A new contracting model for a new era
For a world drowning in contracts and complexity
Contracts are a form of currency - units representing value in our businesses, lives and economies. We approach them much as we have done for centuries, accepting inefficiency, complexity and inequality. Here is how we can evolve the model.
Realisation
Two moments of realisation in particular made me question what on Earth we are doing terms of our approach to contracts.
The first was during a final read through of a 265 page document for a syndicated debt facility. Like those moments in films where you see a person flash back through a reel of life experiences at the moment of death, I flashed back through the negotiations and the many internal and external discussions that fed into the drafting. Every part of the document was seeded with fear and mistrust. 265 pages of what ifs. A new relationship to help fuel growth papered entirely on protection and unease.
The second was discovering plans for a mega funding round had been leaked to the press, despite the fact that we had papered more than 50 non-disclosure agreements with potential investors. Hours spent going back and fore, agreeing language, signing and managing documents across a range of parties at pace, but when it came down to it, what could or would we actually do when confidentiality (which was well understood, with or without the document) was breached?
The cost of a what if world
Legal lives in the world of what ifs, extrapolated from our way with one another over time. The variety and volume of assaults and failings that have gone before, acting as a body of evidence that we cannot trust each other today.
And so we have contracts in increasing volumes and complexity. Documents seeking to cover all eventualities of mistrust, all the ways something could go wrong.
Let’s say there are 330 million businesses in the world[1]. The largest organisations will average thousands of written contracts, small organisations will average one or two. If we took a conservative estimate of 25 written contracts per business on average, we are looking at a total of 8.3 billion contracts worldwide – more than the number of people on Earth. The reality is that number is likely much, much higher number.
World Contracting and Commerce[2] put the average business spend on a low risk contract at $7,000 and a mid-complexity contract at $21,000, with time spent by a heap of people: business and sales folks, lawyers, operations, compliance, finance. High complexity contracts run into the hundreds of thousands.
8.3 billion x $7,000 = a lot of money.
Someone could probably also contribute to this picture statistics on the average time to contract – the incredible lag between decision and paper and the cost of that to businesses.
Zero sum game
Google offers up by autofill ’in plain English’ when you type ‘drafting contracts in’ and provides 1.25 million search results, including books dedicated to the subject. There is a reason for this – the default is not plain English. Contracts are commonly dealing with complex arrangements and are by their nature, therefore, intricate, but there is also an inherent disincentive in contract drafting to plain English.
I remember as a trainee lawyer learning about ‘weasel wording’, and that being celebrated and something to aspire to. How can we cleverly weave in this condition to advantage our position without discussion or have a sleeper cell to argue later in court? It is not uncommon for ‘wins’ to be celebrated and contract negotiations to be scored like football – ‘we won that one 3-1’. This is of course understandable in the current model where the focus (and liability) is on one party’s interests and not those of a shared purpose, but is it the approach that best serves as a foundation for relationships in business from here on?
Pause
Given this context, can we pause for review?
Yes, things go wrong and risk needs to be properly allocated.
Yes, businesses need to be smart and take care of their assets.
Yes, people need to be held to account.
Yes, contracts provide clarity and focus minds.
Yes, contract drafting is an incredibly useful art.
Yes, contracts can help maximise business opportunities.
Yes, the contracting process can bring people together.
But is the approach to contracts we have today the right model? Is there a better way?
Is there a model that would put the relationship first, maintain the practicality and strip out much of the pain?
Another way
In UK company law there is the concept of model articles[3] – provisions enshrined in law that apply on a default basis to companies. They can be adjusted within a certain scope to fit the specific bill. There are a range of model contracts in different sectors such as investment[4], advertising[5], banking[6] and construction[7]. In the EU, standard contractual clauses[8] provide a compliant default for companies transferring personal data internationally.
Can this approach be harnessed and scaled to form the basis of a new paradigm with contracts, comprised of two elements:
Principles of conduct or values that underpin all business relationships and are legally binding, such as those embodied in the UK FRC Corporate Governance Code. Principles of transparency, ethics, and responsibility. Foundational processes for remuneration, risk management, delivery, reporting.
Model terms - an authoritative default set of structures and texts for the various business scenarios we see again and again, built with and backed by relevant public and industry bodies, businesses and the legal and contracts community.
This way there is an agreed basis for contracts that holds weight – weight with those the contract serves, weight with those who serve them and weight with adjudicators, should it come to that. Principles can apply also to derogations, to give them the best chance of being fairly handled.
Swathes of unnecessary or fake bespoke work can be stripped out of the system, along with cost, delay and uncertainty, supporting businesses, and thereby economies, on a universal scale with efficiency and growth, freeing up the focus for the really intricate and priority matters.
This could also apply to consumer-facing contracts, stripping out the standard terms in B2C contracts that matter but noone ever reads, into a set of fair, consumer-body-approved model clauses to which everyone can refer for common ground rights and responsibilities.
A shared opportunity
For organisations for whom cost is no object, there may be resistance to a paradigm such as this. Currently, they enjoy the advantage of unlimited resource, great lawyers and market dominance over others. For the legal and contracts industry, the significant labour of today’s model bears rich fruit.
Historically, the state has been reluctant to get involved in matters between commercial parties, leaving it to them as grown-ups to figure out and for market forces to eventuate.
But there is an opportunity here in the context of the shifts we are seeing in business, society and economies around the world. We have entered a new era and we can apply new standards that fit with where we are heading now.
Efficiency. The current model represents vast inefficiency for all organisations, large and small. At a time of great financial pressure and imperative for growth, re-designing our collective approach to contracting represents an opportunity to strip out this inefficiency and realise significant savings in time and resource. What if we could reduce down our average spend on even low value contracts from $7,000 to $700, or even to $7, and speed up the process? Over an annual cycle or lifecycle of a company, and taken on a collective level worldwide, what sort of savings would this represent?
Certainty. Along with inefficiency comes uncertainty in the current model of contracting. Each different version of the same clause brings its own flavour, each set of language brings nuance in interpretation, whether or not such nuance is needed. Nothing is absolute. Having a common standard in both principles and process would bring us closer to that absoluteness and the increased simplicity it offers, also enabling tech adoption (more of which below). Add to this the ability to draw in using big data, actual intelligence on how risk is crystallising and what is happening across the market, beyond just one practitioner or organisation’s line of sight, thus removing extrapolation and guesswork from the contracting process.
Fairness. Model terms would strip out the ‘your paper versus my paper’ dynamic, providing a neutral, fair position for all parties, which could be informed and kept up to date through data analytics on risk and market practice. Small to medium size enterprises are the life blood of economies, making up the vast majority of all businesses globally - 99% in the UK, contributing ~60% of all private sector turnover - enriching communities and challenging the status quo through innovation, new products and markets. With greater resource constraints and less market/bargaining power than their larger counterparts, SMEs are at a disadvantage in the current system and that disadvantage affects the wider economy. Convoluted contracting takes SME leadership time away from all important execution and growth and they often end up carrying disproportionate liability in contracts, which loads the SME community with risk of failure. We need to review the conditions surrounding SMEs, to support them to thrive: the contracting environment is a key factor.
Relationships. Relationships are one of our greatest assets. Rarely evaluated or really treasured, relationships are the true fuel of business. The way we enter into relationships in business matters. Whether we start out with collaboration, transparency and shared purpose, or with competition, opacity and individual advantage, we are imprinting that into the relationship for its duration and normalising those qualities in business and thereby in wider society. The purpose beyond profit movement is acknowledging and inviting the benefits of greater connection and integrity in business relationships, with suppliers and other partners forming part of a stakeholder ecosystem, to be taken into account and nurtured in the context of deepening ESG (environmental, social and governance) responsibilities. Contracts are an intrinsic part of this and, though often overlooked or seen as detached from the ‘real work’, in fact they can serve to degrade or support the success of a relationship over the long term. The legal and contracting community can play an increasing leadership role in this and in evolving the model.
Technology. The greater the standardisation, the greater the opportunity for contracts to be made ‘smart’, i.e. built in a way that they are machine readable and can produce and interact with data. This enables value to be harnessed from legal documents in a way that simply does not happen when they are static text and get put away in a drawer for the rainy day or left for someone manually to extract relevant information. Designing our documents to be smart enables a range of useful automation and analysis: payment calculations, reporting, compliance analysis, drawing in market or policy information from external sources, filing with authorities etc. Add to this the trust, accuracy and speed factor of extracting information from the secure, current source, rather than one that is re-keyed or a questionable version. Documents can be coded smart whether or not they are market standard, but standardising documents across sectors will have an accelerating effect on adoption and realising the benefits and opportunities technology presents.
Ways of working
This new approach to contracting would bring and necessitate a new discipline and way of working:
A preparedness to work with standards and frameworks rather than only free form.
Identifying what is truly unique in drafting, versus what is a replicable model.
Drafting in a way that enables software to read the data - if this then that.
A willingness to share data and knowledge, collectively to build and enrich the models.
In conclusion
Perhaps one day we won’t need contracts at all. Or even signatures. There will simply be relationships.
Until (and perhaps towards) such day, we need a contracting model that works well, for the many as well as the few, and that is effective to meet individual business as well as economic and collective objectives. Our context is shifting faster than ever before, and businesses are weathering unprecedented storms. It is easy to get buried in the noise, but the opportunity in such times is to review, re-think and take collective action.
If the business community were to come together around a table to demand change from the legal and contracts community, what would they focus on, what would they want? And what might they not ask for that society and economies would, though, need?
There are myriad examples of the law implying terms. Codes and best practice are increasing and evolving in respect of business conduct and governance. But there is no cohesive, authoritative approach for contracts. Very little is codified and herein lies the opportunity – to standardise what can be standardised. We can:
have principles of conduct in business relationships that have the backing of the law so that is coded in, and
apply model terms on a comprehensive scale: model terms that carry weight, built with and backed by industry and relevant bodies, and built to harness the benefits of technology towards shared aims.
To achieve this will take concerted effort. The legal and contracts community can be at its very heart and need not worry about reduction in demand. A new paradigm in contracts, once realised, will bring a shift in and sharpening of focus, yes, but it will also bring new opportunities, new disciplines and further evolution to be embraced.
[2] WCC cost of a contract 2017