We are often so caught up in the process of an ongoing creation of contracts that we forget to sit back and analyse whether the contracts we are creating are as effective as they can be.
So I have taken this opportunity to put together some notes on what defines an effective contract, and I challenge you to hold your contracts up to this light – are they as effective as they could be?
What qualities define an effective contract?
1. Simplicity
If you agree that the main point of a contract is to determine the rights and obligations of parties to a contract, and to allocate the risks involved in that relationship, then it stands to reason that the contract must be clear and easy to understand for each party and for each person who will be required to implement or manage the contract.
This seems an obvious point, but it is so often forgotten in the vast sea of words.
I have so often come across contracts that are difficult to navigate, with complicated language, long sentences and paragraphs, and legal jargon. Not only are they a pain for me to read, but far worse, they are often close to indecipherable by the very people who are meant to be implementing and managing the relationship under those contracts.
What’s the point of a contract, if no-one who uses the contract understands it?
Aspect Tips
* use clear and precise language that is able to be understood by anyone who reads it
* avoid legalistic terminology and jargon
* appropriately use headings to enable the parties to easily navigate the agreement
* aim to have your contract be as short as possible (whilst still covering the important points)
Do your contracts get a tick on simplicity?
2. Completeness
Are all of the key commercial points properly reflected, and are there appropriate provisions to ensure performance will meet your expectations?
I see on a very regular basis the failure to properly clarify service levels and KPIs, and to specify a remedy where these have not been met. Whilst pre-contractual negotiations often involve prolonged discussions about service levels and KPIs (and indeed decisions on who to choose as a successful tender respondent may hinge on the service levels that are represented by a supplier) in a very high proportion of cases, I find that there is insufficient detail on those service levels/KPIs in the contract. Either the service levels are described in a way that is unclear (in light of the fact that they are drafted quickly, and often by people within the business who may not have had contract drafting training), or unmeasurable. Or are simply not tied to any remedy for a failure to achieve them. This failure has resulted in a large number of examples I have seen, of organisations who then face difficulties in getting their suppliers to perform in the way they had intended, and difficulties in terminating underperforming contracts. Although, even where organisations are able to terminate the contract, the lack of performance by the supplier no doubt then also comes at a cost of having to seek our new suppliers and negotiate new contracts.
Aspect Tips
* Plan at the outset: Create a checklist at the outset of your supplier search, clearly identifying the outcome you require from the supplier
* Take thorough notes throughout the negotiation process of the representations made by suppliers in relation to any aspect of the relationship
* Ensure your contract clearly identifies the outcome required, and your requirement of the supplier – in a way that is clear and measurable
* Ensure these areas are reviewed by someone other than the drafter
* Link a failure to achieve these areas to a specific remedy – make sure you understand what you will want the right to do if they aren’t met.
What do you do to ensure your contracts are complete, and encapsulate all of the negotiated terms in a sufficiently thorough way?
In the next installment we’ll be covering some further crucial qualities that define an effective contract. In the meantime, don’t hesitate to let us know if you would like to discuss in more detail how to revamp your contracts to be more effective. Send an email to [email protected] and we will organise a time for a free first confidential consultation.
