Key Takeaways:
- Focus on contracts being business tools, instead of legal niceties.
- Collaborate with your clients to ensure your contracts are a framework for success rather than focused on the law.
- Beware of adding terms that undermine the basic value exchange.
Like a log voting for winter, this lawyer and contract drafter wants you to stop thinking about contracts as legal tools.
Simply put, a contract is any record of a commercial agreement. We create contracts every single day for tasks as simple as buying a coffee, travelling by subway, or downloading an app to our phone. Yet how many of those terms are about you enjoying your coffee, your journey, or your app – how many are really about either the deal or the relationship you have with that supplier?
Of course, I suspect you haven’t read those terms – virtually no one does! Until terms are read, they cannot enhance a business relationship. On the flip side, even if they are not read, their length can undermine the good intentions of that relationship.
What is the Purpose of a Contract?
In 2024, the World Commerce & Contracting and Deloitte Purpose of a Contract Report found that one of the primary purposes of a contract was as “a framework for a mutually successful business outcome” aka a tool for doing deals.
Contract users have a radically different view of their contracts from those who write them. Contract users want their contracts to help them manage risk, communicate needs, record their duties, support the business relationship, manage performance, provide operational guidance, and generate profit. They are focused on the project or transaction, rarely thinking about when things did not go according to plan!
In fact, of the 11 listed purposes of a contract, not a single one referred to the law, whether describing it as a legal tool or that its content needed to reflect legal requirements. For the lawyers reading this who write contracts, that data can dent our ego.
Are We Creating Frameworks for Success?
That 2024 Report found that less than half of contracts (39%) were tools for success. Its predecessor 2017 Report said that rate dropped to a staggeringly low 4% for organisations with annual revenues over $5 Billion.
Why does it matter? This August, when I booked into a hotel in Utrecht, they sent me three pages to read. The first had pictures and wished me a very warm welcome to their former monastery and waxed lyrical about how much they’d like to help. The next two pages came as a shock, with an astonishing list of 14 things I was specifically prohibited from doing. From the sensible – not lighting candles – to the frisky – not inviting sex workers to my room – to the weirdly patronising – “it is forbidden to leave the room more than what is reasonable [sic] dirty.”
These terms are not a framework for success. This style of contract, which reflects all the things that have gone wrong in the past, can destroy the supplier-client relationship. It doesn’t build or enhance trust. It makes the reader feel very much in the wrong before the transaction has even begun.
Jeopardizing Profit
Not only do overly legal or contentious contracts undermine a business relationship, but they can also jeopardize profits.
In 2023, the World Commerce & Contracting and Deloitte published their ROI of Contracting Report which confirmed that “many of today’s contracts jeopardize the value achieved from trading relationships.”
I vividly remember going with my parents to buy a new car back in the 1980s. A young salesman pitched the new white Ford Cortina for a keen price. So my father dutifully took the stub of a pencil from behind his ear and wrote it on a piece of scrap paper. Any attempts in the cozy back office to increase the price, due to extras, were met with a flat refusal from my dad – he didn’t want to renegotiate the deal. The dealer said they wouldn’t make a profit at that price, but none of us believed him!
For contract drafters and lawyers, we can have a similarly negative effect on a “done deal.” Even when we are “tidying up the paperwork,” we can include terms that change the commercial deal, and jeopardize the value exchange. This can be as simple as changing payment processes or periods – causing friction or adding costs – or adding a change process that prevents a supplier from getting more money even when it has already carried out extras.
Things need to change if contracts are to become a tool for success and building trust rather than being seen as simply a legal tool.
Smooth As Silk
As a lawyer or contract writer, our job is to help our clients quickly and effectively convert a sale into a closed deal. Although that is undoubtedly a legal process, for our clients it should be a coherent part of their sales and marketing. So our contracts need to be consistent with their brand, tone of voice, and style.
Instead of relying on templates, we could use a checklist to focus on the essential items. Once that is done, we could decide that this deal doesn’t need extra pages of “small print”. Those terms are often barriers to doing deals as they add bulk and complexity, and undermine good relationships.
Our clients really want us to keep contracting simple. Remember that contracts are not about the law. They are about the business!
One Response
Thanks. This is very insightful. As an entertainment contract negotiator, I have to deal with form contracts all the time which are accretions of clauses to address everything that has gone wrong in the past. Of course, these terms are largely non-negotiable unequal bargaining power in all but a few cases.
I tend to think about contract negotiations as a way of helping the parties reach a full agreement that will suit most, if not all of their business and legal needs.
When drafting myself for clients, I try to focus on the business deal in understandable language (wherever possible when dealing with IP law) and then consider additional language for the most likely risks that the parties haven’t thought about.