Unintended Contracts – Here’s How They Happen


Procurement Pros, you need to know how contracts happen.  Let me tell you a true story.

A few years back, I received a check from my mortgage company for something like $2.28.  A pointless dollar amount.  I assumed it was some sort of escrow payment refund.

I should have thrown it away, but I quickly deposited the check via my online banking app and moved on with life.

Almost 2 years later, I noticed there was a monthly charge for “optional products and services” on my monthly mortgage statement for about $150/month.  I found out I had been paying this amount for 2 years!  Where did it come from?

Well, after much digging, I found out that the measly check I deposited was a contract.  It said somewhere in fine print “by depositing this check, you are agreeing to sign up for our home warranty services for $150/month”. 

Needless to say, I was furious.  I told my mortgage company they would get sued over this.  How prophetic.  I just now received a nice check from a corresponding class action lawsuit.  I wish I knew who to go laugh at in my mortgage company. 

A contract is comprised of 5 components:  Offer, Acceptance, Bi-Lateral Consideration, Competent Parties, and Legal Subject Matter.  It seems all of these were in place, right?  Why did they lose the lawsuit then?

The reason is that the definition of Consideration is “something of value”.  The reason they lost the lawsuit was that THEY got something they valued (my money), but I did not receive something that I valued (a warranty product that I didn’t want). 

It was a unilateral exchange of value instead of a bilateral exchange of value, so there was never a contract in place at all! 

So many times, procurement professionals tell me they are doing business with a supplier without a contract.  What?   My response is always the same:  there’s always a contract. 

People think that a contract must include signatures and formal clauses.  Not so.  It just needs those 5 components.  It can happen over the phone, it can be written on a napkin, even your behavior – actions and inactions – can create a contract.

Sometimes I have clients to whom I send a contract that they never sign.  However, they start scheduling my engagement with them.  I never chase them for contract signature.  Why?  Their behavior has indicated assent to my terms.  I’m golden. 

And what about internal end users that strike up deals with suppliers?  Those count too.  Why? Because the courts don’t hold suppliers accountable to research whether or not the end user had REAL authority (as opposed to apparent authority) to bind their firm.

The courts use the “reasonable person” test.  If the janitor tries to strike a contract to have a skyway built connecting buildings on your corporate campus, the courts will say the supplier should have known better than to strike a deal with the janitor for that. 

But that never happens. It’s always someone that presents authority in such a way that suppliers can reasonably interpret that they in fact have such authority.

Making matters worse, procurement pros think that if a lawyer on their side approves the contract, then it’s a good deal for the business.  This is a fatal, deadly, career ending, and highly consequential myth.   

The lawyers are looking at disaster.  Limitation of Liability, Indemnification, Intellectual Property, Damages, and so on.  How often do those things go wrong? Usually not once in a 40 year career.  But they are still extremely important, just like airbags in a car. 

The things that ALWAYS go wrong are the commercial terms (those related to supplier performance), and the lawyers aren’t looking at those, and they’re not trained to.

Sometimes people proudly tell me “oh, in my company, the lawyers DO look at those terms for us.”  You know my answer?  “I’m sorry to hear that.  That’s too bad!”. 

Why?  Because that’s like being proud that your neighbor is raising your child.  YOU are the one who is supposed to be the expert and the accountable owner of the contract being a good deal for the business, not anyone else. 

And by good deal, I don’t mean good price.  I mean a good deal.  Performance results.  Pre-defined remedies for failure to perform.  Payment tied to performance.  Results oriented success metrics.  You get the picture.

We’ve come to far in this profession to still be struggling with this problem.  Go make a difference.  Be your best!

Now go off and do something wonderful.

– Omid G.

“THE Godfather of Negotiation Planning” ~ Intel Corp

P.S.  I have a game changing announcement coming soon about the CPSCM™ certification program, which my institute has issued to procurement pros all over the world.  This is going to be my biggest announcement ever, and it’s going to ROCK your world.   Stay tuned…

Previous post:

Next post: