Eric Evans
Developing Contracts That
Fit Your Needs:
The Commercial Framework

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Your Presenter
Eric Evans has held Director level positions in the automotive,
retail, fast moving consumer goods and healthcare sectors. He is
the author of three books on procurement and negotiation, and a
speaker on MBA programmes across Europe and the Gulf region
As a management consultant, he has delivered improvement
programmes in demand management and inventory management,
and has coached organisations as they implement collaborative
replenishment and customer-led approaches to demand
management.
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Why is this important?
A contract is a business
document that must be
written in a way which
makes it legally
enforceable.
It will contain legal
provisions, but must be
seen as a business
document
Don’t be
afraid of
Contracts

What drives the content of a contract?
The contract should be driven by
five things:
1.What is the contract trying to
achieve?
2.What risks and opportunities
do we want to manage?
3.What form of relationship do
we hope to have?
4.How will we manage the
business relationship?
5.What remedies do we want if
things go wrong
“A contracts simply says:
This is what you will do,
this is what we will do and
this is what happens if
things go wrong”

Examples
What are we trying to
achieve?
A low price or a fixed price?
Our risk or their risk?
An outcome or following our
instructions?
What risks and opportunities
do we need to manage?
What could go wrong?
What further opportunities
could arise?
What type of relationship do
we want?
Adversarial?
Risk sharing?
Absolute certainty of outcome?
How will we manage the
relationship?
Governance?
Coping with change?
Dispute resolution?
What happens if
things go
wrong?

The wrong way to start…….

Why is this important?
What the customer
wanted
What the supplier
understood
How it was
documented
What it actually didHow it was
designed
How it was billed
by the supplier 8

Risks and Opportunities
A contract is, at its heart, a risk management tool

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Column1 Column2 Column3 Column4 Column5 Column6 Column7 Column8
Failure Mode and Effects Analysis (FMEA)
Risk Number Risk to be considered Probability Consequences Visibilty Risk Value Mitigation
1 Exchange rate changes 8 1 6 48
CR We buy in supplier currency and
hedge
2 Industrial relations dispute 3 7 7 147
CC disallowing disputes as force
majeure CC obliging supplier to advise
on state of industrial relations
3 Ownership of supplier IPR 3 9 8 216
CC Supplier to warrant IPR ownership
CC Supplier to indemnify us
4 Key man dependency 7 5 6 210
CC Supplier to agree long notice
clause with key man
5 Late delivery 5 5 7 175 CC Liquidated damages, back to back
6 Unacceptable quality 2 9 8 144
CC Uncapped damages for poor
quality
7 Supplier Bankrupcy 1 9 7 63 CR We take monthly credit checks
8 Takeover of company 3 7 9 189
CC Termination rights at our
discretion
9
Design proved to be
flawed
2 9 7 126
CC Uncapped damages for poor
quality
10
Supplier breaches
confidentiality
6 8 9 432 CC Liquidated damages
Notes
a) Risk values greater than 150 must have mitigation plans
b) Risk values less than 150: mitigation plans are optional
c)
CC stands for "Contract
Clause"
d) CR stands for "Commercial Remedy"
Risk Analysis
Brainstorm of
what could go
wrong
Likelihood of it
happening
(0 to 10)
Consequences if
it does
(0 to 10)
How much notice
we will get
(0 to 10)
Risk X
Consequences X
Visibility
Actions we could
take

What type of relationship do we want?

The Relationship Continuum
Adversarial Collaborative

Managing the Relationship:
the key role of Governance

The Commercial Framework:
The Point of the Deal
The Commercial Framework is
the first step in in preparation
for contract drafting. It should
define clearly what we want to
achieve and the risks we want
to avoid. This step should be
done before we consider
drafting the contract. This is
the business proposition which
will be embedded in the
contract
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Why do we need a “Commercial Framework”?
The Commercial Framework serves two main
purposes:
1. It establishes the priorities – in terms of issues
and clauses - for the commercial negotiations to
take place.
This ensures that the negotiating team
prioritise the issues which are important.
2. It provides the mandate for the negotiating team
by agreeing what the team have a remit to
accept on each issue, during the negotiations.
By defining the Most Desirable Outcome (MDO) we
agree what we are aiming to achieve; by
defining the Least Acceptable Alternative (LAA)
, we agree the minimum we can accept.
15

The Framework sets out deal principles &
objectives
What
We want from
the deal
Commercial Priorities:
• Meet business needs
• Value for money, end to end, by exploiting
value to maximise profitability
• Security against risk & commercial
assurance/contractual protection
• No surprises
• Managing contracts and relationships
throughout the term and beyond
Balance Risk & Opportunity:
• Both parties to be upfront about risk
allocation and the ‘value/price’ of risk
allocation.
• Increases awareness of risk
• Focus on understanding
risks/opportunities for a given
contract/relationship
Relationship Priorities:
• Commercially sensible relationship.
• ‘Necessary’ contractual depth to
support relationship and capture risk
allocation
• Focus on contract/delivery
management
• Continuity of personnel in order to
retain knowledge and relationships
Principles of conduct:
• Treat other party as a seamless
extension of ourselves (the “extended
enterprise”)
• Relationship premised on ‘What can
we do for each other’
• Senior stakeholder engagement &
access
• Build a mature, trusted relationships at
all management levels to embed a
commercial relationship
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1 4
2

Commercial Priorities:
A word about: “Understanding the Deal”
Before we can start drafting the
contact, we must have absolute
clarity over what the business
need is. This means
understanding outcomes and
deliverables, risks,
dependencies, and the
commercial and contract
strategies which underpin the
contract

The Framework shapes the deal -early
Overview of dimensions included:
Services Remuneration Asset &
Business
Protection
Governance Termination Technical
Legal
Requirements
Contract
Management
• Statement of
business
requirements
• Technical
requirements
• Resource input
&
dependencies
• Staff expertise
• Term
• Knowledge
transfer &
embedding
• Co. policies
• Sub-contractor
& Third Party
• Charging
mechanisms
• Incentives
• Payment
schedule
• Currency
• Bench-
marking
• Liability
limitation
• Subsidiary/
Parent
exposure
• Warranties &
indemnities
• IPR
• Data
protection/
System
security
• Disaster
recovery
• Insurance
requirements
• Employee
Protection
• Governance
Structure
• Dispute
escalation &
resolution
• Supplier
performance
evaluation
• Change
control
procedure
• Tendering for
new work
• Customer
termination
rights
• Our
termination
rights
• Payments
upon
termination
• Exit
management
• Tax
• Regulatory
requirements
• Confidentiality
• Fraud
• Assignment &
novation
• Change of
control
• Divestment of
• General
‘boilerplate’
provisions
• Pre-contract
activities
• Contract
management
activities
• Close-
out/post
contract
activities
Tier2Tier1Tier0
Commercial Framework
Statement of commercial & contract
principles
Contract types supported by
Commercial Framework
Commercial Focus for various contract
categories
Note: Applied where relevant and to the extent relevant considering deal size/significance.

An example of Commercial
Priorities
Focus for contract dimensions related to Commercial Priorities
Lower Commercial Focus
• Business objectives (3.1.1)
• Service Level requirements
(3.1.2)
• Technical requirements (3.2.1)
• Charging Mechanisms (e.g. Types
of Charges (4.1.1-4.1.6), Service
Credits (4.1.9), Currency (4.4.1),
Rebates (4.1.7), Expenses (4.1.8)
• Knowledge transfer (3.6.1)
• Flexibility in volumes & services
(6.4.1)
• System & technical changes
during contract (3.2.2)
• Benchmarking (4.5.1)
• Developed IPR & Licenses (5.4.1-
2)
• Removal of services (6.4.4)
• Contract Term (3.5.1)
• Extension of term (3.5.2)
• Gain Share (4.2.1)
High Commercial Focus
Medium Commercial
Focus
CommercialFocus
Contract dimension in the CF
Low
Med.
High
Knowledg
e Transfer
Develope
d IPR &
Licenses
Technical
changes
during
contract
Removal of
Services/Licen
se
Technic
al Req.
Charging
Mechanism
s & IP
Licenses
Service
Level
Req.
Business
Req.
Volume
flexibility
Term &
extension
Benchmark Gain
Share

Using a Precedent or Template
• Time can be saved by basing a contract on a
precedent or template. This is a more efficient way
of drafting a contract, and as long as the precedent
is a good pone, it reduces the potential for drafting
errors
• It is helpful to:
– Choose a precedent for the same type of transaction
– Choose a precedent where you started from a strong
negotiating position – based on spend, the relationship
with the supplier, the desirability fo doing business with
your company etc
– Use a starting agreement rather than an executed
agreement

Key Drafting Principles
1. Be consistent with the front end
• Check the front end and definitions
schedule
• Use definitions consistently
• Don’t cover provisions that are
covered in the front end (e.g. extra
limits on liability, indemnities)
• Don’t include extra obligations
• Say if you think the front
end/definitions are wrong
2. Use technical terms carefully
• Technical terms with a well-
understood meaning are okay
(e.g. Ethernet, anti-virus,)
• Explain/define ambiguous technical
terms
(e.g. IAM, CoS class 1)
3. Think about structure, and be
comprehensive and clear
• Structure
• Clarity
• Comprehensiveness
4. Points to avoid
• No new customer obligations or
joint obligations
• No liability or indemnity
provisions
• No assumptions
• No agreements to agree
• No charges (except in the
charges schedule)
• No repetition
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Checklist: Good to Go?
1. Are the correct parties named in the contract?
2. Are the recitals accurate – what would the effect be if they were
published in a lawsuit?
3. Do the definitions work each time a provision is used?
4. Are the obligations in the “Actions” section clearly defined?
5. Are the representations and warranties that we are making
accurate?
6. Has the other party made warranties and representations which
are strong enough?
7. Were representations made pre-contract which we need to
capture or exclude?
8. Can we control our covenants?
9. Has the other party made sufficient covenants?
10. Are we able to control our dependencies to their covenants?
11. Could I misinterpret the scope if I tried?
12. Have we carried out a risk analysis?
13. Have we defined “completion” clearly enough?
14. Are acceptance procedures fully defined?
15. Are delivery dates clearly defined?
16. What happens if delivery dates are missed?
17. Have we explicitly defined “dependencies”?
18. When and how is payment triggered?
19. Are we comfortable with the cash flow throughout the contract?
20. When can the one party terminate, and what compensation does
the other party get?
21. What are our liabilities and how are they limited?
22. Who owns foreground and background IP?
23. Are IP licensing terms clearly understood?
24. Are there clear and agreed processes for change management?
25. What assumptions have we made?
26. Have we considered the things we need to exclude from the
contract?
27. Have we been clear on what warranty does and does not cover?
28. Are the representations and warranties that we are making
accurate?
29. Has the other party made warranties and representations which
are strong enough?
30. How will we resolve disputes?

Questions?