I’ve written before that the IACCM is one of the most valuable organizations I belong to. A recent IACCM Ask the Expert program titled “Do traditional approaches to contracting result in better management of risk?” in which in which IACCM Executive Director Tim Cummins interviewed Graeme Colquhoun, Head of Legal, and Steven Weatherley, Head of Audit & Compliance, of UK brewer Scottish & Newcastle (S&N) should provoke a serious discussion—particularly among in-house lawyers—of how lawyers approach commercial contracting.
The 4-person legal department at S&N has adopted what most lawyers would consider a radical approach to contracting. I can’t say it better than the IACCM:
“Within every industry or profession, there is a need to adapt and innovate in order to be competitive. Lawyers spend a huge amount of time drafting and negotiating detailed commercial contracts for their clients. Detailed contracts are supposed to give greater certainty to businesses about their rights and obligations, and therefore to avoid future disputes about what was intended. But do they deliver this in practice?
“The legal team at one of the UK's top companies concluded that, in many cases, detailed contract terms are unnecessary, and can be a waste of time and resources for their business. They went on to develop an alternative solution called Pathclearer.
“[T]hey embarked on a radical reengineering initiative that has resulted in transformation in the way many trading relationships are negotiated and managed. Not only have the contracts themselves been dramatically simplified and reduced in size, but other sacred cows have also been sacrificed. For example, many relationships now operate without fixed term; frequently there are no volume commitments; they have even dispensed with service level agreements and liquidated damages.
“The results? With several billion dollars of spend and revenue now under their new forms of agreement, they have observed:
- Growing collaboration between trading partners, with focus on maximizing value and performance
- Reduced contention and disputes
- Shorter lead-times
- Legal viewed as a critical business partner and change-agent, involved early in strategic discussions and initiatives"
When lawyers need to create a contract, our first impulse is usually to find a precedent document that generally fits the deal. Then we modify the document to fit the current deal. Then we start to think about all the things that could go wrong in the relationship and start crafting a contract that addresses those real and imagined problems—in our client’s favor to the extent we think we can get away with it. The result is often a bloated contract that even the lawyers may have trouble understanding and interpreting—let alone the business people who usually have to deal with the relationship on a day-to-day basis.
The S&N approach is radically different. Their approach is to start with the assumption that they can use a short and simple contract. If they can’t find a good reason not to use this approach, they try to develop a contract that is stripped of as many legal terms as possible—and those that remain are as simple and short as possible.
And I mean really short and simple. The sample contracts they provided to IACCM, types of contracts that would typically run at least ten pages, if not 50, were no more than two pages--and not fine print either. While the S&N team admitted that Pathclearer isn’t appropriate for some types of contracts (e.g., software licensing), they have applied it to a variety of types of relationships, including supply agreements, trademark licenses, and international distribution agreements.
Here’s a link to a slide show that has more detail. Much more information about Pathclearer, including the sample contracts, is available online to IACCM members. Another reason I highly recommend IACCM membership.
