Can We Write Better Contracts?

Andrew Hooles thinks that we can. His article suggests several areas for improvement and is intended to be a call to action.

Are you interested in a better precedent for major IT deals?  Are you interested in focusing the discussions and negotiations in deals on those areas that will really benefit both parties?  If so, a group of us might just be able to come up with a better way and, in doing so, help technology lawyers move back to being at the centre of these transactions.

Two areas that currently spring to mind as problem areas in our deals are covered below, together with suggestions as to how we might improve things.  I believe there are many other issues that could be materially improved by a careful review and 'reimagining' of our contracts and the role we lawyers play in their creation and negotiation. 

If you would like to join a few of us in developing these thoughts, please get in touch with me directly (Andrew.Hooles@uk.fujitsu.com), and we can see how we might take it forward. SCL is supporting me in this initiative.

The two problem areas referred to above are issues I've noticed over the years:

·        The contract is not understood properly and it is not used day-to-day once it is signed.  Effectively, the contract is 'put in the drawer' and is only ever consulted when things go badly wrong.

·        The contract and the negotiations leading up to its agreement are focused on price and issues affecting the price and, to some extent, the solution.  As a result, key elements of the deal are underdeveloped.   

Current Approach to IT Contracts 

The contracts we create for technology deals are traditional in form and content - built on decades of precedents and on approaches to documenting transactions that have developed over time.  Whilst the language isn't archaic, our contracts haven't moved on to embrace the best of modern drafting techniques and principles or evolved to represent the true nature of technology deals as we have grown to understand them.  The most innovative change in form and structure has been the move of the definitions from the front of our agreements into a schedule!

We also treat our contracts as the 'dumping ground' for the various project, service and, to a lesser extent, business elements of the deal: the elements not created by the lawyers are bolted on, rather than equally carefully drafted and expertly dove-tailed to fit well together.

This isn't (all) the lawyer's fault.  Procurement, project, service, 'the business' on the customer side, and similarly on the supplier side, each see this as their procurement exercise, where their issues and documents are what count.  The contractual documentation created reflects this divided approach.

The lawyer is seen as the specialist focused on the 'front end' of the agreement, with only very limited involvement in the schedules and almost no involvement in the technical schedules.

As a consequence, the contracts we end up with are inferior creations:

·        Because of the way they are drafted and assembled, they don't engage those who are going to have to use them once the deal is signed.  So the contract ends up being 'put in the drawer' and only brought out if something goes horribly wrong.

·        Because of the competing priorities and the focus on price and risk in the documentation and in the negotiating process, the contracts, and therefore the deal teams, are focused on the wrong issues (or, at least, don't sufficiently focus on some really important issues).  So there are a number of 'forgotten schedules' that are really very important if a deal is going to work, but that are not sufficiently considered and discussed in agreeing the contract. 

The Contract is Put in the Drawer 

The legal drafting included in our contracts is subtle and nuanced, drafted for clarity and to deal with the implications of case law.

As lawyers, we try to protect our clients to the fullest extent possible and deal, through contractual language, with all the important risks in the transaction.

This approach, and the legal system that underpins it, is extremely successful in traditional commercial transactions:  where the transaction is run by lawyers (and accountants) and it is a one-off – such as buying or selling a business.

Subtle drafting, hidden traps and defensive trenches, are fine in deals where the commercial obligations are quickly completed and the parties can use the legal system to argue over consequences – they are much more challenging when business people are trying to manage through complex services.

Technology contracts continue to be written in this way.  They are written by lawyers for lawyers. In fact, they are written specifically for litigators. They are not written with those trying to manage the deal and the relationship in mind.

When the practices described above are employed the contract isn't properly understood by those tasked with managing the services and the relationship.  They may think they understand it, or at least elements of it, but they are unlikely to have the view the lawyers had when it was created.  More worryingly, 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?

When the contract goes in the drawer the carefully identified and established risk allocation agreed over months of discussion and negotiation is forgotten; the processes and approaches established through discussion go unused; and the parties drift (or sometimes seem to run) away from the contract to a haphazard, undefined and ambiguous contractual, legal and business position.  It is hard to recover from this without a renegotiation and resetting of the deal – and that can be a painful and time-consuming exercise.

We need contracts that are straightforward and understandable.  They shouldn't need a separate guide to explain them – inevitably dumbing down the subtle approaches actually used in the contract.

To take an example of a common and time-intensive discussion in deals at the moment - wilful default and its consequences.  This is one of many possible examples of the type of discussions that should be at the extremities of a deal, rather than at its heart.

We should trust our court and arbitration systems to keep up with our new approaches, and start to record these deals differently. At a minimum our contracts should meet the following criteria – each should be: 

·        Signposted: easy to find your way around

·        Targeted: created so it is easy for key roles to understand the agreed risk allocation, processes and obligations vital to their area of responsibility 

·        Clutter free: boiler-plate, unnecessary definitions and repetition of what the law is should all be separated out into an annex, perhaps even a glossary

·        Consistent: designed in the same way throughout the entire contract and its schedules

·        Surprise free: issues associated with a topic should be grouped together

·        For management, rather than for litigation: drafted with those managing the contract in mind, rather than the courts

·        In plain English: using English in current use, adopting contemporary drafting techniques - with the on-going use of independent assessment and validation and redrafting if it doesn't meet plain English standards. 

The Forgotten Schedules 

The second issue that causes problems in deals is the way our contracts are structured and the resulting areas of focus in the associated procurement exercises. 

The focus of both our contracts and our procurement processes has the effect of leaving the most important elements of the deal to be dealt with by precedent schedules that aren't properly tested by those who are going to be relying on them.

Much of the contract is based on standards created and embellished over the years. Those standards include elements that are of little interest or relevance to the lawyers or to those tasked with getting a great deal done, because they don't have a material impact on the price or risk allocation.

Schedules such as Governance, Escalation, Contract Change, are often unchanged from the drafts we lawyers create, or which we take from previous deals, and are not thought about.  Just fill in the blanks, argue about how many impact assessments will be done at no additional cost, and you are done.

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, whether issues are identified and resolved quickly and before they get out of hand and how new developments are taken account of. 

Obviously it is vital that the teams get the requirement and solution right and get transition and transformation right.  After that, and perhaps after price, these forgotten schedules are the most important parts of the contract – more important than the terms and conditions, more important than financial distress, more important than benchmarking. 

The forgotten schedules are more important because they cause, or avoid, significant issues more frequently than these other parts of the deal. 

A Temporary Fix? 

Without the change of approach described above, there are some things we can do to reduce the risks associated with the two issues described. Here are my suggestions: 

·        Jointly create a contract manual which explains the key parts of the deal and how particular areas or issues should be handled when they arise.

·        Make time for a joint legal presentation to those in both businesses who will be responsible for the deal.  Explain background legal concepts and how the contract works in the following areas:

o   delay

o   calculation of damages

o   other remedies for breach

o   how termination works

o   limitations on liability.

·        Create joint workshops where the two teams go through some possible scenarios and discuss how they will be handled.  Suggested workshop topics include:

o   falling behind timetable

o   customer requires urgent, significant, change

o   multiple changes raised during transition

o   parties can't agree on whether milestone criteria have been achieved.

·        Use the outputs from the workshops to jointly refine the processes and commit to following them.

Summary 

To create contracts with the highest likelihood of succeeding we need to reshape, reword and refocus our contracts and the discussions surrounding their creation.

We need to rethink our contracts and what the customer and supplier teams focus on during negotiations.

Contracts need to become more 'operation manuals' with Governance, Escalation, Change and (a renewed focus on) Innovation at their heart.

Just by refocusing the discussions and the time spent on getting the important things working properly and thought through, we will make the deal much more likely to start off in the right direction.

If you agree, please contact me at Andrew.Hooles@uk.fujitsu.com.  It would be great if we technology lawyers could take back the lead on these deals and how they are documented. 

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

(This article is an amended version of one of 10 Posts by the author exploring the '5 Dysfunctions of IT Deals'. The Posts can be found at https://www.linkedin.com/today/author/7685495.)

 

Published: 2015-11-18T17:18:01

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