Contracts Management why contract terms and conditions are so important By Brig Henry, PEng, CCMP, MBA For Writek Technologies January 31, 2013

Contracts Management A recent survey on the value of contracts management revealed some shocking results: Weaknesses in contract management cost the average company 9.2% of annual revenue. Ref: International Association for Commercial & Contract Management (IACCM) survey Feb 2012

Contracts Management Introduction Contracts Management Terms and Conditions Case Studies Hotel Georgia vs. Condo Purchasers SNC-Lavalin Inc. Concluding Remarks

Contracts Management What is Contracts Management? The process of systematically and efficiently managing contract creation, execution and analysis for the purpose of maximizing financial and operational performance and minimizing risk. Ref: Wikipedia

Contracts Management Managing terms and conditions

Contracts Management - Terms and Conditions 1.Active, passive, and active and passive 2.Active clauses: -Require resources, process, managed eg. Payment terms, delivery, warranty 3.Passive clauses: -Invoked as a consequence of an action or inaction eg. Indemnity, force majeure 4.Active and passive clauses: eg. ethics

Contracts Management - Top 10 Terms and Conditions 1.Limit of Liability 2.Indemnification 3.Price/Charge/Price Changes 4.Scope and Goals 5.Liquidated Damages 6.Payment 7.Data Protection/Security 8.Intellection Property 9.Service Levels and Warranties 10.Warranty Ref: 2012 Top Terms in Negotiation, International Association for Commercial & Contract Management

Contracts Management - Case Study Take Aways 1.Impact of badly managed terms. Both sides lose. 1.Lessons learned - so we do not fall victim of badly managing these terms.

Case #1: Hotel Georgia vs. Condo Buyers Georgia Properties Partnership (GPP) was contracted to build condos adjacent to Hotel Georgia at the corner of West Georgia and Howe Streets

Case #1: Hotel Georgia vs. Condo Buyers Hotel Georgia condo buyer launches class action – Business in Vancouver, May 24, 2012

Case #1: Hotel Georgia vs. Condo Buyers Mismanagement of an active clause will likely cost the developer millions of dollars. What went wrong?

Case #1: Hotel Georgia vs. Condo Buyers The case: -Georgia Properties Partnership (GPP) has contracts to deliver finished condos - GPP decided that they needed another year - As per Real Estate Marketing Development Act (REDMA), developer must provide disclosure statement -Alleged that GPP did not amend the disclosure statement when condo delivery date was changed

Case #1: Hotel Georgia vs. Condo Buyers If Georgia Properties Partnership loses, the plaintiffs could walk away from their purchasing contracts

Case #1: Hotel Georgia vs. Condo Buyers - Buyer Costs 1.Time -spent in the process Note: The opportunity cost due to late delivery is a motivator/trigger. 2. Legal costs - at least in the short-term

Case #1: Hotel Georgia vs. Condo Buyers - Developer Costs 1.Lost reputation -costs: loss in business?

Case #1: Hotel Georgia vs. Condo Buyers - Developer Costs 2.Loss in Profit - Assumptions: i.Ten suing purchasers win and all opt to get deposits back ii.Average condo price: $2M iii.Market prices drop by 10%

Case #1: Hotel Georgia vs. Condo Buyers - Developer Costs 2.Loss in Profit - Results: ItemValue Lost sales$20M New sales$18M Loss (or cost) to developer$2M

Case #1: Hotel Georgia vs. Condo Buyers - Developer Costs 3. Legal Costs - Not insignificant

Case #1: Hotel Georgia vs. Condo Buyers - Summary of Costs PartyCosts Buyer (each)Time and legal costs (at least short-term) Seller (GPP)$2M plus legal costs

Case #1: Hotel Georgia vs. Condo Buyers - Lessons Learned 1.Be aware of local laws 1.Do your paperwork. Mismanaging a simple active clause cost dearly 1.Do not assume that the other party is not sophisticated 1.Get advice from lawyer and/or contract management professional

Case #2: SNC-Lavalin Inc. Major world player in design and build of infrastructure project Fiscal year 2011 stats: Revenue $7.2B Net income: $379M

Case #2: SNC-Lavalin Inc. RCMP and Swiss widen SNC payments probe – CBC News, November 29, 2012

Case #2: SNC-Lavalin Inc. Mismanagement of a clause that has both active and passive elements has cost billions. What went wrong?

Case #2: SNC-Lavalin Inc. - Timeline Summer/Fall 2011: Muammar Gaddafis regime fell in Libya November 2011: Cynthia Vanier, arrested in Mexico for allegedly trying to smuggle Saadi Gaddafi out of Libya February 28, 2012: SNC-Lavalin announces internal probe into inaccurate payments March 26, 2012: SNC-Lavalin CEO Pierre Duhaime resigned amid issues swirling about a prison construction for Gaddafi

Case #2: SNC-Lavalin Inc. - Timeline (continued) September 18, 2012: Police probe McGill hospital November 28, 2012: M. Pierre Duhaime arrested in Montreal, charged with fraud stemming from mega hospital McGill University Health Centre construction November 28, 2012: SNC-Lavalin issues press release: every employee is obliged to sign and follow the Code of Ethics and Business Conduct December 13, 2012: SNC-Lavalin suspends payments to former CEO Pierre Duhaime January 25, 2013: CBC News: SNC Lavalin paid $160M in Libyan bribes, RCMP allege

Case #2: SNC-Lavalin Inc. - SNC Press Releases Feb 28, 2012: internal probe regarding inaccurate payments November 28, 2012: all staff must abide by high ethical standards December 13 th 2012: stopping of payments to Pierre Duhaime January 25 th, 2013: intention to cooperate with police, and commit to ethical behavior

Case #2: SNC-Lavalin Inc. Corporation said: All staff must abide by high ethical standards. The standards are passive. The employees behavior is active. Company may have had its policies in place, but the controls to implement these standards were not.

Case #2: SNC-Lavalin Inc. - Employee Costs 1.Lost jobs. Four so far 2.Jail I.Cynthia Vanier is in jail II.Pierre Duhaime is not far behind

Case #2: SNC-Lavalin Inc. - Company Costs 1.Lost reputation A no brainer Or is it? This week, an SNC-Lavalin lead group was awarded the contract to build the Evergreen Line

Case #2: SNC-Lavalin Inc. - Company Costs 2.Legal costs. May 2012, Sun News Article: SNC investors filed $1.5-billion class action suit, alleging Duhaime authorized $56 million of improper payments to foreign agents January 10, 2013, The Financial Post: Article headline: SNC-Lavalin will face criminal charges, analyst says, but buy it anyway

Case #2: SNC-Lavalin Inc. - Company Costs ItemEstimated Costs Class action law suits (there are two) $100M to $260M Corruption of Foreign Public Officials Act (1998) $100M Total$360M Share price drop is behind the class action law suits

Case #2: SNC-Lavalin Inc. - Lost Market Capitalization $ Date $45.13 Jan 24/13 Feb 28/12 SNC announces probe. Share price drops 20% from $48.37 to $38.43 $62.07, Jan 24/11 Share Price: - Jan 2011 to Jan 2013 $35 Sep 4/12, recent low

Case #2: SNC-Lavalin Inc. - Lost Market Capitalization DateShare PriceComment Jan 24, 2011$62.07Public not aware of the events Feb 28, 2012$38.43SNC announces an internal investigation into inaccurate payments Sep 4, 2012$35.00A few days before police raid the McGill University Health Centre Jan 24, 2013$45.13Share price rising as SNC announces projects eg. a significant project for Goldcorp Inc. in northeastern Quebec

Case #2: SNC-Lavalin Inc. - Lost Market Capitalization Shares issued: 151,000,000 Market capitalization drop of: $2.6B or 27% off as of January 24, 2013 No wonder shareholders are suing!

Case #2: SNC-Lavalin Inc. Summary Nobody unscathed: Employee livelihoods were lost Company faces an estimated $360M in legal costs Collateral damage: Fortunes destroyed - $2.6B market cap loss How badly did SNC-Lavalin Inc. really want to build that prison in Libya?

Case #2: SNC-Lavalin Inc. - Lessons Learned 1.Ensure company culture and governance are aligned with that of the other party. 2.Implement controls to ensure that your staff follow your policies. 1.Do not accept gifts or make bribes.

Contracts Management - Conclusions Summary of Costs: CaseCompany cost Buyer / Employee cost Other Georgia Hotel vs. Condo Buyers $2M and legal time and legal SNC-Lavalin Inc. $360M loss jobs and jail$2.6B off market cap

Contracts Management - Conclusions Terms and conditions: 1.Understand all clauses. 2.Meet their demands. 3.Make sure the other side does too. 4.Get advice from a lawyer or a contract management professional.

Thank you. Brig Henry