To end up with good contracts, you need a process for how contracts get authorised in the business. Basically, that means you should have in place a delegation of authority (DOA) which states:
– Contracts of type X (value, and other metrics) can only be signed off by the Board.
– Contracts of type Y (value, and other metrics) can be signed by the CEO (but by no one else) without involving the Board.
– Contracts of type Z (value, and other metrics) can be signed by (for example) COO and/or CFO (but by no one else) without involving the CEO and the Board.
The DOA is not a process, but it is the end point of a process, so the process has to be set up to lead to it. If someone wants to get a contract signed, they have to go through the authorisation process set out in the DOA. That means that the person authorising the contract can insist that, prior to signature, they are presented with documentation confirming that:
– specific checks have been carried out,
– the proposed contract complies with the business’ standard parameters (or, if it doesn’t, why it doesn’t),
– the contract has been approved by those below them in the chain of command.
When a contract is submitted for approval, it should be accompanied by the following documentation:
- A covering document which identifies the person submitting it (thereby creating accountability) and containing the approvals required from those below in the chain of command (for example, authorisation by the CEO should require approvals from CFO, COO, Head of Compliance) thereby creating further accountability.
- A proposal document which sets out the reasoning behind the proposal and the key elements of the deal. Included in the Proposal (but can also be provided separately), is a due diligence report on the other party to the contract, and a risk assessment in relation to the proposed deal.
- The commercial summary setting out the commercials, including the costs to be paid by the business, including irrecoverable costs, ideally modelled against various scenarios.
- A legal summary which sets out the legal view of the contract, ideally calling out any differences to the business’ standard contract terms.