Simpler contracts are the future, but they demand commitment

Faster contracts can reduce the cost and complexity of doing business with limited added risk, but for it to work companies will have to take contract simplification more seriously.

One of the things that kept contracts short and simple in the past was the humble typewriter – if every version had to be typed out by hand then you had a real incentive to keep things brief. But computers made copying and pasting and adding and adding again a seemingly cost-free activity. So now we face 90 page monster contracts for the installation of a heating system in a single shop.

That means one team of lawyers has to read, understand and amend those 90 pages. Then the other lawyers have to do the same. Back and forth it goes, growing every time. Then someone has to explain it to the commercial parts of the organisation, who might have more additions. Countless hours are spent – and paid for – in this wasteful process while somewhere in the distance a customer waits, impatient and despairing, to get on with their business with you. Things have gone too far.

Contracts seek to do too much, to account for every possible risk. But the covid pandemic showed us the futility of that – not only was covid not in anyone’s contracts, but businesses didn’t even resort to contracts or litigation when their entire way of working was turned on its head. They got together with customers and suppliers to find a way through, to find a way to do business as best they could.

And this is still the fate of almost all commercial activity – pragmatism, compromise and partnership solve many more problems than litigation or even the threat of it.

Businesses that grasp this and write contracts to suit the reality which covid uncovered have a tremendous opportunity in front of them – to act faster, to do more business more quickly, to become easier to deal with, to forge more trusted partnerships with suppliers and customers. The business benefits of moving quickly are legion, and general counsel (GCs) have a chance to help transform the way they work and the fortunes of their organisations.

Put simply, the faster a contract is entered into the quicker the money goes into the business – time is money. The longer it takes to negotiate a contract the less likely it is that a deal will be closed, the parties are frustrated and time and money is wasted.

One of the best ways to enable business to be done quickly is a simpler contract. It can even allow commercial colleagues to complete some deals without any legal involvement at all. And it is built on a bedrock of trust and co-operation that characterises most business activity. If your customer or supplier is intent on bad faith behaviour a contract – no matter how detailed – will rarely save you.

A simpler contract is a clearer one. Language exists to cover most eventualities. Risk is not random, it happens in the same places over and over again, so can be accounted for by targeted detail in a contract. And anyway, as we found in March 2020, covering all eventualities is impossible.

But a simpler contract requires commitment. It is a radical act for a group of commercial lawyers to leave ends un-tied, to use catch-all language rather than detail every potential pitfall. It requires trust, confidence and a pragmatic eye for the commercial big picture.

This kind of contracting does increase the perception of risk because the contract becomes a more principles-based document rather than a list of specified actions. And dealing with specific situations and actions has become ingrained in commercial contracting.

The easiest thing in the world is to add another clause or just a few words here or there to cover one specific eventuality. And once you’ve added one, someone else will suggest another.

But this knee-jerk risk aversion doesn’t tally with commercial reality, and doesn’t recognise the difference between perceived risk and actual risk.

Remember, risk isn’t randomly allocated. It accumulates around some activities more than others. But this understanding doesn’t inform the contract creation process. If it did, contracts would be very detailed in dealing with the elements that most lead to dispute, and less detailed around elements which are rarely disputed.

But this doesn’t happen. World Commerce and Contracting has found that most negotiating effort goes into contract clauses about limitation of liability, but that this isn’t where disputes happen – disputes tend to be around price, late payment and change management.

So there is a mis-match, and much lawyerly effort is, bluntly, mis-spent out of an instinctive need to close down perceived risk without enough analysis of actual risk.

To resist this seemingly cost-free temptation requires discipline and rigour. But the rewards are potentially significant.

Here’s where good data can come in. But too often noble attempts at capturing and reporting on contractual obligations are overburdened by the very complexity companies seek to avoid. By differentiating the material from the immaterial, technology can be more effectively deployed and adopted. This empowers stakeholders to serve themselves and lawyers to focus on the hard and essential issues.

Ultimately, if teams can do their own analysis of what causes disputes and use that to inform the effort they put into different parts of their contract while radically simplifying everywhere else then they will have a commercial advantage their competitors will come to envy.

Clare Francis is a commercial expert and Orlando Conetta a product engineering expert at Pinsent Masons.