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Contract Creation and Management
Span Systems is one of the leading and most prestigious banking software companies located in California. Span Systems develops custom e-banking software. The company is valued at $85 million. Kevin Grant is the Director with Harold Smith being the Transaction Attorney. Span Systems was approached by Citizen-Schwarz AG (C-S) to develop a Java-based transaction processing software program. C-S is a German bank located in Stuttgart and has revenues in excess of $20 billion. Leon Ther is the Outsourcing Director for C-S. Span Systems and C-S signed a one year contract in which Span Systems is to develop a Java-based transaction processing software program for $6 million. C-S has stated to Span Systems that there is a bigger e-CRM order hinging on the performance of the Java-based transaction processing software and Span Systems is hopeful to receive this larger project in the future.
Eight months into the Java-based transaction software project, Leon Ther becomes furious with Span Systems' deliverables being behind schedule along with the quality of the deliverables being unacceptable. Leon Ther asked Kevin Grant to transfer all unfinished code to C-S to find another company to complete the job. Leon Ther also asserted a rescission of the signed contract. Span Systems has heard rumors that Leon Ther has approached another software company to complete the work Span Systems was under contract to finish.
At this point, both companies are livid and seek changes to the contract. Leon Ther wants to rescind the contract and find another company to complete the task or start fresh with the code Span Systems has completed thus far. Span Systems wants to work with C-S to compromise in order for both parties to continue to work together.
There were five original contract provisions signed by both parties. The five provisions were: Intellectual Property Rights, Requirements Change, and Performance, Internal Escalation procedure for disputes and Communications and Reporting. When the objectives were not being met, both parties realized the five original contract provisions were not sufficient to cover all unforeseen requirements.
Basic Concepts of Contract Law
Basic concepts of contract law are merely a promise between two or more parties. The promise made is an enforceable agreement, which will allow or should allow each party to meet his or her needs (Reed et al., 2004). According to Reed, Shedd, Morehead and Corley (2004) who state that the enforcement of contracts is crucial in a property-oriented system of operation. 'A contract need not be formal, written document, and those who make a contract do not have to use the word contract or recognize that they made a legally enforceable promise.' Nonetheless for a contract to be valid there must be basic elements included such as an offer, acceptance, consideration, capacity of parties to contract and lawful purpose (Reed et al., 2004).
To begin with, the most important issue to understand about contract law is how a valid contract is created. Many contract agreements are void because of the lack of essential elements. Therefore, a valid contract has to have five fundamental elements which include an offer, acceptance, consideration, capacity of parties and a legal purpose. In terms of an offer, at least one party must make a promise that is attached to a specific demand. Furthermore, to make a contract valid there must be an acceptance of the offer by the parties being made the offer (Reed et al., 2004). 'The language of the offer determines whether acceptance should be a promise resulting in a bilateral contract or an act resulting in a unilateral contract' (Reed et al. 2004). Moreover, a binding contract will be based on a matching offer, therefore, if the acceptance of the offer changes the terms, than this is considered a counter offer. In addition, to form a binding contract there must be an incentive on the part of the person making the promise or the contract not binding (Reed et al. 2004). Contracts will be legally binding unless each party has the capacity to be bound by the contract promises. Finally, the purpose of a valid contract must be legal and not violate accepted standards of behavior (Reed et al. 2004). Therefore, before entering into an agreement or promise to do or not do something, one should have a thorough understanding of how a contract is formed.
In the simulation between C-S and Span Systems, the companies had a valid contract. In terms of contract C-S offered Span Systems a contract to deliver the $6 million transaction software to market within one year. Span Systems accepted the legal offer with a promise to deliver the software on time. As for consideration, Span Systems sought to gain a larger contract with C-S, for the e-CRM order. However, in the course of the project, there was a breach of contract between parties and therefore the contract required clarification and restructuring.
Citizen-Schwarz AG's perspective
C-S has definitive ideas on the five required elements of the contract with Span Systems. The five elements necessary for C-S to continue with the contract are: C-S should be entitled to receive all work products in progress or completed as of date of termination or cancellation upon all payments due Span Systems, a Change Control Board comprised of the project manager and lead software engineer for Span Systems and C-S will monitor any changes to the user and systems requirements, a project manager from C-S will be stationed in Span Systems offices to participate in project meetings and to meet all software delivery schedules, Span Systems will hire 10 additional programmers.
As for change requirements, the contract provisions states, 'In the event C-S requires ordinary changes to the user and system requirements, C-S will notify Span Systems as soon as possible and pay accruals' (University of Phoenix, 2008). This provision is vague; it does not state a definite time frame required to notify Span Systems of the required changes and does not state the accrual rate. Because of this, there has been an obstacle in meeting agreed upon time lines. The contract currently states that there will be regularly scheduled status meetings between Span Systems and C-S. However, due to C-S undergoing a project management restructure, reviews of the deliverables have not happened according to schedule.
C-S needs are not being met which raised several concerns relating to the quality of the product, the testing of the product, timely delivery and communication. Furthermore, C-S perceived these concerns to be risks. For instance, the products were not being tested in a timely manner, products were found to be defective, and software objectives were not meeting the timeline of one year, along with the lack of communication between parties, thus created disagreements. Therefore, C-S seeks to mitigate their risks by modifying the original contract provisions.
Span System's perspective
Span Systems perspective of the contract is not aligned with C-S's perspective. Span Systems' contract provisions are: C-S will be entitled to receive all work products in progress or completed as of date of termination or cancellation, payment for the work is to due Span Systems, the Change Control Board will decide the changes to be accepted or rejected as long as it is greater than 200 function points, the cost of stationing a project manager from C-S in Span Systems' offices will be an added cost but will eliminate delays and expedite the flow of communication and Span Systems will hire additional programmers with Span Systems paying for the cost of training the new team members.
From Span Systems' perspective, C-S did not submit and sign off according to the contract provision. Furthermore, the company believes that C-S has not been sensitive to Span Systems' challenges that have caused a schedule slip, defects and has increased the size of the project. Span Systems risk losing the contract and jeopardizing the relationship if C-S ignores Span Systems' concerns. Span Systems' intention is to fulfill the contract and place the company in contention for the e-CRM contract. Span Systems believes that C-S has violated the contract by not providing ample time to modify program changes and wants to renegotiate the terms of contract.
Remedies to resolve dispute
Business relationships can be irreparably damaged through litigation. In order to avoid permanent harm to ongoing relations, a number of alternatives to litigation have been created. There are six different types of alternative dispute resolutions available prior to going to trial. The six types are: negotiated settlement, mediation, mini trial, mock trial and arbitration (Reed et al., 2004).
Mediation settlements are the least expensive when it comes to settling disputes between parties. This remedy is an unbiased approach that allows a third party to assist in resolving conflicting differences between each company. Equally important, negotiation is a less expensive alternative to resolve differences between the parties without litigation. One may say that negotiation is a bargaining tool to assist parties state his or her respective position (Reed et al., 2004). Although Span Systems and C-S did not use mediation as a remedy, they did use negotiation to resolve their differences and avoid the act of rescission.
The contract between Span Systems and C-S has been renegotiated to include the following provisions and changes. The renegotiated contract provisions are listed in Table B. The provisions in regards to Performance will include: weekly analysis on updating project date, weekly proven tested code performances, clearance of first 200 function points and weekly deliverables on new timelines. Other changes to the contract in regards to Change Control Board /Panel (CCB) will be: CCB will be comprised of C-S and Span Systems; weekly reports to project manager for any revisions that may arise in changes to size of the project, the quality control team will accept or reject changes and revise timelines. The changes to the contract provisions for Communication and Reporting will be: project manager from C-S to control all performances, reports delivered to all associates involved in project on a weekly basis. Changes to the contract provisions for Project Restructure are: weekly meetings with new quality control, project and programmer teams, signature on both parties of agreement for the new revised timelines and implement the new timelines within one week. The changes to the Dispute Resolution are: Span Systems and C-S contract will be null and void if restructured and new code, revisions of timelines are not kept updated, weekly processes are not reviewed by CCB, and all analysis not completed per revised contracted guidelines, there will be written agreements on understanding new revised contract from both parties and final payment of contract will be disbursed after turn key project is finalized.
As Justice Oliver Wendell Holmes wrote, 'The law is the witness and external deposit of our moral life. Its history is the history of the moral development of the race' (Reed et al., 2004). As Span Systems and C-S review each company's provisions, they can better understand the provisions each company was seeking to accomplish. When taking into consideration all the stakeholders, the consequentialist ethics known as stakeholder theory maintains that ethical corporate behavior depends on managers who recognize and take into account the various stakeholders whose interest the corporation impacts (Reed et al., 2004). Both Span Systems and C-S can look at the existing contract provisions and make compromises to better serve the interest of both parties. By modifying and re-negotiating the contract, Span Systems and C-S can continue to work together to accomplish the goals of both companies.
Reed, O., Shedd, P., Morehead, J. & Corley, R. (2005). The Legal and Regulatory
Environment of Business. [University of Phoenix e-text].
New York: the McGraw-Hill Companies. Retrieved January 4, 2008
from University of Phoenix, rEsource, MBA/560 ' Enterprise Risk.
University of Phoenix. (2008) Contract Creation and Management Simulation. Retrieved
January 4, 2008, from University of Phoenix, Week Two, rEsource. MBA-560-
My rEsource Student Website
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"Contract Creation And Management." 123HelpMe.com. 11 Dec 2013