ACTIVE CLAUSES VS. PASSIVE CLAUSES— PERFORMANCE CONCERNS VS. LEGAL CONCERNS

One perspective on contract clauses is to view them as either "active” or "passive.” This distinction, introduced by the IACCM,[1] is based on whether the term requires resources or action, or whether it comes into effect only if something happens or fails to happen. Active clauses are about performance: actions and roles that need to be performed to make things happen. They create obligations that need to be fulfilled. For example, payment terms and delivery terms are "active”: they create specific obligations that require resources and supporting actions. Passive clauses, in turn, normally only enter the picture if those obligations are not fulfilled— for instance, if performance does not happen at all, in the right way, or at the right time. Passive clauses address issues such as liabilities, remedies, and force majeure.

Another distinction useful for our purposes is that made by law professors Ian Macneil and Paul Gudel. They divide contract planning into two main dimensions, performance planning and risk planning.[2] The first dimension is about the substance of the relationship, seeking to secure smooth and efficient performance and accomplishment of the parties' goals. The second dimension is about risk and contingencies: contract terms dealing with remedies, limitations of liability, indemnities, dispute resolution, and the like.

Using the above approaches, it is easy to see how active clauses and passive clauses as well as performance planning and risk planning have an impact on contract risks and their management. However, conventional thinking about contract risk management tends to focus on passive clauses and risk planning. If something goes wrong, passive clauses are expected to work to the benefit of the party using them. however, this is risk allocation, not risk management!

Active clauses and performance planning should not be isolated from passive clauses and risk planning. While the former seem to fall into the domain of business and project managers and the latter into the domain of legal and risk management professionals, they are all intertwined, and their use should be synchronized. otherwise, there is a real danger that, echoing Stewart Macaulay, there is a huge gap between the contract as written ("the paper deal”) and the true agreement ("the real deal”).[3]

When dealing with risk, it is important to see the difference between causes and consequences and address both. Passive clauses tend to deal mainly with the consequences of risk. While dealing with these consequences is important, businesses need to deal with causes and likelihood as well. This is where the active clauses play a key role. They should establish the foundation for a successful deal and relationship based on how the parties actually want to work together. Passive clauses, when used proactively, can help guide the relationship back on track when disturbances occur. They can help resolve disputes and minimize losses. What they cannot do is protect against bad judgment, bad business deals, or bad investments. Proper pre-contract planning—making sure the active clauses reflect the parties' true goals, needs, and expectations, and that the contract provides clarity about them—is indispensible.

once active and passive clauses are agreed, they need to be followed. The resources required to meet obligations need to be available, and the agreed actions need to be taken at the right time and in the right way. For this to happen, both parties need to fully understand the operational aspects of the contract. The required obligations and actions must be understood by delivery teams and business and project managers responsible for implementation. When implementation succeeds and no unexpected events occur, there is normally no need to invoke the passive clauses. Making sure contractual promises are kept and obligations are fulfilled is one of the best ways to control contract risk.

  • [1] See, for instance, iACCM (2011b) Contract and Commercial Management. TheOperational Guide. Zaltbommel: Van Haren Publishing, pp. 123, 366, 522.
  • [2] Macneil, i.R. and Gudel, PJ. (2001) Contracts—Exchange Transactions andRelations. Cases and Materials, 3rd edn. New York, NY: Foundation Press.
  • [3] Macaulay, S. (2003) The real and the paper deal: empirical pictures of relationships, complexity and the urge for transparent simple rules. In D. Campbell,H. Collins and J. Wightman (Eds.), Implicit Dimension of Contracts: Discrete, Rational andNetwork Contracts. Oxford: Hart Publishing, pp. 51-102, 51.
 
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