Contract Creation and Management
Citizen-Schwarz AG is a German based banking company with revenues over $20 billion. To increase its presence within the industry and become a formidable competitor, Citizen-Schwarz AG sought a vendor to build a Java-based transaction processing software to enter the retail financial services market in America. Citizen-Schwarz AG contracted Span Systems, a California based customer e-banking software developer to devise the program in accordance with a $6 million contract (University of Phoenix, 2009).
Ambiguous and inadequate contracts are the cause of many disputes today. The lack of written agreed terms of reference can also contribute to disputes between parties (Carmichael, 2002). According to Carmichael (2002), “Correct documentation is fundamental to a successful project, and is important as any other project item,” (p. 52). The agreement between Citizen-Schwarz AG and Span Systems lacked specificity. Span Systems had an opportunity to develop software for one of the most prestigious banks in the world with the possibility of further business contingent upon the successful execution of the current contract. The company had difficulty keeping up with the project’s timelines because of staffing changes at Citizen-Schwarz AG. Poor communication, poor quality and lack of detail in the contract caused several issues culminating with Citizen-Schwarz AG calling for the rescission of the contract (University of Phoenix, 2009). The
paper aims to address five contract provisions; performance, change control, communications and reporting, project structure, and dispute resolution. The revised provisions aim to ensure the needs of each party are met and that the corresponding risks are minimized.
Span Systems and Citizen-Schwarz AG needed a form of contract law before they started business with each other. Contract law has many different types. Contract law “enables private agreements to be legally enforceable. Enforceability of agreements is desirable because it gives people the certainty they need to rely on promises contained in agreements,” (Reed, Shedd, Morehead & Corley, 2004, p. 5-6). If the two companies were able to work out a contract that was agreeable by both parties then perhaps the reputation of both companies and
the money invested into the project would not have been lost.
Citizen-Schwarz AG relied on Span Systems to complete the project in a timely fashion which was agreed upon from the beginning. As the project continued, deadlines were missed and problems arose when the companies met. Promises were broken from the beginning and even though there was no written contract, Span Systems was still found liable because of contract law. In the end this caused more problems for both companies because Citizen-Schwarz AG did not get the processing software they wanted and Span Systems reputation was tarnished and potential money was lost.
According to Reed, Shedd, Morehead and Corley (2004), contracts are made up of five elements: (1) offer, (2) acceptance, (3) consideration, (4) legal purpose and (5) capacity. An offer contains a specific promise and a specific demand. An offer was made by Citizen-Schwarz AG to Span Systems to build software for their banking needs. The offer was accepted by Span Systems. An acceptance is needed to create a valid, enforceable contract. Consideration requires an incentive or inducement for a person or business’ promise that is not binding. The consideration for Span Systems was the $6 million payout for the work once the project was completed. The legal purpose requires an agreement to be legal and enforceable only if it complies with the law of the land and public policy. The software being created is considered legal purpose. The capacity of a contract defines whether the person or business was able to be bound by a contract. Both companies are multimillion or multibillion dollar enterprises which are able to be bound by a contract. All elements of a contract were evident in the simulation.
Remedies to Contact Disputes
A contract dispute may arise between parties when either side is dissatisfied with what has been produced based on a contract. Span Systems and Citizen-Schwarz AG are experiencing a dispute over issues of performance, quality and deliverables, and requirement changes since original determinations in the study stage. According to Reed, et al. (2004), “The conduct of business is primarily a series of contracts, or legal relationships created between individuals by their own agreement…When one party to a contract fails to do what he or she agreed to do, a breach of contract has occurred,” (p. 17).
Several remedies are available to resolve a contract dispute which may arise from a breach of contract (Reed, et al., 2004). Such remedies are: negotiated settlement, arbitration, various damage awards, specific performance, and rescission. A negotiated settlement is a voluntary out of court settlement acceptable to both parties. Arbitration involves settling a contract dispute by a neutral third party.
Court-awarded damages resulting from a breach of contract are compensatory, consequential, nominal damages, and liquidated damages. Compensatory damages aims to award the plaintiff in a manager equal to complete performance of a contract. Consequential damages aims to repay the plaintiff for unusual losses, such as a company closing due to failure to deliver products or materials. Nominal damages are token damages awarded when a breach of contract has occurred with no financial harm to the other party. Liquidated damages are specified in the contract and are enforced by the court only when they do not unfairly punish a defendant (Reed, et al., 2004).
Specific performance in a contract dispute is a court enforced “direction that a contract should be carried into effect according to its terms,” (Anson & Huffcut, 2007, p. 54). Rescission annuls the contract when both parties are left on equal terms (Reed, et al., 2004).
Risk and Need Analysis
Citizen-Schwarz AG put all faith in Span Systems to complete the project and put them ahead in the banking industry. The needs of Citizen-Schwarz AG were clearly defined in the original contract. They hoped the new system would be profitable and that they would be able to complete internet transactions in a timely fashion. They also had hopes of keeping the communication lines open between everyone within the banking industries and be able to communicate with the vendor their risks and ideas would get done in a fast but efficient manner. Citizen-Schwarz AG and Span Systems could not agree on an original contract there were many risks involved with this project. As a company in the banking industry with no contract between two parties, the potential to lose important information because of a lack of clauses added for protection always exists. Many changes occurred within both companies and Citizen-Schwarz AG’s upper management was always changing, there was nothing implemented to help in this case causing for new ideas to be asked and deadlines missed.
Citizen-Schwarz AG has specific needs in order to be bound to a contract. Span Systems must be able to acknowledge the requirements in order to conduct business with Citizen-Schwarz AG. First, the company’s main goal is to remain a competitive leader in their industry. To remain competitive, the company seeks to invest in technology that will promote profitability. The technology will be sourced from a vendor who can supply the software quickly within the required dates on the established timeline. The software must be produced within the given deadlines with regard to quality. Any changes in the process or requirements will be addressed to the project manager at Span Systems and will be monitored closely by Citizen-Schwarz AG. Open lines of communication are critical to project completion. Updates and status reports are to be given to Citizen-Schwarz AG on a daily basis via electronic communication. Written notes of progress will also be maintained. The project is to be held in confidence as the new technology will give Citizen-Schwarz AG a stronghold in the financial industry.
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