolve it without escalating to senior management or getting other departments involved.

    A 6th may be that the operational team have never seen the contract (and don’t have access to the legal drives). If the technical problems are time sensitive, those ‘on the ground’ will not want to waste precious time chasing down a copy from the archives.

    Thinking about other areas of non-compliance, I have heard (anecdotally) that a common reason for under-reporting/payment of royalties is that the nuanced terms of the agreed contractual terms have not been properly communicated to an organisation’s finance team. This reinforces your point that the solution is not just to simplify the contractual language, but to communicate the terms properly to those who may need to comply with its terms.

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