Home' micenet eMag : micenet AUSTRALIA February March 2015 Contents LEGAL ISSUES | MATT CROUCH
pecifications for goods are,
relatively speaking, straight-
forward, because they are more
tangible (see the last article).
When it comes to services, however, things
can get more complicated...
Buyers of services do not wish to pay
good money to a service provider that just
makes a lot of noise and heat - buyers want
Suppliers, on the other hand, should be
reluctant to promise outcomes, especially
when it is considered that many, if not most,
outcomes involve factors that are beyond the
control of the supplier, more or less.
As a supplier, promising outcomes in our
contracts is fraught with difficulty. First there
is the difficulty of defining the outcome
promised: “We guarantee the event will be a
success” is a clause I have seen – what does
this mean and how is it measured? Worse:
“We guarantee that the conference will
generate a surplus.” Or worse still: “We
guarantee that the conference will generate a
surplus of at least $X.” The PCO is promising
a financial outcome that is largely beyond the
PCO’s control. There are so many factors
that could intervene – perhaps anticipated
sponsors do not materialise, or delegate
numbers are way down because of GFCs,
pilot strikes, bird flu, war or terror attacks,
earthquakes, or scandal that divides an
association’s members – the list is endless.
In the second part of this series, Matt Crouch explains why getting the
specifications right is essential if you are to avoid nasty disputes.
A GUIDE TO
When a PCO or event manager guarantees a surplus, he/she is doing a lot more than
promising something he/she cannot control. He/she is taking a risk position in the business of
the client. The PCO/event manager is underwriting the project and if the guaranteed surplus
does not eventuate, he/she will have to pay the difference from his or her own pocket.
All this has a deep connection with the balancing of risk and reward in our contracts. If a
supplier is asked to do work, the service fee is a reward for that work. A simple fee for service
would normally cover the supplier’s cost of performing the work plus an appropriate margin as a
reward for skill and supply/demand factors such as the quality or rarity of the skillset provided.
The return for taking a financial risk in the client’s business by promising a financial outcome,
on the other hand, can never be properly rewarded by a simple service fee. If you are exposed
to a potential loss (by having to make good the guaranteed surplus), then it is only fitting that
you should also be entitled to a slice of the surplus/profit if that is what transpires. Balance of
risk and reward!
Suppliers: in the absence of a deal by which you are entitled to receive an appropriate slice of
a client’s financial surplus, stick to a simple service fee and avoid describing the services in
terms of outcomes you cannot fully control. Expunge the word “guarantee” from your
Now, if suppliers are reluctant to promise outcomes and buyers want such promises, how do
we resolve this conflict? Suppliers can be required to apply their skills and to do specific things
to make reasonable endeavours to achieve outcomes but the failure to reach the goal should
not penalise the supplier unless the supplier failed to apply him/herself to the task.
Hair-trigger penalty clauses in contracts are a related problem – “We’ll pay you if you achieve
$X, nothing if you don’t.” Such arrangements are largely unfair – fail to achieve X by a dollar and
the supplier gets nothing for his/her efforts. At the very least, stepped or sliding scales are much
more balanced and don’t have that “all or nothing” risk about them.
The specification in a services contract is often linked to the payment provisions. This is
sensible as milestones in the performance of the work can be used to properly manage the
cash-flow and the risk/reward balance between the parties. The supplier gets paid instalments
as various dates and work stages are completed.
Getting the specification right and linking it sensibly to risk and reward is not always easy –
but consider and apply these rules and you have a good start. m
Matt Crouch can be contacted at Hodgkinson McInnes Legal via email - firstname.lastname@example.org
46 | micenet AUSTRALIA
Links Archive micenet AUSTRALIA December 2014 January 2015 micenet April May 2015 Navigation Previous Page Next Page