Skip to content

Vagueness in Contract Terms (Continued)

January 30, 2012
Last week, I wrote briefly about ‘vague wording’ in contracts. It was in response to a question regarding whether imprecise terms – such as ‘reasonable efforts’ or ‘timely execution’ – can ever be justified as good practice in contracting.
I think the value of testing vague wording actually comes at the front end of a negotiation. It is, after all, a good way to test and explore the sincerity and capability of a supplier. If they are vague, it can often be because they want to limit their commitment. However, unfortunately it often comes at the end of the process, when the benefits may be more limited.
As a customer, there is a need to decide how much value to place on precision. In other words, there is often a link between ‘vaguer’ and ‘cheaper’ (and if someone is precise and cheap, you had better check whether they have the assets to back up their commitments!)
I think the problem that often arises (and it is essentially an economic problem) is that negotiation takes place in segments, not holistically. In general, a group like purchasing will negotiate on price. This is often done in isolation of other terms and they are, of course, trying to drive to the lowest level, sometimes paying limited attention to capability to perform (except to the extent that they used it to qualify bidders). Groups like legal generally get involved at a later stage – and they are now battling over terms that have real cost implications, but where the supplier has no room for manouevre since the price is already set. So the real issue that we face in these circumstances is the failure of negotiators to make connections and to link the areas of the contract.
A second scenario is when the contract involves high levels of innovation. If there is innovation, how do I know precisely what can be committed? You (the customer) cannot even tell me precisely what you require. So the vagueness is there on both sides and the relationship has to be set as mutual voyage of discovery, with a key commitment being that we will jointly work to eliminate the fog that currently surrounds what is needed and what needs to be done. In these situations, demanding precision will be highly destructive if not impossible, and leads to the loss of innovation because it becomes too risky.
The real point is that we must recognise the limitations of the law in these circumstances and also the limitations of the lawyer in making what is essentially a business risk decision, balancing factors such as price versus certainty or innovation versus certainty.
2 Comments
  1. You wrote

    “I think the problem that often arises (and it is essentially an economic problem) is that negotiation takes place in segments, not holistically. In general, a group like purchasing will negotiate on price. This is often done in isolation of other terms and they are, of course, trying to drive to the lowest level, sometimes paying limited attention to capability to perform (except to the extent that they used it to qualify bidders). Groups like legal generally get involved at a later stage – and they are now battling over terms that have real cost implications, but where the supplier has no room for manouevre since the price is already set. So the real issue that we face in these circumstances is the failure of negotiators to make connections and to link the areas of the contract.”

    This is startlingly the reverse of the practices I’m used to. Our belief was “Every interaction from the very beginning with a supplier is negotiation.” Our department was generally dealing with suppliers in more personal and less transactional cultures but the practice was applied domestically in the US too. The idea of someone other than those who had been developing the relationships and understandings getting involved in a “negotiation” at the end would have been rejected as completely unworkable. Negotiation is not a separate step.

    We were fortunate to have a legal department that was in tune with this practice. We had a 31 clause standard contract and the legal department had to approve changes to only two or three of them. Purchasing could change the others and add more at will. And we never let our lawyers talk to their lawyers…Also, any procurement person who focused on price alone would not have lasted very long. Expectations for quality, responsiveness and other key aspects were set out from the very start, often before we would even ask for a price.

    The company was Hewlett-Packard, not exactly a slouch.

    • Dick, thanks for this comment. I know that you personally reflected a wide range of good practices. I am also sure that HP has often pursued a more enlightened approach than many. I think perhaps the growing risks of international business and regulatory intrusion may have undermined the integrated, holistic approach that you recall. But perhaps the best test would be to see how suppliers feel about the fairness and balance of their negotiations; maybe some will add their comments.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: