Papering Energy: Do Your Contracts Have the Right ‘Power’?

I have spent years in law firms and in-house legal departments counseling clients in the energy sector with respect to their contracts and the related process they utilize in papering their deals. What I have learned is that the pitfalls awaiting a company that isn’t effectively papering its deals and/or following a streamlined and clear contracting process are many. As such, it’s worthwhile to evaluate both paper and process to more successfully ink those big energy deals.

I know, I know—this problem doesn’t exist at your company, right? I hear that a lot from clients, and nine times out of 10, their perspective changes when they are asked if any of the issues listed below frequently pop up in the day-to-day of getting business done.

Paper and Process Issues

Among paper-related issues are:

• The company wants to implement a change across the entire existing customer base—for example, a price increase—and as it turns out, the customer contracts aren’t uniform in terms. That means a review of every contract becomes necessary. This is both time-consuming and expensive.
• The company gets hit with a large penalty related to participation in an energy program and wants to pass it on to the customer. The contract terms are too vague to assume that the company can do so, or worse, the contract doesn’t address it at all. Asking the customer to sign an amendment so that you can pass through that penalty is not an option.
• New customers and your sales team complain that your contracts are overly complicated and way too long, resulting in protracted negotiations or a total loss of deals.
• You sit down to read your “standard” contracts and realize they no longer accurately reflect the business risks your company currently faces (that is, they are outdated).

Among process-related issues are:

• Confusion about how to get legal work done—for example, whom do legal requests go to?
• Lack of clarity regarding what or whose “paper” to use for contracting.
• Setting unrealistic expectations, both internally and externally, regarding turnaround time.
• Ineffective or no communication between internal teams once a request is submitted.
• Inability of sales to close mission-critical deals in a timely fashion due to a protracted and/or nonexistent contracting process.
• Termination and/or expiration of important existing contracts without the opportunity to discuss renewal in a timely fashion.

Ultimately, all of the foregoing will result in financial detriment to the company.

Revising Paper and Process

Understandably, evaluating and changing the company paper and/or the contracting process can feel daunting when it involves so much substantive legal work, but it doesn’t have to be. A competent, experienced attorney can evaluate and revamp a company’s paper and processes relatively quickly using something similar to the following process.

First, the attorney should meet with the legal and business teams to understand their business, discuss the existing contracting process, and find out what’s working and what isn’t. Then, the attorney should conduct a comprehensive review of all relevant contracting forms (confidentiality agreement, master services agreement[s], vendor agreements, etc.) and provide suggestions for change. Often, this results in shorter, more precise agreements that better serve the business than protracted, overly complicated 30-page forms that contain unclear and/or unnecessary provisions.

The attorney should then obtain legal and business team sign-off on updated forms. With respect to existing contracts, the attorney should propose a plan for achieving uniformity in material contract terms without a wholesale renegotiation. From there, the attorney can then turn to creating a contracting process document that outlines items such as:

• Where to send all legal requests.
• When to contact legal—does the document require legal review? (The answer is almost always yes.)
• Clear guidelines regarding whose contracting paper to use. Company paper is always preferred.
• Clear guidelines regarding how to request the appropriate contracting form and instructions regarding the deletion and prohibition on use of old forms.
• Clear guidelines on expectation-setting with external customers/vendors. For example, don’t promise a customer a turnaround on a contract within 24 hours without first asking legal if that is reasonable for that contract.
• Clear guidelines regarding “to dos” before submitting the contract to legal. This may include, for example, creating a legal submission email, which should explain:
  • Whom the company is contracting with (legal name of party, vendor, customer, partner, etc.).
  • What is needed, such as “legal review of Company X’s software license agreement.”
  • When is the document needed or what is the requested deadline for legal review. Be sure to offer a realistic timeline. “ASAP” is not a timeline/deadline; choose an actual completion date.
  • Why the company is contracting with this party (description of goods and/or services), such as “The company needs to purchase a one-year software license for software that does …”
  • What the dollar value of the deal is.

Other items include:

• Clear service level agreements (SLAs) regarding turnaround times—for example, one to two business days unless there is a reason that isn’t acceptable, in which case legal will notify the requester within a reasonable time regarding why the SLA cannot apply and provide a realistic time frame for completion.
• Clear guidelines regarding what happens after submitting a request to legal. For example, who is responsible for sending a redline back to the client?
• Clear signature protocols (who can sign on behalf of the company, signature method, etc.).
• What to do with fully executed agreements.
• Management of agreements post-execution (tracking expiration dates, renewal discussions, etc.).

Given the size and scope of the power industry, vague contracts and sloppy contracting processes can cost companies a lot of money. An experienced attorney can help you regularly review these essential parts of your business.

—Tracy Caswell ([email protected]) is a partner in Kabat Chapman & Ozmer’s Atlanta office. Over her 30-year career serving as both in-house and outside legal counsel, she has handled complex commercial contracts, business negotiations and transactions, employment/human resource matters, litigation, arbitration, mediation, intellectual property, risk and resource management, and board governance.