Extreme Contract Simplification

david.munn@comcast.net (David Munn) — Sat, 10 Feb 2007 12:20:19 -0500

Ive 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 discussionparticularly among in-house lawyersof 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 cant 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 problemsin our clients 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 interpretinglet 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 cant find a good reason not to use this approach, they try to develop a contract that is stripped of as many legal terms as possibleand 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 isnt 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.

Heres 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.

Contract Terms and Negotiations - IACCM Project

david.munn@comcast.net (David Munn) — Tue, 23 May 2006 01:24:13 -0400

I spend a fair amount of my time negotiating contracts -- primarily software license and services contracts on behalf of the seller -- and I'm constantly amazed at the amount of time contract negotiators spend (waste?) arguing over certain contract clauses. In more and more cases that I see, the buyers are taking extreme positions that make getting to a reasonable middle ground much harder. At the same time, sellers, driven by their own agendas (e.g., tougher revenue-recognition standards), are taking positions the buyers see as unreasonable.

That's why I'm excited about a Contract Negotiations Guide project the International Association for Contract and Commercial Management (IACCM) is taking on. In the words of Tim Cummins, Executive Director,

"Our aim is

to create a baseline that is broadly accepted as 'reasonable' for both buy side and sell side,
to generate greater mutual understanding of the factors that cause variations from this position,
to outline the spectrum of negotiated terms that typically result.

We believe such a guide will assist in cutting lead-times and reducing the extent of confrontation when one side or the other is seen as 'unreasonable' in its position, relative to the value or risks perceived by the other side."

I see this as a valuable effort. At the very least we should end up with a thoughtful analysis of contract terms that we can use for reference and training. At best it could result in a set of best-practice contract terms that reasonable buyers and sellers can use to greatly reduce the amount of time spent on unproductive contract review, revision, and negotiation.

This is one of the reasons IACCM has become one of my favorite organizations. They understand what contract negotiators do and they want to help us all do it better and more efficiently. In addition to this project, they put on some excellent programs. I think anyone who negotiaties contracts could benefit from membership in this organization.

If you're interested in participating in the Contracts Negotiation Guide project I'd suggest contacting the IACCM at info@iaccm.com.

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Extreme Contract Simplification

Contract Terms and Negotiations - IACCM Project