University leadership has a responsibility to support effective contract management

Editor’s Note: welcome to the relaunch of our series, Legally Speaking, with our new contributor, Cheryl Foy, university secretary and general counsel at Ontario Tech University. This series will provide commentary and analysis on legal issues in university administration. See also the related article by Ms. Foy in University Affairs, “All universities should have a general counsel.”

Universities, like other organizations, enter into many contracts. There are leases, insurance policies, benefits policies, partnerships, research agreements, memoranda of understanding, placement agreements, employment agreements, confidentiality agreements, volunteer agreements, procurement agreements, license agreements, service agreements, donor agreements and so many more. There’s a lot of money, resources, liability and risk tied up in contracts. University leadership is responsible to ensure that the contract management process at their organization is effective and responsible. Effective contract management means doing three things well: 1) investigation of the options; 2) negotiation of the contract terms, and; 3) management of the implementation of the contract.

While some do it well, I can quite comfortably say that many organizations, including universities, generally do contract management poorly. Lawyers see and have to manage the outcomes of poor contract management. It’s a significant part of what we do. Why is contract management a challenge? My observation is that there’s an underappreciation of the complexity of the contracting process and of the knowledge and time required to run a good diligence process, negotiate well, and do the follow through required to manage the contract and the relationship between the contracting parties. There are many things that can and do go wrong. Here’s what to watch out for.

Legal advice is a necessity

Universities typically don’t have access to legal resources to provide advice to university clients on all of the agreements into which universities enter. This means that only larger or more risky contracts are reviewed by legal counsel. Contrary to popular belief, it is not possible to understand contracts without legal training. This is true no matter how intelligent the reader and no matter how senior the reader.

There are many aspects of a contract that a lay person can understand but even plain language contracts use language that in many respects is code. Lawyers draft contracts using language that has been used before, considered and interpreted by courts over decades if not longer. There are over 57,000 cases dealing with contracts on the Canadian Legal Information Institute (CanLII) legal database. Contract law is evolving. Unless you have been educated to understand the code in which contracts are written, you cannot read and properly understand a contract.

Because in-house counsel really understand their clients and their organizations, they are best placed to ensure that contracts reflect what their clients need and what their clients can manage and deliver. Unless directly involved from the outset, outside counsel may have to rely more heavily on standard clauses that may not reflect the understanding or arrangements between two parties. It may not be possible to have counsel look at every agreement, but clearly identifying high-risk contracts that must have legal advice is a good start.

Insufficient time is spent on diligence

Diligence is a legal word that essentially means doing your homework. Organizations enter into contracts to address a need or solve a problem. Diligence is about being clear about the problem being solved and being clear about the solution. The tricky part about contracting is that the contract has to reflect the solution being sold. So, when a third party tells a purchaser that its services or goods address all aspects of the solution that the purchaser needs, the contract has to include all of those aspects. When working with in-house clients, much of a lawyer’s time is spent making sure that what was discussed between the parties actually gets reflected in the agreement. If it’s not, there’s no way later to make sure that the purchaser receives what it thought it was buying.

Diligence is also about doing your homework on the person or entity providing the goods or service. Universities have reputational concerns. They have legal obligations. For example, entrusting personal information protected under privacy legislation to a small foreign company with an interesting software application is likely not the right solution no matter how cool the application.

Negotiators should be skilled and committed

Negotiation is a skill and an art and not just anyone can do it. Individuals negotiating on behalf of the university have an obligation to fully engage and to get the right and best deal for the organization. Each party comes to the relationship with different interests and different needs. Negotiation is the process in which parties engage to find a solution. Each party should be satisfied with how their needs and interests are being addressed. If your university is not negotiating, you can be sure the other party is, and you can be sure that you are not getting the best deal you can.

I hear a lot that my clients are told we have to use the other party’s agreement. Negotiators should understand that there is almost no situation in which the other party’s contract is not negotiable (Canadian government funding contracts are an obvious exception). Furthermore, while contracts can be more or less balanced, they are rarely equally fair to both sides because they are written from the perspective of one party. The negotiator’s job is to secure a balanced or favourable agreement. Among other things, good negotiators are strategic: they understand people, legal issues, their own organizations, the motivations of the other party, and are not afraid or embarrassed to have discussions to get their client what their client needs.  Universities need good negotiators and it shouldn’t be assumed that every manager or director or even vice-president has good negotiating skills or knowledge.

At the negotiating table, negotiators should be thinking about diligence and implementation, and the contract should address issues that came up in diligence as well as issues that will come up in implementation. This involves a lot of communication during the negotiation process with the people on the ground who identified the problem and the solution and those who will be implementing the contract.

The forgotten necessity: managing implementation

More than 90 percent of the time after the contract is signed it goes into a file and isn’t looked at again until things go wrong. The contract is an essential tool to manage implementation. It tells us what was promised and what is owed. It tells us what we can expect from the other party. To properly manage implementation, those responsible for various aspects of the contract, from finance to the users of the good or service, need a primer on the agreement right after it’s signed – what’s in it and what their role is in implementing it.

To effectively manage the contract, dates need to be recorded. When does the contract terminate? When does it renew? How far in advance does notice have to be given? How long are the confidentiality periods and who is responsible for managing them? Confidentiality periods often run past the end date of a contract and there are obligations to destroy information. Who is tracking and doing that? Contract implementation should address these and many more obligations.

Take the first step

So often in the university environment, contract management is not seen as a discipline unto itself and as such is not resourced. Instead, university employees ill-equipped to do so perform the key tasks of diligence, negotiating and implementing with varying degrees of success and typically “off the sides of their desk” as an add-on to their daily duties. Understanding the complexity of effective contract management and accepting that it is important to do it well is the first step. The second is to assign skilled resources to develop appropriate policy, procedures and to train employees. When contracts go wrong, as they often do, it’s important not to treat those events as one-offs. Instead, it’s important to debrief why things went wrong and how that knowledge can improve the university’s contract management process. There’s a lot of opportunity to do better. Take the first step.