Dis-Kinnected

Contract certainty may be a major problem for the London insurance market, but Kinnect is no longer part of the solution.

Despite investing several years and many millions of pounds in its Kinnect insurance trading platform, Lloyd's has now decided to shut it down.

Breaking 300 years of face-to-face, pen-on-paper contract negotiation tradition was never going to be easy.

More on this later...

Avoiding Contract Scandals 103

When the blame game begins, ignorance is rarely a good defence. It does, however, seem to be a very popular defence. Which brings us to the third lesson in this series.

Lesson 3:

Don't stick your head in the sand when your contract prices mysteriously go up, just as market prices around you are going down.

There's another name for prices that seem too good to be true: kickbacks. And with AWB accused of kicking back around $300 million to Saddam Hussein's regime, everyone wants to know who knew.

Not me, says AWB boss Andrew Lindberg. He has no recollection of puffing up the price of wheat contracts in order to funnel cash from the UN oil-for-food program back to the former Iraqi regime. After four days of questions, and around 200 "can't recall" answers, counsel assisting the special inquiry had this to say:

"It's ridiculous to suggest that you did not know, Mr Lindberg. Are you a complete fool?"

The inquiry continues.


Lindberg can't recall

Avoiding Contract Scandals 102

As the old saying goes: It takes two to tango. Which brings us to the second lesson in our contract scandal series.

Lesson 2:

Don't offer a cushy job to the procurement official who just awarded you a contract at an inflated price.

Failure to heed this lesson cost former Boeing CFO, Michael Seers, his job. And it landed him a four month prison sentence. All because he offered Darleen Druyan a job at about the same time she awarded his company a $23 billion contract.


Sears cops 4 months

Avoiding Contract Scandals 101

When a contract scandal breaks, everyone ducks for cover. Who broke the rules? Who knew? Who should have known? Whose heads will roll? The media shines a bright light into the darkest corners of the deal, looking for someone to blame.

There are two classic targets when the blame game begins. Those who did the dodgy deal, and those who should have stopped it but didn't. The former look corrupt. The latter incompetent.

Using two recent contract scandals as a guide - the Boeing Tanker Aircraft scandal, and the AWB Wheat-for-Oil scandal - we've come up with some simple lessons for staying out of trouble.

Lesson 1:

Don't take a cushy job at the company to which you just awarded a contract at an inflated price.

Failure to heed this lesson cost Darleen Druyan 9 months in prison. The former Air Force procurement official had awarded a $23 billion tanker aircraft contract to Boeing as a "parting gift", just before she went off to work there.


Druyan in happier times

Sign Here Please...

For most people, the task of creating and negotiating contracts was transformed some ten years ago, when email "tipped" and became the preferred mode of business communication. Drafts are prepared in Word, then emailed back and forth. Most of the time, changes are marked up (although sometimes not, but that's another story), and eventually a final version emerges, ready to sign.

It's at this point that things go decidedly low-tech. Despite much e-signature talk and buzz over the years, the task of signing contracts still seems to happen with pen, paper, fedex and fax.

But where do you look when, 6 months down the road, a dispute is looming, and you want to check the final terms of the contract you signed? Do you trust the last electronic copy buried deep in your email archives, or do you go rummaging around for the signed piece of paper?

This simple problem - keeping a signed digital copy of the final contract in one central place - is what EchoSign hopes to solve with a new web-based service.

All you do is browse to EchoSign, upload your final contract, tell it who needs to sign, and the contract is emailed to all relevant parties. They print, sign, and fax it back to your EchoSign number, and the final signed versions are stored as PDFs for future reference. Easy.

FSA Reaches for the Stick

Two years sounded like a long time. Less than one year doesn't. So with 11 months to go till John Tiner's deadline for contract certainty in the London insurance market, the question is being asked: what happens if the market misses the deadline? What if the deals are being done, but the details are still missing? Does it really matter?

It's starting to sound like the answer is yes. It matters. The FSA is reaching for the stick.

Amongst other things, David Strachan, the FSA's Insurance Sector Leader, hinted that brokers and underwriters who fall down on contract certainty may be required to hold more capital. Another option will be restrictions on the drawdown of broker commissions. Ouch.

Read the full text of David Strachan's speech at the The Insurance Institute of London.

Focus on the Fine Print

Pactum is latin for contract. And contracts are the focus of this blog. From the recitals to the execution blocks, and all the fine print in between.

Whether you're a contracts manager, general counsel, risk manager or deal maker, there's no escaping the joys of contracts. A great contract makes you money and keeps you warm at night. A bad one leaves you exposed and counting the costs.

Why blog about contracts? Because there's always something useful to learn from a contract scandal, and there's lots to keep up with when it comes to drafting, negotiating, closing, signing, managing, enforcing and renewing the contracts we deal with every day.