Reader David Munn recently wrote this item regarding an interview in which Tim Cummins of the International Association for Contract and Commercial Management asked the heads of Legal and Audit at Scottish & Newcastle, one of the world’s largest brewers, about their contract simplification program, called Pathclear. Click here to go IACCM’s web page about the interview; click here to see S&N’s slide show on the subject.
Here’s what IACCM had to say by way of background:
About 5 years ago, the Legal group at Scottish & Newcastle decided to challenge this traditional view. They were overwhelmed by the volume of contracts to review; they were exhausted by repetitive negotiation of terms that added little or no value to the business; and they were tired of being seen as the pariahs that stood in the way of getting relationships closed.
So they embarked on a radical reengineering initiaitve that has resulted in transformation in the way many trading relationships are negotiated and managed. Not only have the contracts themsleves been dramatically simplified and reduced in size, but other sacred cows have also been sacrificed. For example, many relationships now operate without fixed term; frequently there are no volume commitments; they have even dispensed with service level agreements and liquidated damages.
The results? With several billion dollars of spend and revenue now under their new forms of agreement, they have observed:
- Growing collaboration between trading partners, with focus on maximizing value and performance
- Reduced contention and disputes
- Shorter lead-times
- Legal viewed as a critical business partner and change-agent, involved early in strategic discussions and intiaitives
David says that the sample contracts S&N provided to IACCM were indeed short—two pages of regular-size print rather than ten or more pages.
I haven’t seen any of these contracts, but I’m sympathetic to the approach. I think that the choice boils down to the two extremes—radically short or comprehensive. When I’m working on an agreement that doesn’t warrant, say, a comprehensive confidentiality or notices provision, I often find it tough to whittle the language down. In the right context, it might be simplest to dispense with most of the usual protections and instead rely on the relationship of the parties to prevent dispute and, should a dispute arise, rely on contract law’s default rules to fill in the gaps.
The dichotomy of short and simple versus long and comprehensive reminds me of the traditional distinction between the civil law and common law approaches to contract drafting. (That’s something I discussed in this blog post.) As in that context, for the short and simple approach to work all parties would have to buy into it. If one party prefers the comprehensive approach, normally that’s the approach that would prevail.
3 thoughts on “Simplifying Contracts”
It’d be interesting to see the contracts. Whenever I see “contract simplification” arguments made, I can’t help but think, “what they’ve done is not made it simpler, but rather difficult to know anything with any certainty.” While they’re certainly right that “certainty” in some things is “illusory,” how often is that really the case? But, really, people don’t draft contracts because they like to draft contracts. People draft contracts to avoid 1) mutual assured destruction of the relationship (contra the foundational principle of the simplified approach) and 2) really, really expensive time spent arguing the details in litigation.
In any event, this contract simplification scheme seems to essentially be a “master” + “statement of work” arrangement. The master agreement, rather than being negotiated, is derived from 1) common law 2) standard contract rules (UCC, various treaties, etc) 3) course of dealing 4) good faith. To me, that’s a litigator’s dream (or is it nightmare) come true.
One last point. It’s been my experience that where there is already a good working relationship, contracts don’t matter much at all anyway. The problem is getting to that point in the first place (and contracts are usually necessary at that point). Those previous contracts then become the foundation for the course of dealing and essentially foster the scheme they describe. If that’s there point then nothing new.
I think Mike’s comment has much merit. That said, my thinking is that we’ve still not done enough to prove that the cost of obtaining certainty does not outweigh the costs imposed on the client’s overall business goals. Even if one contract out of a hundred goes really bad, does the litigation from that one kill all of the benefits obtained from the other 99? If we’d sought certainty in all of our contracts, would we have ended up with only 50 deals instead of 100? If we’d gotten 50 incremental more deals by using small contracts, are the profits from the extra deals going to outweigh the litigation costs from the one bad deal? In all, why is retaining risk necessarily a bad thing for every one of our clients?
(Clients are just as guilty as the lawyers in many aspects of the above — I’m not blind. I toss the questions out for debate though…)
I agree with Mike F., but I also think this issue is linked to your recent post on termination for convenience clauses. As a vendor, give me a few key paragraphs (termination for convenience, liability limits) and I can dispense with lots of other provisions without any loss of clarity or certainty. Viewed from this perspective, many contracts are horribly, unnecessarily bloated, resulting in unnecessary transaction costs (and lost deals). Eric.