Better Contracts

June 8, 2017

Just like many
others who have worked as technology lawyers for many years – in my case, for
almost 25 years now – I question why the deals we do go wrong so often: Why do
they need resetting so soon after they have been signed? Why do they get to the
point that they are terminated more than just occasionally? I am not talking
particularly about my current employer – these are concerns that stem from my
work mainly acting for customers and my knowledge of the industry and the
issues we see across the industry.

The deals I’m talking about here are large,
complex, transactions with many ‘touch points’ between the organisations
involved. They are always going to be challenging to get right, but, by now,
and with the standardisation and development of the underlying technology that
has gone on over the past two decades, I would have expected much better
outcomes, much more often.

What goes wrong?

Looking back at my experience of these
deals, I identified five areas of ‘dysfunction’ and several factors in each
area that contributes to or directly causes a failure of these deals. Many of
the areas are ones that lawyers are not in a position to mitigate or avoid –
they relate to Project Dysfunctions, Solution Dysfunctions, Procurement
Dysfunctions and Relationship Dysfunctions. However, we lawyers can and should
do something about Contract Dysfunctions. My view is that there are two
contract-related factors that contribute to the continued failure of these
large deals: Factor 1 is that the contract is put in the drawer after
signature; Factor 2 is the ‘forgotten schedules’.

Factor 1: The Contract is put in the Drawer

contracts continue to be written by lawyers for lawyers and not with those
trying to manage the deal and the relationship in mind.
As a result, those managing the deal
often ‘put the contract in the drawer’ – after all, it is only needed when
things go badly wrong, isn’t it?

Factor 2: The Forgotten Schedules

Schedules such as Governance, Escalation
and Contract Change are often unchanged from drafts created by the lawyers, or
taken from previous deals, and are not thought about. Yet these schedules
represent the heart of the on-going relationship – mechanisms that will make
the deal a success or a failure. These ‘forgotten schedules’ will ultimately
determine how the deal is managed, issues are identified and resolved quickly
and before they get out of hand, and new developments are taken account of.

What is the Better Contracts Initiative
aiming to do?

The Better Contracts initiative grew out of
the desire to help improve the chances of deals being successful, and, more
specifically to address the two factors identified above.

It turns out that many other SCL members
had similar thoughts and have wanted to look at every aspect of our contracts
to see how we could make our deals more likely to succeed.

Over the course of the last 12 months we
have held a number of meetings with SCL members and others interested in this
initiative. Early meetings were designed to explore the issues associated with
our contracts and see if key themes or areas of focus could be established. We
identified three principles that we believed were important to improving our
deals. They were:

  • our contracts must be easy to use and to
    understand unaided;
  • our contracts must be discussed and
    documented so that they truly reflect the joint understanding of the parties;
  • our contracts must anticipate the most
    probable and significant risks and address them.

Separate workstreams, were set up to take
forward each of the three principles and each held a series of meetings to
identify what could be done.

Taking each Workstream forward

The Better Contracts Initiative has been
fortunate in being supported and taken forward by some great lawyers and with
the support of senior members of IACCM. Some of those leading the initiative
include: Mark O’Connor, DLA; Alistair Maughan, MoFo; Bridget Fleetwood,
PinsentMasons; Andrew Jacobs, BT; Mark Lumley, Shulmans; Sally Hughes, IACCM;
Matthew Lavy, 4 Pump Court; Tiffany Kemp, Devant Ltd; Jeremy Moreton, IAG;
Katherine Eyres, CMS; and Susan Biddle, Kemp Little.  Many others are involved too and are making
significant contributions to the workstreams. Thank you to all those who are
supporting the initiative!

Workstream 1 (Our contracts must be easy to
use and to understand unaided)

Workstream 1 is probably the most developed
workstream with several documents close to publication as ‘best practice’ guides
and examples for use in our deals.

The areas Workstream 1 has focused on are
simple and clear drafting, using graphics and icons and identifying user groups
and keeping topics together.

Simple and clear drafting

How can we simplify our drafting so that
our agreements are more like the user guides that we all produce after the deal
is done? Maybe we develop a practice of running a ‘readability’ test on clauses
when we’ve drafted them? Perhaps we should use the Flesch readability test and
commit not to include any clause which has a score of less than 60/100.

The team is developing a style guide and a
suggested glossary. Amongst other things this will propose replacing stock
phrases such as ‘special, indirect and consequential loss’ with a single word –
perhaps ‘special’ – which could be glossed with a more detailed explanation
that picks up on the legal connotations.

Using graphics and icons, better

We rarely use graphics and process flows in
contracts. But it’s very telling that we use them often in:

  • negotiations – when we are trying to close
    down the knotty issues, we often resort to diagrams and process flows to reach
    the top table audience and to simplify concepts so that the issues can be
  • contract guides – when we are trying to
    show people what the contract says in layman’s terms.

So, if they’re so useful, why don’t we
actually incorporate them into the contract itself?  We understand that this can involve engaging
the skills of a professional designer – but it is a price worth paying.

Workstream 1 is proposing to adopt process
flows to explain the steps in a process like:

  • service ordering
  • service level failure/ general default
    remedies provisions
  • change control
  • dispute resolution.

Graphics are great for explaining the
thought processes behind complex drafting and the team is proposing the use of
diagrams to illustrate complex provisions – painshare/gainshare provisions, for
example. The team also suggests that we should use timelines to explain how key
time-based concepts in the contract are intended to work:

  • transition and exit
  • other provisions that have notices provisions
    and obligations linked to periods of time measured from notices.

Finally Workstream 1 intends to propose the
use of formulae to explain pricing and related financial provisions.

Identify user groups and keep topics

We ought to make the contract more modular
so that the contract users can pick up the part that they need and carry it
around with them:

  • operational services;
  • service levels and performance management;
  • pricing and financial;
  • people transfer, people management and
  • information management and data security;
  • governance escalation and disputes;
  • legal and commercial.

The traditional structure of Ts and Cs and
schedules doesn’t work.

  • The temptation is for lawyers to focus on
    the Ts and Cs and neglect key schedules.
  • We also tend to deal with topics in both
    places – service levels and service credits is a good example. The model
    contract has at least 8 clauses within clause 7 on performance indicators as
    well as the full Schedule 2.2 on performance levels.
  • We should move to a document style that has
    a guide and index so that people can find what they are looking for.
  • The modules should cover an entire
    workstream and should not cross refer to other sections unless it is really

Workstream 2

Workstream 2 has been focused on ensuring
our contracts are ‘discussed and documented to ensure a joint understanding’.

The team has identified a number of areas
for further exploration. These include:

  • Identifying issues that rarely get properly
    addressed in the procurement process but are meaningful to the proper operation
    of IT projects and prepare guidance on how they should be addressed. One of the
    first areas of focus here is the development of guidance on the preparation,
    discussion and agreement of the customer’s requirement and supplier solution.
  • Technology could be used to improve the
    joint understanding of the parties in our deals and the Workstream is looking
    at possible technology-based solutions in this area.
  • The team is also aiming to develop a
    pre-signing ‘Understanding Health-check’ to add in an extra gateway at the end
    of the contract negotiation phase and before contract signature in order to
    determine the level of joint understanding before the contract is signed. This
    will include a common set of issues and processes to ‘stress test’.
  • Additional guidance on key points for
    contract management is also under construction. Amongst other things, the
    guidance will demonstrate the benefit of maintaining a conformed copy of the
    contract and will provide ‘dos & don’ts’ for contract amendment wording, so
    that changes are easy to conform into the baseline contract.
  • Finally, the Workstream is considering what
    procedures, mechanisms and data should be included in a joint handover pack
    from the customer and supplier negotiating teams to respective contract
    management teams.

Workstream 3

Focused on the ‘probable and significant
risks’ arising from complex technology deals, the Workstream has a wide range
of issues to consider. An early development from this workstream has been the
creation of guidance and an associated template to capture and clarify customer
requirements and show how and the extent to which they are met by the supplier.

Other areas that the team is looking into
include encouraging greater and more connected legal involvement with the other
disciplines responsible for successful deals and the team has particularly
focused on the project management community.

The workstream is seeking to address the
approach our contracts take to dispute avoidance and resolution through the use
of reference class forecasting; the inclusion of third parties to act as ‘contract
advocate’ or as a certifier of certain elements of the contract; and the
development of an adjudication panel for quick decisions particularly where
there is significant project work underway.

Next Steps

The initiative is making significant
progress in developing ‘best practice’ guidance and examples that we hope will
be adopted by the rest of the SCL community and all those involved in complex
technology transactions. Documents will start to become available over the
coming few months but there is still time to get involved and provide your
input into the initiative overall and the development of the guidance. Please
do get in touch with any of the team if you would like to help. We will provide
further updates as the documents are published.

Andrew Hooles is Legal Director,
Commercial, Legal and Assurance at Fujitsu Services Limited.