Contracts, Negotiations and Management of Contracts

Introduction

Contracts are entered into to pursue a business objective, for instance to establish a business relation, to enter new markets, to gain competence or experiences, or profit on short or long term.

Larger companies usually have a contract management department (or similar), which is responsible for each negotiation, management of single contract, and the whole portfolio of contracts. The responsibility for negotiations and the follow-up of single contracts, are usually given to a team, consisting of lawyers, economists and often also engineers.

It is important that all members of the team have insight in both the commercial and the legal aspects of drafts and signed contracts. They all should be able to assess the contract (or drafts) as a whole, and they should have a basic understanding of both legal and commercial concepts, to have a precise communication and functioning co-operation. In legal contracting there is a recognized need for economists with an advanced knowledge of contract law.

The course is interdisciplinary and focuses on the legal and economic insight that are of importance when contracts between businesses (B2B) are negotiated, concluded and followed-up. Which knowledge, skills and general competence do the candidates need, to contribute to functioning contracts in accordance with the business objective?

Course content

The course will be divided into two parts. An economic part and a legal part. 

The economic part starts with the realization that a crucial part of contract negotiations concerns the identification of the underlying values and tradeoffs in the situation. The students are exposed to a framework allowing them to make such an identification. This framework has a firm grounding in microeconomics, but also draws on principles of organizing negotiations as well as insights from behavioral economics. 

Having identified the values at stake in the situation the negotiating parties can eliminate inefficient contracts. Negotiating parties have a common interest in achieving this.

The question now becomes which of (potentially) many efficient sets of contract terms the parties should / will chose as the final agreement. In addressing this question it is drawn on insights from game theory and behavioral economics.  Various normative and positive solutions to the bargaining problem are discussed.

Contract fulfillment and contract breach are discussed at length, and techniques aimed at securing self-fulfilling contracts as part of the negotiation are identified. This part of the course draws on economic contract theory.

The students learn to quantify underlying values and tradeoffs, and to implement various solutions to the bargaining problem through a toolbox of spreadsheets.

Along the way various game theoretic concepts are tried out by the students through participation in a set of economics experiments, partly in the BI research lab and partly through an internet platform (VeconLab). The aim is to make students aware of the circumstances under which deviations from the equilibria concepts of standard economic models of bargaining and contracting can be expected.

The legal part of the course, focuses on contract law and contract praxis. An advanced understanding of general contract law (obligasjonsrett), including interpretation of contracts (or drafts), how terms are implied by law or fact, and insight into contract models, clauses and concepts, is necessary to understand and assess the (typical) legal terms, and therefore also the contract as a whole. Some contracts are often particularly important from a strategic point of view, such as purchase and sale of businesses, contracts related to (national and international) co-operation between companies (Joint Ventures etc.), and contracts related to the distribution network (for instance franchising) and the supply chain. The student will obtain insight into such contracts, inter alia by working with cases. The course will also include specific issues related to shareholder’s agreements and contracts between related companies (including companies in international company structures).     

In practice, contracts are drafted in many different ways. However, standard contracts are increasingly more widely used. Examples are: construction contracts, fabrication contracts, shipping contracts and it-contracts etc. The widely used standard contract form for construction work, NS 8405, will be used to illustrate some of the commonly used contract models, clauses and concepts. In addition, insight into the standard contract for construction work is in itself valuable, due to the size and importance of this industry.  

It is not possible to integrated the economic and legal aspects (or it will at least demand a lot of research). The course will focus on the interaction between the different aspects, and this will be done through discussion of cases. A possible case might be (simplified):

It is late during the negotiations and the company estimates that it is 80 % probability that they will be able to change one more clause, 50 % probability that they will be able to change two clauses, and 20 % probability that they will be able to change three clauses. Which clause should they give priority as first, second and third? To decide, it is necessary to assess the legal effects of the three clauses, the economic risk etc. 

The candidates will also gain insight into the differences between typical national and international contracts.

The objective of this course fits well with both Specialization 1 and 2, cf. the study overview (studieplanen). Share transactions and financing of business are all based on negotiations and contracts (Specialization 1). Specialization 2 is about leadership and labor law, which will provide a basis for the candidate to take leadership responsibility for the negotiation, or contract management, team (prosjektleder), or the contract management department.   

The course contains the following topics:

• contract law, including (in short terms):
  • The content of contractual obligations
  • Performance of contractual obligations
  • Breach of contract and remedies
  • Revision of contract
  • Mora creditoris (kreditormora)
  • Monetary claims (pengekrav)
• NS 8405 - The standard contract for construction work
• Theories regarding negotiation skills and strategy
• Identification of underlying values and trade-offs in negotiations.
• Organizing negotiations in order to achieve such identification.
• Quantification of underlying values and trade-offs in negotiations.
• Identification of various normative and positive solution concepts to the bargaining problem.
• Quantification of various normative and positive solution concepts to the bargaining problem.
• Techniques suitable for securing honest fulfillment of contractual obligations.
• Behavioral insights regarding standard economic models of bargaining and contracting.