Contract law governs the formation and enforcement of contracts. A contract is a legally binding agreement that a court or arbitrator may enforce. Contract law regulates the formation of contracts, their execution, and the formulation of an appropriate remedy in the event of a breach.
Contract law is used by everyone who does business. Contracts are used by both businesses and people when they purchase and sell things, license products or activities, enter into employment agreements, and more. The most basic human activity involves contracts like buying at the grocery. Contracts ensure that these transactions go through without a hitch and without misunderstandings. They enable parties to conduct their business with confidence. Contracts ensure that the terms of a transaction are understood by all parties involved.
Process of forming a Third-Party Contract in Banks
It depends on how the business is going to purchase the goods and services, either going to be the sole source, meaning we go directly to one seller or to one vendor, or it can be through RFX where different vendors are considered. RFX can mean a request for proposal or request for information, that’s how a third-party contact is initiated.
RFP or Request for Proposal is publishing all the business requirements, what do they need, what are the expectations, what are the requirements for the vendor to meet to provide the goods and services that are needed by the Business Units or BU. That is the initial phase of the contract. This is followed by a proof of concept or an interim agreement to test whether or not the product is going to work. If the BU is happy with the product or service after testing, then that is the only time they execute a Master Services Agreement or MSA.
MSA or a formal agreement is going to document the purchase of the existing service or goods. Now, those MSA terms already include all the schedules or the bank requirements that will manage the risks present in the contract.
The process is not as simple as an ordinary contract like any other company because the Bank follows many regulations in countries where the Bank operates. There are many processes that contract lawyers have to do on the back end and on the front end to make the contract fully compliant with the regulations.
Breach of Contract
When there is a breach of contract, there is a provision not to go directly to litigation or arbitration. Bank manages the risks and any kind of dispute through regular meetings in a governance committee that meets regularly. In case there’s any kind of dispute or a breach, they don’t directly go to a lawyer as there will be a conversation first among the executives who will try to iron out the problem and solve the issues.
When worst comes to worst and this happens rarely, then the Bank would go to arbitration or litigation.
Role of a Contract Lawyer
The primary work of a contract lawyer in the Bank is not managing contract breaches. Rather, their job is the management of the problem even before there is a breach. For example, if the vendor is not capable of delivering the goods or service. If there is a problem with the service level agreement, if there’s a problem with the product, the lawyer would really be involved in managing the lowered expectations, extending the delivery period, visiting the penalties, and requiring service credits instead of going into litigation. The contract lawyer is more of a risk manager rather than a litigator.
A contract lawyer’s work in the bank is in the back end and not at the courtroom. He is the one working to prevent disagreement from ripening into a legal dispute. He should be a good negotiator, not a litigator.