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What are we Missing in Our Contracting Process?

In my experience structuring contracts and negotiating them I have observed that there are certain critical nuances we keep missing out on that leads us to executing sub-optimal contracts that on several occasions even become unfit for purpose. This article intends to highlight some of these dimensions that can really help organisations and teams engage more meaningfully to achieve better outcomes from an executed contract. Some of the aspects highlighted may also help legal professionals make the entire contract process more enjoyable and meaningful.

Understanding the Business Context Fully: It may be far too familiar for in-house counsels to just receive a contract draft with no background or context and with a tight timeline of 1 business day to revert. This generally happens because business teams involve their legal teams only once the business relationship as well as commitments on the commercial front are finalised. The actual contract from the business team's perspective is just treated as a formality which just needs to get done come what may. This results in the legal team having to nudge business teams for details with very limited time to really absorb the business realities and the commercial outcomes intended to be achieved. This holds true even in scenarios where contracts need to be developed from scratch to capture a commercial understanding. We really need to create more business team engagement in the legal contracting process and make it a collaborative endeavour. This can to a large extent avoid situations where the negotiating team needs to keep going back for approvals and internal alignment leading to a longer cycle time for contract closure.

Getting to Know the Pulse of the Business Relationship: Legal teams really need to spend more time in grasping the dynamics of the relationship and the effort that has gone into building the relationship with a particular supplier, customer, or strategic partner. This is critical to ensure that the right tonality and strategy is in place when legal teams come into the picture to close the deal. Far too often, I have observed that the lack of deep understanding of the relationship leads to a one size fits all approach to negotiating critical terms of the contract and misunderstandings primarily arising due to inconsistent positions taken by business leads and the legal teams subsequently. It is also critical to understand that aggressive negotiation is not always necessary to achieve ideal contract outcomes.

Lack of Clarity on which battles to fight (Sense of Give & Take): We far too often lose sight of the larger picture and tend to get mechanical in our negotiations. For instance, we fail to ask whether we really need an indemnity provision in a particular commercial relationship or whether we really need to fight over a limitation of liability clause. The ideal approach to negotiation must always be based on mutual promises and commitments one party is willing to take on in return for something the other party does in return. A contract must always create value for both parties while protecting business specific risks only. Risks that have no foreseeable economic impact should really not be brought to the table as that often leads to protracted and needless delay in contract closure.

Lack of Clarity on Scope & Goals to be achieved: Even very simple contracting arrangements with vendors for instance encounter this problem which becomes extremely frustrating for contract professionals in the legal team. For instance, I have very frequently received contract drafts without the annexes populated by the business stakeholder or the stakeholders saying it is not too important. What is even more shocking is to see executed contracts with the scope and commercials page blank. Such a casual and apathetic approach to contracts is not only bad for business but also difficult to enforce. For example, a service contract with a vague description of services and SLAs or a cross reference to a standard SLA located on a website can make it difficult to hold a service provider accountable when there is a disruption. We are very often left with absolutely no leverage in such cases to advise business when a dispute arises on such a contract.

Optimism Bias: One of the primary reasons for a casual approach during the contract negotiation stage is an optimism that nothing can go wrong. This remains the case despite legal teams insisting on covering for certain critical risks. It is also often the case that critical points cannot be discussed because of the optimism bias playing out during discussions between business teams making it awkward to raise those issues later at the time of formal negotiations.

Lack of Communication between Negotiating Team & Contract Implementing Team: This is an area that needs more work. There is rarely a structured process to educate people lower down in the organizational hierarchy on what can and cannot be done under a contract where they may be required to perform obligations or use a tool as a customer. This very often leads to situations where an employee misuses a license or fails to fully understand his role under a contract with a customer. This can lead to severe economic loss for companies in the form of penalties or other punitive costs being imposed in addition to reputation loss if the breach reaches the press.

A need to treat Vendors as Partners: In a customer and vendor relationship it is often taken for granted that as a customer can get whatever it wants from the vendor without really understanding the vendor's challenges in implementing the customer's requirement. It is now more than ever before (post Covid) that it becomes important to understand the vendor better and work towards the improvement of the vendor as well to benefit from the deal. We need to shift to creating holistic contracts in line with how Apple and Android work with App developers wherein there is a sentiment created amongst the stakeholders that they are contributing to a larger cause at the same time providing App developers the ecosystem they need to deliver better results. IACCM research also suggests that relationship with vendors must be collaborative to achieve better results rather than it being merely transactional.




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