[EP 041] Quick Tips: Four Top Tips in Creating an Effective Contract (Part 2)


CLICK HERE to download the transcript for this episode.

Episode Highlights

01:21 Tip#3: Use Appropriate Clauses In Your Contracts
05:44 Review Your Templates
06:06 Understand Your Templates Internally
06:29 Learn From Your Past Experiences

10:12 Tip#4: Check Your Contract Outcomes
12:22 Review Your Contract Outcomes For The Past Year
12:58 Identify What Worked In Past Contracts
13:15 Identify What Didn’t Work In Past Contracts
13:53 Measure The Effectiveness Of Your Contracts

Hi, it’s Joanna Oakey here and welcome back to Talking Law. Today we are looking at the second part of our two part series in the Four Top Tips in Creating an Effective Contract.

If you missed part one, in part one of our two part series we outlined two important qualities of an effective contract, namely simplicity and completeness. That was in Episode 40. So if you missed it head over to our website at talkinglaw.com.au and look for Episode 40.

And in this episode, we will be covering two more crucial qualities for people who are wondering if their contracts are as effective as they could possibly be.

Tip#3: Use Appropriate Clauses In Your Contracts

Running on after simplicity and completeness, we have number three – appropriateness of the clauses used.

A risk of templates is that sometimes the approaches adopted in the template won’t accurately reflect the realities of the relationship that you want to set up with your customer or with your supplier. Most organizations will have their own set of templates for their use with their customers and generally speaking their provision of goods or services to their customers is fairly similar from one client relationship to another. And so it’s appropriate then in this situation to use a template.

But one thing that you have to look out for in this sense is those relationships with customers or clients that are a little bit different and that create risks or obligations that fall outside of the usual arrangement because what often happens in this sense is that organizations who have templates in place will simply use those templates without critically thinking about whether or not they’re always appropriate for each of those client or customer relationships. And what this can mean is that sometimes you haven’t dealt in enough detail with the details that are relevant to that particular client relationship.

Examples of this that I see sometimes are where organizations might quote for a particular job but they haven’t in their contract been absolutely clear about what the acceptance criteria is from their customers in relation to that work. And what can happen then is that sometimes organizations are in this situation where there is a dispute between them and their customer and the customer simply doesn’t pay because it hasn’t been clear whether or not the goods or services have been fully supplied or supplied in accordance with what you the supplier had intended.

Sometimes this might be if there’s variations halfway through when you are providing the goods or services or if something else has changed along the way or if it just wasn’t particularly clear what you’re going to be providing and to what standard. Making sure you are using the appropriate clauses within your agreement and that you have thought in advance about what templates you’ll use and what elements of those templates might need to be changed or specifically considered from project to project can help ensure that you’re not in a situation where you have customers who are refusing to pay because you have come to some slightly different viewpoint about whether or not the goods and services have been properly and finally provided in accordance with what you had assumed the customer had wanted.



Now let’s flip this around a little bit and look at it from the perspective of you dealing with supply relationships. Whilst most organizations as I said will have a template that they deal with in relation to the customer relationships,only a small proportion of organizations that I deal with have a set template that they use for suppliers or a purchase order agreement.

Supply agreements or purchase order agreements as a template can be really useful for an organization to have. But sometimes these templates won’t accurately reflect the realities of the relationship that you’re looking at setting up with your supplier.

For example I see on many occasions indemnity clauses that are completely inappropriate for the situations in which they are used either creating overly onerous provisions for one party that are not appropriate or relevant in the circumstances or on the flip side provisions that fail to capture the proper risks that really need to be dealt with. This is an example where having the right contract is really important particularly when you’re in the situation where you are dealing with a supplier’s contract in a supply relationship. Often those indemnity clauses would be completely inappropriate for you, your organization and the relationship that you’re entering into.

That’s one area where you should pay specific attention.

Another example is insurance clauses. So these are often used without any consideration of whether the insurances being requested are relevant to the relationship or whether the amounts being requested for cover properly reflect the industry or the size of the party that’s being required to hold them.

What are our tips in this area?

1. Review Your Templates

Read through the templates that you intend to use before you use them, which seems pretty obvious. But sometimes you can become too familiar with templates that you’re using and forget to go back, from time to time, to review those templates and consider their appropriateness and make sure you understand their appropriateness for where you are using them.

Read through the templates that you intend to use before you use them. - Joanna Oakey #TalkingLawPodcast Click To Tweet

2.Understand Your Templates Internally

Take time to understand your templates internally so that you can readily identify which elements may not be appropriate in all cases. This is relevant both for your supply contracts and your customer contracts. So it’s really ensuring that the people who are at the coal face of negotiating these contracts understands the templates that they’re dealing with.

3. Learn From Your Past Experiences

Start keeping records of which clauses are being regularly sent back to you with changes by the other parties whether they’re customers or the suppliers.

It might save you time to have predefined fallbacks rather than having to deal with new wording each time you deal with a new customer and a new supplier arrangement so it’s really about making sure you develop an approach internally that allows you to more effectively deal with these contracts because you’ve already thought about what fallbacks you’ll allow.

Ensure that the people who are at the coal face of negotiating contracts understand the templates that they're dealing with. - Joanna Oakey #TalkingLawPodcast Click To Tweet


Let’s take a short break

When we come back, we’ll delve into our fourth and last crucial quality for effective contracts. And that’s next. I’m Joanna Oakey and you’re listening to Talking Law.

The Deal Room – Our Sister Podcast

If you’re a professional involved in business sales and acquisitions activity (i.e. a broker or accountant), or if you are a business owner looking to expand by acquisition or if you are building to sell your business in the future, check out Talking Law’s sister podcast – The Deal Room! Together with Talking Law, these are now two of the top legal podcasts in Australia!

The Deal Room Podcast contains information, interviews and tips & tricks relating to the world of business sales and acquisitions. We love this area of law, and thought it was high time we took some of our specialist knowledge and shared it in commercial context, rather than just talking about legal stuff!

We release new episodes every tuesday. You can listen to our episodes on www.thedealroompodcast.com or subscribe to The Deal Room Podcast on iTunes to be the first to know when a new episode is out.

A New Innovative Product

Are you looking for a top quality legal team to assist you in your organisation? Aspect Legal is an innovative commercial legal practice, that specialises in providing fast and professional services for their clients. If you would like to chat about how we might be able to assist you, simply head over to our website at aspectlegal.com.au to book in a time for a free discussion with one of our lawyers.

While you are there, you might also like to check out our innovative product, Legal on Tap. Our SME version of this product provides a business with access to a team of lawyers to answer questions as they come up in the business. And our large business version also provides this access to our team of lawyers – as well as a wide range of online based training in contract law for non-lawyers. Both of these products are available for a ridiculously low monthly price. If you are interested, simply head over to our website at aspectlegal.com.au and check out the Legal on Tap pages, or alternatively head over to our contact page and submit a form to let us know you would like more information!

Welcome Back

Welcome back! Earlier we talked about the importance of using appropriate clauses in your contracts. Let’s keep the conversation going and discuss our last top tip in creating an effective contract.


Tip#4: Check Your Contract Outcomes

The very last element that we are talking about here in relation to what to consider when you’re creating an effective contract is the outcome.

Now “outcome” perhaps we should have covered off first. But I wanted to leave this to last because it is the most important area so I wanted to make sure we had enough focus on it all at the end.

At the end of the day, the answer as to whether a contract has been effective is most properly answered at the end of the relationship. If you’ve gotten to the end of the contract term and you’ve achieved your requirements and initial intended outcomes, then the contract was effective obviously. If the contract has navigated disputes by providing each party with a clear guideline about how to manage the dispute and those disputes have them being dealt with quickly and effectively, once again one could view the contract also as having been effective.

If on the other hand there’s been confusion throughout the contract term in relation to any rights or obligations of either party or if the contract hasn’t delivered your initial objectives or requirements or if there’s been confusion by either party about any aspect of the relationship, then the contract perhaps could have operated more effectively than it actually did.

So what this should do then is create a warning sign for you because sometimes what happens is that organizations get so busy with dealing with particular issues within contracts that they forget to go back and reassess what the learnings are from each of those contracts. And that’s something in Aspect Legal that we focus really heavily on, on ensuring that where there have been issues that have been created in relation to a contract or that have arisen through a contract that at the end of the process of navigating our way through how to deal with that issue, we then also stop and say “Okay, how do we stop this from occurring again?”



And that might be readjusting your templates or it might be readjusting the process that you went through at the initial stages of the contract where you thought about what the outcomes were that you wanted from that contract and ensured that you had considered how your contract would deal with those and dealing with those areas in the relationship.

Our Aspect tips are here.

1. Review Your Contract Outcomes For The Past Year

Spend a little time reviewing your recent contracts. And the beginning of the year is often a really good point for doing this, going back through the last 12 months and thinking about the recent contracts and creating notes about what worked with some customer and supplier relationships that perform the best and what happened with relationships that weren’t as successful. And sometimes then it becomes clear about patterns that are emerging and about areas that you need to think of more clearly in your contracting for the next 12 months moving forward.

2. Identify What Worked In Past Contracts

Think critically about what elements of the successful relationships that you identified from the last 12 months you could use to build into your contracting process. So it’s working out what worked and then working out why it worked and seeing if you can identify patterns.

3. Identify What Didn’t Work In Past Contracts

Think critically about how you could use the contract to avoid some of the issues that you faced in the less successful relationships. And sometimes the biggest learnings for you and the biggest and useful approaches in your ongoing improvement of your contracting process comes from critically thinking about the things that didn’t work quite to plan. So if you think about those issues that have occurred in your contracting relationships in the last 12 months, then also look at patterns that may have emerged from this. And look at how you can use that to make your contracting relationships into the next 12 months more successful.


Measure The Effectiveness Of Your Contracts

And then finally number four – build a process to enable you to measure the effectiveness of contracts moving forward and to give you time for reflection at least annually to help redesign your contracts to drive optimum outcomes for all parties.

In future podcasts we’ll also be focusing further on what other methods you could employ to help build your contracts with a view to supporting successful contract outcomes. But until then if you need any assistance with this process, just head over to our website that aspectlegal.com.au or talkinglaw.com.au to book in a time to speak to one of our lawyers that Aspect Legal about how we might be able to assist you in going through this process of reviewing what has worked and what hasn’t so that you can set up your client and supplier and other relationships more effectively for the next 12 months into the future.

So that’s it for our two part series on the Four Top Tips in Creating an Effective Contract. As you probably have gathered by now it’s not necessarily an easy process but it’s certainly a process that’s worth reflecting on at least once every year to ensure that you are creating contracting processes within your organizations that drive successful performance from your contracts.

In this episode we talked about the appropriateness of the clauses used and looking back at the outcome, the outcome of the last 12 months in relation to what drove successful contracts and what patterns in less successful contracting relationships. Once again if you miss part 1, just head over to Episode 40 for the first two elements in this series that were simplicity and completeness.

That’s it for today. Thanks so much for joining us here. If you would like a transcript of this episode, because there was a lot that we covered, just head over to our website at talkinglaw.com.au – Thanks again for listening in! And we will see you next time.