Essay Instructions: Identify the legal issues present and note legal principles that apply to each .
Prepare a memo to discuss what legal risks and opportunities are in the simulation.
Identify what a manager may do to avoid those risks, minimize liabilities, and benefit from opportunities. Each legal risk or opportunity is governed by specific principles.
Identify the principles and relate specific measures managers may take to minimize legal risk or realize legal opportunities.
Evaluate alternatives to resolve problems identified in the simulation.
Explain which alternative approach you believe is best and why.
Write a memo of no more than 1,400 words.
Format your memo according to APA standards.
Businesses in today’s environment must ensure that contracts have minimized risk and maximized remedy in the case of a breached contract. Disputes that are not mutually resolved may end up in litigation resulting in cost outlays due to legal and time expenses. Companies such as Span Systems (SS), a leader in banking software, and Citizen-Schwarz AG (CS), a powerful bank in Europe, should have a clear process for entering into contracts and renegotiation such that will avoid breach of contract conflict. Both parties have an obligation to fulfill each term of the contract and failure to meet said terms is considered a breach of contract.
SS entered into a one-year, six million dollar contract with CS to provide robust banking system software which, upon completion, will become solely owned by CS. The contract terms clearly outlined the need for a fully-functional system to be in place by the specified contracted date. The decline of the relationship between SS and CS began when a breakdown occurred in the timeframe outline for the deliverables. Other failures include a change in management, changes to system requirements, project scope and organizational changes. As a result, the contract is in danger of being breached by both parties, however, CS has threatened to exercise rescission from the contract based on SS performance. CS and SS legal teams have an opportunity to remedy the situation through renegotiation of the contract terms and a resulting restructuring through amendments that will solidify each company’s standpoint regarding execution of the contract.
The original language found in the SS-CS contract was ambiguous in defining the acceptable terms of the performance of the contract. “The performance or lack thereof by one party becomes very important in determining the rights and duties under the contracts (Reed, Shedd, Morehead, & Corley, 2005, p. 222). In order to solidify each parties understanding of the contract and performance expected is to provide specific definitions related to each performance area of the contract. Less ambiguous language will also provide an easier time of mediating a breach, if it becomes necessary (University of Phoenix, 2002). In the Amendment Contract Terms section, the new terms containing the revisited language pertaining to the right to terminate the agreement, the actions of those rights, and the definitions of the acceptance criteria are reviewed.
Elements of the SS and CS Contract
“Mutual Consent” is the first element that exists in the contract between SS and CS. There has been a breach of contract because communication has been hampered by the project management changes at CS. These changes broke down communications that were established early in the project phase.
“Mutual Consideration” is the next element that exists in the contract. In order to be valid, the parties in a contract must exchange something of value. In this case, it should have been the Java-Based transaction software developed for CS. According to the schedule, 60% of the project should have been completed by the time of contract conflict, but only 40% was completed.
“Performance on Delivery” is another element that is present in the contract. In order to be enforceable, the action contemplated by the contract must be completed. This means that the Java-Based software should be complete and delivered to CS as scheduled.
Finally, “Relationships” is another element of the contract. SS and CS will benefit by discussing how each company stands to prosper in continuing the business relationship as supplier and customer. This shows that the two companies are willing to go beyond a signed agreement and proactively remedy the situation.
Span Systems Perspective
SS endeavors to resolve issues with CS by initiating non-litigation tactics such as mediation or other resolution methods.
Today when negotiations between disputing parties begin to fail, the process of mediation is considered as an alternative to litigation. Mediation is the process by which a third person, called a mediator, attempts to assist disputing parties in resolving their differences (Reed et al., 2005, p. 120).
SS needs to explore the basic-level of conflict resolution by interfacing with CS and allowing concessions and adjustments to be made by each party.
SS’s best interest is to maintain a good business relationship with CS not only because of the current contract obligations but an additional sustaining business opportunity exist in e-CRM but is contingent on the successful completion of current commitments. By implementing non-litigation tactics such as mediation or other resolution methods, SS will increase its chances to resolve the contractual issues with CS and prevent costly lawsuits and further goodwill between the two companies.
Within the performance clause, CS can terminate the agreement within 7 days. The major benefit to SS under this amendment is payment in full by CS to SS. This payment has to be made before the termination clause can be activated.
However, this amendment still allows CS to maintain possession of the code that SS has delivered thus far to date, injecting risk into the agreement since SS’s intellectual property could fall in the hands of a competing software company or, worse yet integrated into another program. Rumors surfaced during the January discussions suggesting that CS were in negotiation with an Indian company to outsource the remaining element of the software project. This risk is possibly adjudicated by a clause that would not allow CS to maintain possession of the code, whole or in part, unless the project was completed and the program was implemented at CS. This amendment also carries a 30-day acceptance testing period that allows CS to accept the quality level or reject in the case where problems with the code exist. During the testing phase, CS will maintain and share records of data resulting from the SS system in order to ensure that the project scope and requirements have been met.
SS should also seek to limit the liability as an information technology (IT) supplier. Tranter and Jones (2004) discuss the need for IT suppliers and their underwriters to minimize damages should the contract fail. “Unfortunately, the nature of IT contracts means that the consequences of failure often greatly exceed the price paid for the contract by the user — hence the necessity for suppliers to effectively limit their liability” (Tranter & Jones, 2004, ¶ 3). Given that CS has already expressed dismay over the quality of the code received, coupled with CS organizational and project requirement changes, SS would be wise to renegotiate a contract clause limiting liability. Naturally this would cause CS to raise eyebrows, however, if done tactfully and worded properly, the long-term business relationship between CS and SS can be maintained.
With a change control clause, CS will compensate SS for ad-hoc changes that are outside of original requirements and will be pre-approved by the Change Control Board. SS would be much more agile in fulfilling approved changes since an increased software engineer staff is scheduled to be in place and SS will gain additional compensation from labor should changes be required.
Citizen-Schwarz AG Perspective
CS contracted with SS to develop a Java-based banking system. After several meetings on the project, a communication error occurred because of a management change at CS. SS has not met their obligation on the contract and now rumors are circulating that CS wants to outsource the remaining project criteria to an India-based software company.
CS wants to find reliable software companies that can finish the java software system as well as contract for an additional system with e-CRM technology. Given the performance of SS, CS has explored the possibility of rescission from the contract due to fears that the one-year deadline will not be met based in part on the original schedule that shows only 40% of the project has been completed, whereas 60% should already be complete. In addition to lacking time performance, CS perceives the quality of deliverables as below tolerance. “Simply stated, a contract involves a promise or an exchange of promises.” (Reed et al., 2005, p. 215). CS recognizes that the contract with SS is a promise and wants to work with SS to resolve the issues. CS wants SS to keep their promise and commit to completing their end of the contract.
Before CS will agree to extend the contract to SS, there has to be an agreement on the existing software obligations. CS has agreed to mediation to resolve the contractual issues with SS. These issues must be addressed in the mediation process with SS. Because mediation is an opportunity to benefit both parties, it is in the best interest of SS to work cooperatively with CS on creative ways to resolve these
issues.
Under the terms of the contract, performance by SS was an enormous undertaking. CS will make payments on the contract in design increment depended on project completion timeframe. Any changes to the production of the software will be presented to CS for approval. Only then can SS make the change implementation. Both parties should work together to agree on changes that will result in the quality control specifications of the software system as CS originally desired.
Additionally, a project manager from CS will be stationed at SS to check the progress of the project and defuse any situation that will limit or hinder the software production. It is essential that SS fully cooperate with the CS project manager. SS should follow through on all instructions by the CS project manager to avoid any further delays and achieve acceptable quality control specifications by CS. Failure by SS to comply with CS project manager’s oversight may jeopardize the relationship further. CS would like to work with SS to mutually resolve these issues and will give them assurances of the project progress with the project manager on site.
Amendment Contract Terms
Performance
Neither SS nor CS may cancel the agreement in whole or in part, subsequent to more then 50% of the consideration having been tendered by the other. In order to be enforceable, the action contemplated by the contract must be completed. If the quality of the product has been deficient, then CS has the right to claim the contract has not met performance guidelines.
Performance of commitments by each party under the new contract is binding and must be met as stated in this agreement. Each party must perform the consideration promised to the other. Lack of performance by either party constitutes a violation of the rights and duties under the contract. Failure to perform breaches the contract.
Change control
Any changes to the original project scope and requirements will be supervised by a Change Control Board. The Change Control Board includes members from both SS and CS. These members will include a project manager and a lead software engineer. The Change Control Board will determine whether to accept or reject any requested changes. The Change Control Board will also make the determination of the acceptable change in the project. The Change Control Board will render their decision within two business days of the requested change.
An amendment to the contract should include CS responsible for additional expenses incurred to satisfy the changes. The compensation schedule is included in figure 1.
Post-contract change Charge to C-S per line of code
3 months $ 1,000.00
6 months $ 1,200.00
9 months $ 1,500.00
12 months $ 1,750.00
> 12 months $ 2,000.00
Figure 1. Change Control Board – Accepted changes compensation schedule
The additional fees incurred will be paid in accordance to the payment terms outlined in the original contract. CS and SS agree to the amount outlined in the original agreement will be considered the flat rate if the requirements are decreased in volume (University of Phoenix, 2002).
Communications and reporting
A project manager from CS will be stationed in SS offices in order to participate in project meetings and act as the direct interface between CS and SS. The cost of stationing the project manager will be borne entirely by CS. In addition, project status reports will be uploaded to the SS extranet in order to keep CS informed of status and meetings.
Project Structure
In order to meet the software delivery schedule originally agreed to, SS will add at least 10 programmers within 10 days of the effective date of the contract. Span will send the resume of the programmer to CS for approval. CS will undoubtedly be pleased with SS actions and will recognize SS aspirations to settle the dispute harmoniously.
Dispute Resolution
Each party has a vested interest to avoid litigation in the event of a dispute and use the negotiation settlement method. Both parties agree to use an alternative dispute resolution (ADR) clause to minimize financial risk in litigation. The parties will exercise the principle interest-based form of negotiation. Negotiators will use a seven-part process (see figure 2) to determine the best solution to resolve the dispute: communication, relationship, interests, options, legitimacy, alternatives, and commitment (Reed et al., 2005).
Negotiation Element Description
Communication-Communication clarity between parties will foster a joint problem solving environment.
Relationship-The relationship is valuable and both parties will likely benefit from retaining or enhancing the relationship.
Interests-The two parties share similar interests that cannot be furthered without transparency of intent and communication
Options Allows both parties to explore and brainstorm possible solutions to the conflict; an option offered does not necessarily constitute a proposal for compromise
Legitimacy-Involves the application of accepted standards to the topic negotiated—rather than having the party’s state unsupported propositions.
Alternatives-Outcomes that are possible without the agreement of the other party. In essence, alternatives are the thing that parties to a negotiation can do away from the bargaining table.
Commitment-Successful negotiation must conclude with the parties making realistic commitments that can be put into practice.
Figure 2. Interest-based negotiations (Reed et al., 2005, p. 118)
Conclusion
“Business relationships can be irreparably damaged through litigation. To help avoid this harm and to help ensure productive, ongoing relationship, a number of alternatives to litigation have developed” (Reed et al., 2005, p. 115). Companies are taking greater advantage of extended business relationships and Span Systems, a leader in banking software, and Citizen-Schwarz AG, a powerful bank in Europe are no exceptions. Span system entered into a contact with Citizen-Schwarz AG to provide a Java based banking software. During the course of the execution of the term of the contract, several situations occurred that caused a breakdown in communication between both parties. As the factors of the contract are analyzed, we can explain the results of the re-negotiation of the contract between SS and CS. The evidence suggests that the elements of the contract had to be revisited in order to from a decision-making process where information from both parties could be evaluated and a determination made on the amendments to the contract terms.
