It is surprising how often contracts between companies are not signed or executed properly. Case law is full of examples of disputes occurring between organisations who are both working to an unsigned contract. These usually centre on ‘contract by performance’ issues, i.e. there was a contract sort of agreed but it was never actually signed. One company is claiming that its version of the contract is the correct one and the other is relying on a different version. This unfortunately can end up in the infamous ‘money for lawyers’ scenario.
So, based on the premise that a signed contract is a good thing, why don’t companies sometimes sign contracts? I would speculate that the principle reason for this is bureaucratic inertia. It is often more difficult to sign a contract than to start working without anything signed-off. For example, in the following scenario:
In Big Company Ltd, the business process for signing contracts is as follows:
- All contracts must be signed by the company secretary
- All contracts must be presented to the company secretary with a fully signed recommendation report, which as a minimum, is to be signed by the relevant procurement manager, the relevant category manager, the main business stakeholder, the responsible business director and the relevant finance manage
- In addition, a legal report must be presented, signed by the relevant lawyer
This would be a fairly typical scenario for a contract worth say £8m. Whilst this may seem like a reasonable and cautious approach to ensuring the business does not commit to rash contracts, it has a number of inherent weaknesses. Primarily, there are too many people in the approval process and the incentives are often mixed on whether it is better for them to sign the report or to ignore it. In addition, it is an administrative problem to get so many people signing a report, leaving aside the separate legal report.
Many is the hour I have spent traipsing around corporate headquarters with a bundle of reports and a pen, ready to hand to a signatory. If a signatory is ill or goes on holiday, this process stops, but the business driver for mobilising the contract continues. For example, an immoveable date such as ‘launch the product in time for the Christmas sales’ will not be delayed but the contract signing will be.
Returning to the scenario, next the signed reports are submitted to the company secretary, who promptly goes on holiday and doesn’t delegate his sign-off. When he gets back from holiday, he has a query and returns the contract for further review. By this time the actual contract, i.e. the people doing the work, has already started. A PO was raised on the premise that the contract would be agreed but the PO refers to a contract that is not signed. The supplier is now being paid for a contract that was never signed as they are invoicing on the PO. So, we end up in a position where the contract is underway and the agreement was never executed.
To add to the inertia over signing, now that more information is known as the contract is underway, it is not unusual for one party to avoid executing the document. The performance of the contract may have unearthed something that may be counter to what they were going to sign up to, i.e. it is less risk for one party to never sign the agreement, and rely on ambiguities in what was the agreed version.
So, how do we minimise contracts not been signed? This probably deserves a book rather than a single post but if I could suggest one thing, it would be more delegation in sign-offs. It should be the people who have the true responsibility to successfully deliver who sign the contract, e.g. the programme manager or the senior procurement manager. This ensures that they have direct accountability for the outcomes of the contract and what was written in it.
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colincram
colincram2013
piblogger
Procurement Insights EU Edition 
piblogger
October 29, 2014
Reblogged this on Procurement Insights and commented:
Editor’s Note: Are contracts really necessary?
Tom M
October 31, 2014
I would say it depends… The key thing is that both parties are very clear about what their obligations are. Whether you have a signed contract is less relevant. Most court cases are caused by ambiguity over what’s expected.
hakan
November 1, 2014
yes. some companies have KPI like contract coverage. thanks
Jerry Roum NULUN
November 3, 2014
Question: Which option will likely keep the parties out of court, having a fully executed contract or not having one? As a consultant in oil and gas for many years I advocate having fully executed contracts as I believe in good fences make good neighbors.
Rgds, Jerry Roum NULUN
Tom M
November 3, 2014
Call me old fashioned, but I like a signed contract
tetruman
November 7, 2014
Another related problem is the last minute negotiations. You have provided a draft document with the RFx selected and negotiated terms with the successful bidders(s) – or so you think – then they send t to their legal department who wants to tear it up and start again! Meanwhile your start date is getting nearer and the incumbent is winding down – the last thing you want to do is go to them and ask then to stay on for another month or two while you finalise your negotiations. i started a new job once to find that a couple of months before I started an new service contract commenced with four separate suppliers and no contracts signed! Not a good place to be specially since one of the contractors failed six weeks after I started.. Eventually had all contracts signed – 18 months later!
Lessons
– plan, plan, plan. If you need to get the Board to approve make sure you have the lead times in your project plan. Know who is going on leave when and plan around it. Have a contingency for the unexpected. (I know – easier said than done)
– get contracts signed before the contract starts – when you are in the best negotiating position.
– use your strict timeline as a negotiating tool – if your prospective supplier thinks they will miss the opportunity if they don’t finalise the contract then they can move (legal) mountains
Tom M
November 10, 2014
‘use your strict timeline as a negotiating tool – if your prospective supplier thinks they will miss the opportunity if they don’t finalise the contract then they can move (legal) mountains’
Agreed- holding your nerve in this situation is key, i.e. no signature, no deal.
Alex
November 10, 2014
In most cases and regardless of whether a contract has been physically signed, the fact that the entities are executing the tasks is execution of the contract itself. This is known as ‘implied in fact’ as the parties ‘form the contract through their conduct.’
Alex
November 10, 2014
N.B. Under UK law, and thanks for the great blog post!
Alex.