Running head: Recognizing Contract Risk and Opportunities Memo

Contract Risks and Negotiations with Citizen Schwarz AG (C-S):

Legal Issues and Opportunities for Future Span System Contracts

JoAnne Gattoni

Business Law/531

May 17, 2010

Marlene Wilhite, Esq.

Recognizing Contract Risk and Opportunities Memo 2

Span Systems

Memo
To: Kevin Grant, Director, Harold Smith, Attorney

CC: Span Systems Board of Directors

From: JoAnne Gattoni, Project Manager

Date: May 17, 2010

Subject: Contract risks and negotiations with Citizen Schwarz AG (C-S): legal issues
and opportunities for future Span System contracts.

__________________________________________________________________________

____

Purpose of Memo:

As Span Systems’ lead project manager for the Citizen Schwarxz AG (C-S) software project, I
wanted to provide an overview of the current project, issues, and contract renegotiations taking
place to resolve the disputes on several of the original contract clauses that have been
considered ambiguous. After the start of the project, problems and concerns surfaced from
both companies on issues as they relate to performance, change control, communications and
reporting, and project structure. The purpose of this memo is to review each of these clauses,
describe the legal principles and risks as they relate to issues surrounding the C-S project,
identify measures to avoid risks, and evaluate alternatives that managers can take to avoid
similar risks in the future and optimize opportunities. With more than 28% of software
development project contracts failing because of contractual management, knowledge of
contract controls will reduce risks and enhance long term relationships with C-S and future
companies (Gefeb, Wyss, & Litchenstein, 2008).
Background of Contract with Citizen Schwarz AG (C-S):
Span Systems signed a $6 million express contract with Citizen Schwarxz AG (C-S) to develop
banking software. As project manager of this contract, it was imperative that I ensure that our
performance is exemplary as it centers on the possibility of securing a future e-CRM project
contract with C-S. Eight months into the one-year contract, our company received a letter from
C-S executive Leon Ther demanding immediate transfer of unfinished codes and insisted on
Recognizing Contract Risk and Opportunities Memo 3

rescission of the contract. Span Systems CEO advised that we settle the dispute amicably
before C-S seeks legal action (University of Phoenix, 2002).

C-S Contract Risks, Alternatives, and Opportunities for Future Contracts:

Each legal risk or opportunity is governed by a specific principle. Both Span Systems and C-S
agreed to the follow the original contract provisions of contract promises: substantial
performance, internal escalation procedure for disputes, changes in software requirements,
communication and reporting, and intellectual property rights (University of Phoenix, 2002).
Several alternatives to these principles were examined and considered prior to renegotiation
and amendment of the current contract with C-S to avoid rescission or litigation in court. Rather
than argue contract clauses, Span System has chosen to bring the project back on track.
However, to ensure our managers have knowledge on the contract disputes raised, I have
summarized the legal principle in question of breach.

Breach of “Substantial Performance” principle:

The first breach of contract provision focuses on substantial performance of contract.
C-S stated that Span Systems performance on deliverables over the last couple of
months are behind the 50% completion schedule and the quality has been
unacceptable claiming major defects detected in the user testing stage of the program
and warrants consideration of rescission. Per the performance clause, the contract is
more than 50% complete and therefore does not meet this violation. However, the
quality of product is within their right to make this claim. In reviewing the alternatives
available to dispute this principle, we decided not to argue the point of 60% completion
because C-S deadlines needed to be met for them to remain competitive, to avoid profit
losses, and to maintain trust between our companies. Span Systems offered to hire
and train 10 additional employees at their expense for the project and upload daily
project updates for authorized C-S personnel to view. C-S offered a project manager to
monitor defects and participate in remedies (University of Phoenix, 2002).

Breach of “Requirements Change” principle:

The next breach of contract provision addressed in the renegotiation was Requirements
Change. The contract states that changes to the user system originally agreed on and
handled per procedure outlined in the information Technology Project Methology
Standards would occur during business hours and costs paid to Span by an accrual
rate. In addition, user and system requirements have grown since the study stage of
the system and make it difficult for Span to accommodate agreed upon cost and
timeliness. It was recommended that both companies agreed to have a Change Control
Board comprised of project managers to ensure any changes to the user and system
requirements will be monitored.

Breach of “Communications and Reporting” principle:

C-S agreed to participate in regular status meetings to ensure communication and
reporting of project, with more meetings needed at the initial start of project and reports
sent to both companies on agreed method of transition. Because of changes in project
managers at C-S, reviews of deliverables have not occurred as planned delaying
delivery of Span Systems work. Alternative solutions to reduce risks and elevate
communication and reporting issues can include direct uploading daily reports for
authorized C-S executives to review and a C-S project manager will participate in
meetings.
Recognizing Contract Risk and Opportunities Memo 4

Breach of “Internal Escalation Procedure for Disputes” principle:

C-S violated of the internal escalation procedure for disputes because they failed to
notify Span Systems in writing for resolution of contract disputes or engage in
negotiations prior to pursing a demanding rescission of contract. Their lack of proper
procedure put us at an advantage for re-negotiation of terms and conditions. In a
contractual circumstance, Alternative Dispute Resolution procedures should be used if
the opportunity for negotiations is not reached. C-S agreed they did not follow
escalation procedures and apologized.
Breach of “Intellectual Property Rights” principle:
While working on renegotiating the terms of the contract, the marketing director of C-S
reported that the company is talking with another developer and possibly has shared
the code of a few modules. This would be a violation of Intellectual Properties Rights
Principle which protects Span Systems right to the software developed until C-S
completes total payment agreement. However, our legal team recommended not
pursuing this principle based on a rumor. This is an important factor in determining
areas of negotiation: ensure facts are correct, accurate and substantiated before laying
your negotiation cards on the table.
Summary:
Clarity of purpose is the quality for successful contracts, especially because contracts are by
no means totally free from interpretation (University of Phoenix, 2002). Under UCC code 2-
207, valid contract language should include: the parties involved, subject matter of contract,
price and payment, delivery, and performance times. When one of these performance
elements is faulty, the contract is subject to argument for negligence and breach (Moody
Jennings, 2006 p. 517, 545). To minimize possible risks of disputes, Span Systems managers
should understand how contract misunderstanding and misrepresentation may occur and use
active steps to reduce the factors that contribute to unexpected and unwanted legal
disputes (Azia, 2008). Negligence and/or breach of promises of performance allows for
rescission of the contract which may require renegotiation, arbitrations, punitive damages,
costs in lost productivity, damage of relationship between companies and their reputation. The
old adage that ‘an ounce of prevention is worth a pound of cure” would appropriately apply to
the current dispute and renegotiations in the bilateral contract between Span Systems and
Citizen Schwarxz AG (C-S) in which both parties made promises to perform according to
contract specifics.
Unfortunately, both companies demonstrated performance mistakes on this project. It is true
that quality may have taken a back seat to accommodate the original contract deadlines,
changes, and but poor wording regarding “ordinary” requirement changes in the original
bilateral contract have been anything but ordinary. Nonetheless, our Span System project
team has gone out of its way to meet the schedule. Negotiations over specific contract clauses
have permitted Span Systems to move forward with a revised contract and allow our company
the opportunity for future relationships and projects with C-S (University of Phoenix, 2002).
For questions on current project with C-S or for additional information, feel free to contact me.
JoAnne Gattoni
Project Manager
Span System
Recognizing Contract Risk and Opportunities Memo 5

References

Azia, S. (2008). Liability risk management. Great Neck Publishing, (), 1-10. doi:Business

Source Complete.

Gefeb, D., Wyss, S., & Litchenstein, Y. (2008). Business familiarity as risk mitigation in

software development outsourcing contracts. MIS Quarterly, 32 (3), 531-542. doi:

Academic search complete.

Jennings, M. M. (2006). Business: its legal, ethical, and global environment. Retrieved

from https://ecampus.phoenix.edu.

University of Pheonix. (2009). Contract creation and management [Computer Software].

Simulation, Law 531- Business Lay Course Web Site.