Scope In Commercial Contracts (1)

Earlier this year, the global organisation World Commerce & Contracting (World CC) released a report provocatively titled “Most Important Terms 2022/23 – Negotiating for marriage or divorce?” which looked at the clauses most frequently negotiated and those which were viewed as the most important.  The survey that led to the report was extensive - the report draws on data from 1,305 organisations throughout 59 countries and from an even mix of suppliers and customers.  22% of the survey participants were practising in-house counsel.

One of the most interesting findings in the report is that while terms addressing scope and goals/specification were perceived as being the most important terms in contracts, such terms only made it to number six on the list of most negotiated terms (after limitation of liability, price/charge/price changes, indemnities, liquidated damages and termination).

This is consistent with what we see in practice.  Often parties spend a lot of time negotiating the 'front end' terms of contracts without spending a great deal of effort on the 'back end' description and details of what is actually happening. 

This is a real problem.  While the commercial contracts we draft can be carefully constructed to allocate risk appropriately and to set up a framework for the parties' relationship with an array of mechanisms and remedies to deal with situations where things are going wrong, in practice the exercise of contractual rights and remedies will hinge on clear descriptions of scope.  At a basic level, generally at law (and under most contracts) a party won't have remedies for breach of contract unless it can show that the other party had a clear obligation that the party didn't meet - and a clear description of scope is critical in this.  In practice, a significant portion of contract disputes are all about scope - ie what was one party actually obliged to do for the fees it received.

The same World CC report found that scope and goals/specification was the fourth most common source of disputes or claims (after price/charges/price changes, delivery, and service levels - noting that delivery and service levels are really also about scope rather than risk allocation).

So why, if scope is so critical, is it given so little focus in negotiations?  World CC suggest that it may be due to an unhelpful focus on terms which address the consequences of failure rather than terms which are focused on factors that support success (perhaps driven by the lawyers who prioritise risk allocation and risk transfer).  There is undoubtedly some truth in this - although it may also reflect that the lawyers can be the first people to be criticised if something does go wrong and the contract lacks appropriate risk allocation and remedies.  However, there are also some very practical factors at play which influence the degree of negotiation attention given to terms dealing with scope descriptions and specifications:

  • The need for expertise: Great scope descriptions and specifications need technical or operational expertise.  They need to be drafted (or at least heavily involve) people who really understand what services or goods are being purchased.  Apart from the most basic services, most scope descriptions and specifications simply can’t be drafted by lawyers in a vacuum.  Rather, this is fundamentally a business as opposed to a legal task.  However, it is also an essential part of a binding contract - the reality is that contract drafting is simply not an exercise that can be left entirely to lawyers.  Instead, drafting good scope descriptions and specifications requires collaboration from all parties to the contract.  In fact, unless the service or product is bespoke and unique to the customer, often the best place to start is with the supplier's own descriptions of what they provide - as they should know better than anyone else what they can and will do for their customers.
  • The need for legal input: That said, technical or operational experts aren't always very skilled at recording in very precise and consistent language what is being purchased.  Or they tend to describe scope in a manner that presupposes a detailed understanding and technical background that those interpreting the contract in the future (being new joiners to the business, lawyers or even the courts) simply won't have.  That's where the role of the lawyer comes in - a lawyer can work with a technical or operational expert to ensure that descriptions of scope are carefully drafted, internally consistent (including the use of consistent terminology), accurate, logical and, to the extent possible, written in a manner that a lay person could at least get a basic understanding of what the scope involves.   Lawyers can also often identify terms used in contracts which the technical or operational experts of one party considers have a well-understood, standard industry meaning, but in fact don't.
  • Time and cost: Unfortunately, engaging both technical and operational experts and lawyers in writing great scope descriptions and specifications (let alone negotiating them with a counter party) takes time and money.  Furthermore, the task often isn’t something that can be done early on in the contracting process.  For example, while a customer may be able to release a form of contract as part of a procurement process, often the customer simply won’t be able to draft the description of the services or goods it is procuring as that will be heavily dependent on what the supplier respondents will offer and what will be ultimately selected by the customer.  Scope descriptions are necessarily one of the last things to be drafted and frequently are pulled together under significant time pressure.  In our experience, it is also quite common for scope descriptions to be left to the business with little or no legal input (or input only requested at the last minute when there is little time or appetite for redrafting).  There are also cost pressures at play.  Involving a lawyer to a level where they have a deep understanding of the technical scope, and can be truly useful in spotting issues, involves time and almost invariably will cost more.  The client needs to be prepared to invest up front in legal review - something that it may not feel is worth the money if the parties to the contract are comfortable (at a business level) with the scope description and are not anticipating any disputes.
  • The need to deal with flexible scope: Finally, it is important to recognise that detailed scope is not always known at the time parties enter into contracts.  A party may have a view of its high-level requirements and a supplier may have a high-level idea as to how they will meet them, but both parties may need to do more work to further detail the scope (either in terms of further detailing what needs to be done and/or how it will be done).  This can be really challenging.  Contract law is predicated on certainty - and certainty of scope is key.  If a contract lacks sufficient certainty, it isn't enforceable at all and the courts typically won't enforce mere "agreements to agree".  This means that parties who haven't nailed down the scope at the point at which they enter into a contract need to think very carefully about, and ensure their contract captures, how and when that certainty will be achieved and how detailed scope will be captured later and become a binding part of their agreement.  They also need to deal with what should happen if the parties don't or can't reach that point.

So what's the answer?  There isn't a straightforward and easy solution.  World CC offer a few suggestions to better align the most negotiated terms with the ones that are really important, namely:

  • Contract simplification: Essentially improving contract forms to make them easier to navigate and understand
  • Proactive legal thinking: Placing securing a successful business outcome as the primary goal through better internal collaboration and analysis
  • Establishing a balanced position on contract terms: Making sure that the organisation's proposed terms aren't out of step with the market to free up time to focus on what really counts
  • Improved planning: Inclusive team activities involving the right stakeholders to determine priorities and targets.

In addition, to ensure contracts include great scope descriptions and specifications, we would suggest:

  • Identifying early on who will have the expertise in what is actually going to be provided/undertaken under the contract.
  • Finding a sensible way for technical, business and legal people to all work together effectively to draft scope descriptions that are both technically accurate but also sufficiently certain from a contractual perspective.  This might involve, for example, the lawyers providing a basic template or list of things that should be present in the scope description and specifications and the technical and business teams giving the lawyers a briefing describing verbally what the scope is (and giving them an opportunity to ask questions) before they dive into reviewing the initial draft.  It could also involve some collaborative drafting.
  • Identifying the level of scope certainty that will be in place at the time the contract is signed and, if the scope is not fully known or determined, identifying and recording the contractual process for getting there (and the consequences if the parties can't agree).

Finally, it's critical to make sure enough time (and budget) is set aside for the above tasks.  There is obviously a cost-benefit analysis to be made in setting aside time and money for contract drafting and negotiation.  In any procurement process it of course makes sense to focus the timeline on the activities necessary to identify the provider who offers the best solution for the customer's requirements and who the customer believes it can build a productive relationship with.  However, it is also critical to ensure that the parties genuinely are on the same page about who is going to be doing what and what the supplier is responsible for providing.  Many a contract has come unstuck when two well-meaning parties genuinely wanted to do business together but simply had very different understandings as to what was in scope and failed to identify this before they entered into a contract.  Rushing contracting drafting and negotiation when you've run out of time, money, and sometimes patience, can be a recipe for disaster.