[EP 040] Quick Tips: Four Top Tips in Creating an Effective Contract (Part 1)

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Episode Highlights

01:07 Build Good Relationships Through Effective Contracts

03:14 Tip #1: Keep Your Contracts Simple And Understandable

[05:49] Keeping It Simple With Clear And Precise Language
[06:42] Keeping It Simple With Appropriate Headings
[06:59] Keeping It Simple By Keeping It Short

11:14 Tip#2: Make Sure Your Contracts Are Complete With All Key Commercial Key Points

[13:35] Ensuring Completeness By Planning Ahead
[13:47] Ensuring Completeness By Taking Thorough Notes
[13:56] Ensuring Completeness By Identifying Outcomes
[14:09] Ensuring Completeness By Specifying Remedies

15:02 Let’s Wrap Up!

16:02 Download Our Contracting Checklist

 

Hi, it’s Joanna Oakey here and welcome back to Talking Law. Today, we have another Quick Tips session. Our Quick Tips sessions are all about giving you the high level areas of information that you need to know in relation to a particular area, in the shortest possible time. We will be talking about the Four Top Tips in Creating an Effective Contract.

So why are we talking about this, you might ask. Why is this important?


Build Good Relationships Through Effective Contracts

I see time and time again clients who are caught up in the process of ongoing creation of contracts that sometimes have forgotten to sit back and analyze whether the contracts they’re creating are as effective as they can be.

Often what happens is that we get busy. We get busy by supply arrangements coming towards us, client contracts coming towards us. And we feel the need to get contracts out the door, turned around as quickly as possible, without thinking properly and deeply enough about whether or not these contracts are as effective as they could be in backing up the relationship that we were trying to create. And I think conceptually this comes back to the question as to why do we have a contract in the first place?

I see contracts as one of these areas that essentially should be a living document. So I don’t subscribe to the concept of contracts being something that you just churn out and then put in the bottom drawer waiting for something to go wrong to then pull it out so that you have a right to litigate.

Of course contracts can be useful for that purpose as well but I think contracts can be far more useful if they’re viewed as a living document that helps underpin the relationship that you’re trying to create. In this way, often it’s best to look at contracts as somewhat of a checklist to help you ensure that you have covered off the key components of a relationship with your contracting party whether or not that’s a supplier or a client or some other contracting party that you’re dealing with.

I don't subscribe to the concept of contracts being something that you just churn out and then put in the bottom drawer waiting for something to go wrong. - Joanna Oakey #TalkingLaw #podcast Click To Tweet

So if we see contracts in this light then of course it becomes important for us to think then clearly about what it is that makes these contracts effective. So I’m going to talk here about four simple areas that you can focus on to make sure you’re analyzing your contracts in terms of their effectiveness. And hopefully as I run through this list you might find some ideas about how you can quickly and easily turn your contracts into documents that are more effective for you in guiding your relationships with your counterparties.

 

 

 

Tip #1: Keep Your Contracts Simple And Understandable

Let’s start with number one. My number one tip here is simplicity. If you agree that the main point of a contract is to determine the rights and obligations of a party to a contract and then 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.

Now once again I’m just gonna repeat that. It’s important that it’s easy to understand for each party and also for each person who would need to implement or manage that contract. It’s not enough for simply the legal teams on either side to understand the contract. It’s also really important that the business that’s implementing the contract understands it as well.

This might seem obvious, but it’s often forgotten in the vast sea of words that contracts can sometimes become. I’ve so often come across contracts that are difficult to navigate with complicated language long sentences and paragraphs, and shock-horror legal jargon.

Not only are they a pain for me to read. Honestly, they are most painful! But far worse, they’re often close to indecipherable by the very people who are meant to be implementing and managing the relationship under those contracts.

Really, what’s the point of a contract if no one who uses the contract understands it? This rings true for both your client in a contract, so in that sense you really need to ensure that if you have client contracts that you’re using again and again and again that your salespeople, but also your implementation team understand what’s in those contracts and understand how the contracts work.

Once again when we’re talking about supply contracts it’s important that your procurement team or people who are involved in that supply relationship whoever it is that’s implementing that supply or dealing with the supply from the supplier understands what is in the contract. And I’m not just talking here about the outcomes that should be clearly stated in a contract and sometimes they’re not. But it should also be payment and performance timings, criteria – so the standard of performance that’s required. Sometimes this is a discussion between the parties but not implemented importantly in the contract in a clear enough sense that they can be measured into the future and so you can work out whether or not your supplier has performed and complied with the contract.

All right so what are my tips in this area.


Keeping It Simple With Clear And Precise Language

Number one use clear and precise language that is able to be understood by anyone who reads it. Seems obvious, right?

But sometimes your templates will need work to get them into this state because often times I see contracts, particularly where contracts have come from long lasting contracts so they haven’t been reviewed regularly or where organizations have a parent company that is based overseas and are using contracts that are fed by their overseas based parent companies. Often these rank among some of the most difficult to decipher contracts here in the Australian context.

What we’re trying to aim for here is clear and precise language, avoiding legalistic terminology and jargon. You don’t need it in there.

 



Keeping It Simple With Appropriate Headings

Appropriately use headings to enable the parties to easily navigate the agreement. I think this one is a really important one because the use of headings helps us to get to the part of the contract that we want to read at any particular point in time and headings should be simple obviously.


Keeping It Simple By Keeping It Short

And finally aim to have your contract as short as possible whilst obviously still covering the important points. And once again it is very hard to achieve a short contract that also covers the important points. So here we have to work out a balance. But quite often shorter contracts can actually be more effective than longer contracts if the longer contracts aren’t likely to be easily understood by the people who are reading and implementing them.

What's the point of a contract if no one who uses the contract understands it? #TalkingLaw #podcast Click To Tweet


I challenge you to have a bit of a think about each of these areas that I’ve talked about in relation to simplicity, the clear and precise language. Are you using legalistic terminology and jargon? Are you using headings that are short and easy to decipher? And is your contract as short as possible within the confines of still providing the protection that it requires?

So think about each of these areas and consider whether or not your contracts get a tick on simplicity.


Let’s Take A Break

Let’s take a short break. Coming up after the break, let’s have a look into our second top tip in creating an effective contract. And that’s next. I’m Joanna Oakey and you’re listening to Talking Law.

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Welcome Back

Welcome back! Earlier we talked about about the importance of keeping your contracts simple and understandable. Let’s keep the conversation going and discuss our second top tip in creating  an effective contract.

These are our first two tips in creating effective contracts! #TalkingLaw #podcast Click To Tweet

 

Tip#2: Make Sure Your Contracts Are Complete With All Key Commercial Key Points

After simplicity we move to number two – completeness. Whilst we said we want to ensure that our contracts are simple, we also want to ensure that they are complete, that all of the key commercial points have been properly reflected and that there are appropriate provisions to ensure performance will meet your expectations. And this is particularly important in for example supply relationships.

I see on a very regular basis a failure to properly clarify service levels and KPIs for example and to specify a remedy where these have not been met.

Sometimes when you’re leading up to a contract, so you’re having pre-contract negotiations, there’s often prolonged discussions when you’re dealing with suppliers about service levels and about KPIs – so key performance indicators that they must meet. And often decisions on who to choose as a successful supplier may hinge on the service levels that are promised by each of those suppliers.

But on the flip side, in a very high proportion of these cases I find that there is insufficient detail on the service levels and the KPIs in the contract itself. Usually what I see is either that the service levels are described in a way that is unclear in light of the fact that they were drafted quickly or often by people within the business who perhaps haven’t had contract drafting training. Or on the flip side that they’re simply unmeasurable. Or that they’re not tied to a remedy for a failure to achieve them.

This failure has resulted in a large number of examples that I’ve seen of organisations who then face difficulties in getting their suppliers to perform in the way that they 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 out new suppliers and negotiate new contracts.

It’s really important that if service levels are important to you, that you have properly reflected these in the contract and that they are measurable and that you have linked a remedy to each of those areas for failure to perform because otherwise you might be left with a right of damages not with a right of termination.


Ensuring Completeness By Planning Ahead

My tips here are to firstly plan at the outset. Create a checklist at the outset of your supplier search clearly identifying the outcome you require from your suppliers.


Ensuring Completeness By Taking Thorough Notes

Take thorough notes throughout the negotiation process of the representations that have been made by your suppliers in relation to any aspect of the relationship.


Ensuring Completeness By Identifying Outcomes

Ensure that your contract clearly identifies the outcome required and your requirement of the supply in a way that’s clear and measurable. Ensure these areas are reviewed by someone other than the drafter.

 

 

Ensuring Completeness By Specifying Remedies

And finally link a failure to achieve these areas to a specific remedy. Make sure you understand what you want the right to do if those service levels aren’t met.

What do you do now to ensure your contracts are complete and encapsulate all of these negotiated terms in a sufficiently thorough way?

This is something for you to reflect on perhaps right now. And if you don’t have a process in place, then perhaps it’s important for you to consider putting in place a process now so that you can ensure that you have a checklist that helps guide you into the future through your negotiations with your suppliers to ensure that your contracts are complete and contain all negotiated terms in a way that you can then use them in the future to drive that relationship with your counterparts.


Let’s Wrap Up!

Well that’s it for the first part of our two part series in the Top Tips in Creating an Effective Contract.

So just as a recap, today we talked about simplicity and completeness. Achieving simplicity is firstly about making sure that you have the right templates in place that correctly reflect the simplicity or complexity that’s required in your particular contracting situation. So it’s about templates. And completeness is about ensuring that you have the right processes in place to ensure that you’ve captured all of the elements that are important that need to go into the contract and that you have reflected them in the contract in the right way or that you have communicated this appropriately to your lawyers to ensure that they can reflect it accurately in the contract.

So for completeness, it’s really about making sure that you have the right checklist as part of your process to ensure that when you’re working through the contract or working through the negotiation process you’re covering off all of the most important elements. 

Download Our Contracting Checklist

All right. So tune in next time for the next two tips in the second part of this two part series in creating an effective contract. In the meantime if you’d like more information about this topic. Head over to our website at talkinglaw.com.au for a free transcript of this episode and also a download of our cheat sheet the five minute contracting checklist.

So that checklist is a very short checklist of some of the things that you should be considering,  and certainly as we talked about completeness in this episode. And I recommended that you have a checklist. This cheat sheet is something that you could use for that process of ensuring that you have checked off the most important areas for each contract that you’re working through or relationship that you’re working through. And then ensuring that they are then appropriately dealt with in the contract.

Through our Talking Law website, you’ll also be able to download a transcript of this episode and you’ll also be able to find details of how to contact our lawyers at Aspect Legal if you’d like help with any of the items we covered today.

Thanks again for listening in. We look forward to having you back for the next episode of the second two Top Tips in Creating an Effective Contract. Thanks for listening in and see you next time.