There has long been a tension between business units and legal departments over contracting. In many companies this tension has resulted in a “live and let live” environment, since the companies don’t have much contract-driven litigation and haven’t been slapped with sanctions.
However, this seemingly benign tension has flared into something more intense in some companies, and general counsel are finding that looking the other way is no longer an option. Audit committees of boards (especially at public companies subject to Public Company Accounting Oversight Board standards) are asking for audits of their companies’ contracting practices. Here are some of the circumstances that have prompted action:
- At a board meeting of a publicly traded Fortune 100 company, the GC and the CFO of a company were asked to succinctly state the “total value of all obligations contained in active agreements.” No one on the management team could answer the question.
- Elsewhere, a company’s management could not represent an overall “risk” level across all contracts.
- At the same company, during the pursuit of a potential acquisition, key common customer agreements could not be located—at least not fast enough to appease anxieties of the target company. The deal fell apart.
- When these agreements were eventually located, some of them were not even fully executed or had been executed by individuals without authority to bind the company.
- At another company, commercial groups in the company lamented the “delay in response” due to legal department involvement in contracting, and proceeded to exclude the legal department from the contract review cycle. This resulted in the execution of agreements that went significantly outside of the bounds of risk tolerance at the company—especially in areas such as indemnity and liability.
