Incorporating Key Performance Objectives into Contracts

Most parties enter into a contract with one thing in mind – ‘what outcome do I want when the contract is complete?’  The answer is often something tangible such as ownership of plant and equipment or intellectual property.  What purchasers commonly overlook is how they want their business, or the asset, to function after the contract is complete.

When negotiating the terms of a contract, it is equally (if not more) important that the purchaser considers the end result they want to achieve by acquiring an asset. This is especially the case for contracts including computer hardware or software. Failing which, the purchaser may be left with an asset which is not capable of performing the tasks the purchaser had purchased the asset for in the first place. This is potentially an extremely expensive mistake – just ask the Queensland Government about its Health department payroll system!

To ensure that the purchaser has a right to return, or require further work from the vendor of the asset, we recommend that contracts in the technology or software sphere include specific performance objectives or criteria that are required to be met upon completion of the purchase.

Examples of performance objectives may, for example, include matters such as the ability to:-

• permit multiple users simultaneous access to a computer program, with any access restrictions (such as a capped limit of users) allowing for the growth of the purchaser’s business;

• store of a minimum data limit, with the ability to increase the limit of an existing system;

• conduct appropriate performance testing in a “live” environment to ensure it meets the required operational standards in the real world; and

• have independent expert approval to ensure that the purchaser’s performance standards are met.

This is particularly important in contracts for the supply or upgrade of technology where, if the performance objectives are not met, then the purchaser will be unable to utilise the asset fully, or at all.

A key benefit of incorporating performance objectives into a contract is that it provides the purchaser with the ability to recover any damages suffered where there is a failure to meet those objectives. In the absence of express performance objectives in the contract, the purchaser may not have any rights against the vendor where the asset does not meet the requirements of the purchaser, unless the purchaser is able to rely on Australian Consumer Law, which can be a costly and lengthy process. 

We strongly recommend that the objectives and outcomes be considered first when preparing a contract, and those be drafted as outcomes the contract performance is to achieve.  While the business world has followed this idea for decades, legal drafting in some cases has not caught up.  We have been using this strategy with very successful results in everything from manufacturing equipment, management agreements, hardware and software contracts.

For more information, a more detailed copy of the survey results or to arrange an interview, please call Maree Schneiders on +61 (0)411 446 484 or maree@strategyco.net

About MSI Global Alliance:

MSI Global Alliance (MSI) is one of the world’s leading international alliances of independent legal and accounting firms, with over 250 member firms in 105 countries.

In Australia and New Zealand, MSI consists of 15 independent legal and accounting firms that provide specialist services to local and overseas businesses.

As a group, MSI members are committed to serving companies and individuals both in Australia, New Zealand and around the world.

For further information about MSI in Australia and New Zealand, visit www.anz.msiglobal.org