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Why redesigning your contracts is so important

Posted by Tim Cummins, President of IACCM, Professor, Leeds University School of Law; Chair, International Commercial & Contract Management | Aug 12, 2015 9:30:22 AM

When we think of contracts, most of us envisage a paper document, full of dense typing, with formalistic style and wording. Or we may even think of an on-line version, a 'click-here- to-accept' contract - but with just the same hard to read typing and hard to understand language. Certainly not something we avidly pick up to read.

The arguments for this approach are mostly based on tradition. This is the form and format that is familiar to lawyers and hence to judges. Therefore our approach to contracting is driven by the belief that the overwhelming purpose of a contract is legal in nature and that ease of interpretation by legal experts is of paramount importance.

Attorneys would add to this by suggesting that a key purpose for a contract is to ensure the avoidance of doubt (a position which I wholeheartedly endorse). They might then proceed to claim that lawyers are trained to write with clarity and precision, using specific words in ways that may be critical in the event of dispute - and therefore that producing contracts must remain the preserve of the trained lawyer.

And there, m'lud, I rest my case!

The importance of clarity and precision cannot be doubted. There are innumerable instances where contract documents lack precision or create ambiguity and doubt, leading to protracted claims, disputes, even litigation. An interesting example came to my attention just this week, in a case where the parties had failed to define the term 'new' (see Reliable Contracting Grp., LLC v. Dep't of Veteran Affairs for details). The vast majority of such situations never reach a court - the parties recognize that it is much smarter to give in or to compromise.

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So my question is this. Given the frequency with which parties disagree over their contracts, why is it that we still believe that today's approach offers an effective or efficient process for creating and recording agreements? Why do we think that generally accepted, legally-driven methods actually deliver optimum value to our business? Is it simply that we are scared to challenge tradition or are we failing to explore alternatives?

At last we are seeing the emergence of truly disruptive technology. In a short blog (which I strongly recommend that your read), Brian Powers writes about how 'smart, connected contracts are coming'. He lists the exciting ways that contracts will drive business information and decision-making. What he does not mention - but what is actually of tremendous significance - is that driving this value will force a very different approach to the way that contracts are assembled. Essentially, to be programmable, a contract really will have to be complete and avoid doubt.

To provide a parallel, look at the world of engineering design and drawings. Like contracts, these are critical documents, prepared using traditional methods and formulas and the preserve of experts in their creation. But increasingly, this is not the case. The introduction of methods such as BIM (Building Information Management) is taking engineering and construction into the age of virtual reality, where designs are being programmed and where stakeholders and users can 'walk through' their planned structure. What is especially interesting is that the process of programming demands far greater precision than is ever achieved through traditional methods. A computer program does not allow omissions or inconsistencies.

Already, with many contracts being so long and so difficult for users and management to understand, we see many businesses going to the time and expense of 'translating' their legal contracts into alternative documents or extracting data to embed in relevant applications. This is the only way that they can ensure rights and obligations are understood and to avoid the risk of performance failure. Yet this translation process is itself risky, often leading to misinterpretations or missed items.

It is no surprise that enterprising lawyers and designers are increasingly exploring new approaches in contract design, starting to embed the visual techniques or graphics that improve understanding and test the integrity of the terms. They are structuring agreements in ways that facilitate decomposition and communication to those who must perform. They are re-purposing agreements as business enablers, rather than the preserve of the lawyer.

Ultimately, redesigning contracts is important because contracts themselves are important. They must address the needs of today's more complicated business environment and recognize that the world of instant information via portable devices demands a radical shift in conventional thinking.

IACCM works with a number of design, simplification and legal experts in undertaking contract design assessments, together with market and competitive analysis, which result in agreements designed for users and 'ease of doing business'.


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Topics: contract /commercial management, technology, risk management, legal

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