Developing Contract for BAE Systems

Executive Summary

Effective procurement and contract management is a highly important practice for BAE Systems in Saudi Arabia. Properly devising terms and conditions, the organization can improve probity, performance, and outcomes, saving costs at the same time. There has occurred an evident shift from the perception of contracts as pieces of paper to understanding that these are living documents that are capable of changing business processes and delivering higher value for the same money. Thus, the paper at hand analyses how the terms and conditions must be structured to ensure the best outcomes for the firm. The analysis revealed that there are numerous risks that have to be taken into consideration when concluding a contract (quality, extension time, unethical practices, increased costs, the battle of the forms) when developing a set of terms. The key recommendations how the company could improve its present performance include:

• to review current organization processes and set achievable goals as per the contract management;
• to use templates to avoid ambiguity;
• to automate;
• to resort to a contract management consultant’s services;
• to build a plan of how monitoring is going to be performed.

Terms and Conditions

As far as quality is concerned, my organizational terms and conditions ensure that the risks of low standards or customer dissatisfaction are brought down to a possible minimum. First and foremost, according to the terms of the contract provided by BAE, the Supplier provides all the required quality standards and obtains their approval on behalf of the Purchaser. In case the Purchaser or individuals authorized by him/her have doubts about the level of quality, it is allowed to visit and access the Supplier’s premises to make sure that all the proper works that are related to the Purchaser are carried out following the due protocol. Furthermore, the facilities, procedures, and processes involved in production can be inspected and audited. The Purchaser can receive all the relevant data on the quality and work progress at any time he/she finds necessary. Full exercisability of these rights is supported by free access to office accommodation, telephone, and fax that allow procuring all possible assistance. Therefore, the risk of poor quality is reduced as it could for the Purchaser.

As far as extension time is concerned, BAE mitigates this risk by specifying the delivery date in the Order unless any other date is indicated by the Purchaser or his/her official representative. This delivery term must be duty paid unless other conditions are stated in the Order. Furthermore, the Supplier is totally responsible for all risks associated with unloading at the delivery place, which implies that any delays or time extensions must be compensated. All the ordered products are to be packed in such a way as to ensure their timely delivery and preservation of their perfect condition up to the place of their destination. If the Order is not delivered in time or in the condition promised to the Purchaser, he/she does not have to accept delivery of the goods. However, time extensions can be arranged in personal negotiations with the customer. In the case of force majeure situations, the delay of performing obligations is possible if the Supplier provides sufficient evidence for its occurrence and notice of the cessation of any of such events. It is also possible for the Purchaser to terminate the order in this case.

Another big risk that has to be addressed is the risk of increased costs due to various reasons. The Purchaser is guaranteed that any additional expenses and costs are covered by the Supplier if the order is delayed or terminated or if there are any unexpected conditions.

Finally, unethical practices are excluded by the Contract of BAE since the Supplier is obliged to comply with all requirements of all relevant laws including anti-corruption ones. Moreover, the Purchaser is to be notified about any Claim concerning ethics. Ethical standards are made a part of the corporate culture. They ensure compliance with all the existing regulations related to anti-bribery (including the U.S. Foreign Corrupt Practices Act of 2017 and the Bribery Act of 2010) (Crandall & Whaley, 2016).

Battle of the Forms

The majority of business processes run via purchase orders without signing any documents (contracts) since companies want to avoid a halt every time they must buy something. This halt is accounted for by the fact that lawyers responsible for contracts need quite a lot of time to negotiate the legal terms. However, in any case, there should exist some rules or agreements that regulate the relationships between the parties involved (Azhar, 2017). They typically depend on some specific facts and transactions connected with this or that agreement. If the parties manage to reach a compromise on the issues of interest, it becomes much easier for them to conclude a contract (Blum & Bushaw, 2017).

In most cases, the customer places an order that contains unreasonable, one-sided conditions that are profitable only for the party proposing them. In its turn, the other party replies by sending equally unreasonable terms in the form of a pre-printed contract (Barton, Berger-Walliser, & Haapio, 2013). As a result, form documents that the two sides exchange are drastically different and no contract can be signed. This implies that no actual agreement is reached as for the terms of the further cooperation (Cordero-Moss, 2014).

The problem is that the formation of any contract requires an offer (stating the conditions) and its acceptance on behalf of the party that receives it. When a company or an individual makes an offer to another company or individual, the latter side has the power to create a contract (Schwenzer, 2016). Once the conditions are negotiated and accepted, the relationships between the sides change since they are not obliged to do what they have agreed to according to the conditions outlined in the contract (Van Weele, 2014).

At this point, it is highly important to remember the so-called “mirror image rule”. It states that the acceptance of the contract has to match exactly the offer made. In case there are some other terms of acceptance advance by the other party, they are already regarded as a counteroffer, which is nothing else than the rejection of the original one (Schwenzer, 2016). The problem is that in the case of the battle of the forms, neither of the two proposals is fully accepted (Vyas, 2016). For instance, if the purchaser places an order and pays for it before shipment, he/she expects the order will be performed according to his/her conditions.

Under the common law, no contract is possible unless the acceptance matches the offer to the letter. If the purchaser has already paid for the order, it implies that the seller’s terms will control the transaction since they were the last document sent before the shipment was paid for (Schuhmann & Eichhorn, 2015). This is referred to as the last shot rule, which means that performance governs the contract when the last document is sent by the buyer (Vyas, 2016). Yet, this scenario is also problematic owing to the fact that despite its seeming reliability and reasonable character, it is not a contract. It may be non-beneficial not only for the seller but even for the customer (for instance, in case the counter offer contained more attractive conditions) (Date, 2016).

The attempt to solve this problem was made by the Uniform Commercial Code (section 2-207), which was aimed to eliminate the existing unfairness. First and foremost, the document ensures that there appears a contract if a document exchange has already been performed thereby overruling the last shot and the mirror rules (Mutua, Waiganjo, & Oteyo, 2014). Under this section, the point that the two parties can propose drastically different conditions does not hinder the actual formation of the contract since the second writing should be regarded as a form of acceptance (Mensah, 2015). However, it cannot solve the problem that neither document can be perceived as a controlling one, which means that the terms of the contract remain rather vague.

It is also necessary to differentiate between additional terms (in case the second document contains rather sight variations that do not make it drastically different from the initial ones) and different terms (when there are considerable differences found between the two). They are acceptable unless the first document limits their acceptance by stating that all the mentioned services can be rendered “in my terms only” (Kerzner, 2017).

In order to illustrate the legal aspect of the battle of terms, it is necessary to analyze some case laws related to the issue. This will make it clear how the situation is typically resolved in practice (as it is evident from the theoretical foundation that a number of decisions can be called legal even being quite contradictory). The major questions that should be answered are: 1) when it can be stated that there is a contract between the sides; 2) if there is, what terms it has (Kravari, Bassiliades, & Governatori, 2016).

Real cases prove that the majority of courts tend to admit that if one party rendered a service to the other, there is indeed a contract between them (even if there is also a batter of the forms or the service was defective. For instance, Butler Machine Tool v. Ex-Cell-O Corpn (1979) is one of the most famous cases, in which a machine was purchased on the terms provided by the supplier, who included a price variation clause (Monczka, Handfield, Giunipero, & Patterson, 2015). This implied that he/she could increase the price in case the production of the ordered machine turned out to be more costly than expected. In their turn, the customers attached their own conditions, which did not include any price variation as a possibility. As a result, the suppliers demanded a higher price after sending a tear-off slip to the buyer and delivering the machine since the clause had not been removed from the contract. The court acknowledged that there was a contract between the parties but it was unclear on whose terms it had been concluded (Kerzner, 2013). There are two approaches that can be used to analyze the case law.

According to the traditional approach (favored by the court), it is required to see if there appeared a situation, in which one of the parties made it clear to the other that the first party agreed to continue doing business on the proposed terms. In the case at hand, this situation emerged when the suppliers send a tear-off slip, which meant that they agreed to exclude the price variation clause from their document. If the differences cannot be reconciled owing to their drastic contradictions, the points of conflict must be removed and replaced by a new, more acceptable variant (Dekker, Sakaguchi, & Kawai, 2013).

Unfortunately, there are no universal guidelines that would allow ensuring that the agreement is carried out under your own conditions since (as it is obvious from the analysis), each case can be approached and solved differently, in favor of different parties. However, BAE System implements the following steps to ensure that this situation is avoided or successfully carried out:

• The organization leaders are mindful of the fact that the conditions that are included in the invoice rarely apply to the contract and should not be relied upon. They rely exclusively on the terms and conditions provided in the contract.
• The organization makes sure that the proposals are formulated in a comprehensible language and are not contradictory (as is evident from the text of the contract).
• BAE implements the system of order confirmation to make it clear that the customer agreed to the offered terms.
• When the company has to take part in the battle of the forms, it uses the rule of the last shot.

Relevant Performance Measures

It is essential for a firm to ensure that the relevant performance measures are monitored and measured properly. The most effective techniques include (Kerzner, 2017):

• Setting key performance indicators. The organization must be able to identify which points are integral to the success of its procurement practices and what the effective performance of the supplier must look like. Key performance indicators make it possible to assess the actions of the supplier during the contract life. They must be included in the text of the contract to be referred to when necessary.
• Arranging regular meetings of procurers and suppliers. Such meetings are necessary for the development of long-term contracts to make it clear to all stakeholders what should be expected from the other parties. The frequency and character of these gatherings may vary. They can be: 1) progress review meetings (regular gatherings of the two teams necessary for the discussion of the current trends); 2) technical meetings (held when required between technical experts to discuss what technical problems may negatively affect the performance); 3) long-term audits (intended to determine to what extent the goals indicated in the contract are achieved).
• Organizing contract-specific audits. During the implementation of the contract, there may appear certain risks that should be addressed during such audits. This is an essential part of the quality assurance system.
• Performing spot checks. These inspections can be both announced and unannounced (the latter act as a more powerful tool of monitoring). They make it possible to confirm that the supplier acts according to the terms indicated in the contract even when the implementation of it is not closely monitored. However, it is dangerous to overuse this method since it can damage the relationships between the stakeholders.
• Issuing contract reports. It is possible to require the contractor to provide performance reports in written form to ensure that any violations of the conditions are detected in due time.
• Providing non-conformance reports. It is often the case that non-conformance is not addressed in a due manner since plans are not adjusted to minimize the exposure. Non-conformance reports can make it possible to avoid such risks.

Recommendations

The following recommendations can be provided to improve contract management in BAE:

• To review the existing practices and processes and to set achievable goals. If improvements are required, it implies that something is not operating properly. To eliminate flaws, it is needed to review contracts and identify what flaws have to be removed and how to do it. However, it is important that the new goals should be achievable and easily measurable. If they are too high or too numerous, it is unlikely that the contract system will be reinvented.
• To use templates in order to avoid ambiguity in wording. In contracts, it is highly important to use standardized language; otherwise, it is possible that the other party will interpret vague wording differently. The use of clear phrases will mitigate the risk of misunderstanding of obligations and make it unnecessary to clarity each term. Moreover, it is important to ensure that the language of the contract is neutral and simplified (as the one used in templates). This will facilitate the process of reading for non-English speakers.
• To automate management processes. For BAE, it is becoming increasingly complex to keep track of all the agreements, schedules, and other legal papers as the organization is developing quite rapidly. To avoid becoming messy and disorganized, it needs automation and a centralized hub to manage all its activities, cycles, and supplies.
• To resort to a contract management consultant’s services. A consultant is required to provide proper assessment, recommendations, and implementation guidance that will allow streamlining the process of contract management, eliminate threats, and improve performance.
• To develop a plan to be able to monitor the processes on a regular basis. What is relevant for contract management of the present day may quickly become outdated. That is why all the activities must be reviewed regularly as per their actuality.

Conclusion

BAE Systems in Saudi Arabia is a successful organization that currently demonstrates effective contract management practices. However, if the organization introduces certain innovations, it can improve probity, performance, and outcomes, saving costs and mitigating the risks at the same time.

References

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