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I was recently reminded of the popular Ted Talk by Simon Sinek, called Starting With Why. It’s worth a watch. Sinek describes how, very often, organisations fall into the trap of focusing on what they do and how they do it but forget to ask the question ‘Why?’.
As a commercial lawyer, I spend a lot of time drafting and negotiating contracts. In this world, there is a lot of excitement about how technology is transforming the way in which contracts are created, negotiated and managed. There are established tools for automating the way contracts are created, as well as more advanced technologies that can ‘intelligently’ analyse the content of vast quantities of text. Steps are also being taken to develop ‘smart contracts’, which could enable contracts to be ‘agreed’ automatically, with little or no human intervention.
In all this excitement, I wonder how many people are asking the question ‘Why?’.
I don’t mean “Why automate?”. I’m sure everyone understands the benefits of ‘faster and cheaper’. What I have in mind is a much more fundamental question: “Why do we write contracts at all?”.
This may seem like an odd question for a contract lawyer to ask, but I think it’s an important one to consider if we want to implement technology in a way that genuinely improves how we currently do things. I also think it’s a question too often neglected, even outside of the technology debate.
So with that in mind, here are some thoughts on why we put so much effort into (written) contracts.
For me, the core purpose of contracts is to prevent disputes and help resolve them where necessary. We may have drifted away from this (something I’ll come to later), but for me it is the ‘Ground Zero’ of why we put so much effort into agreeing contracts.
Writing a deal down helps prevent arguments about what was agreed. The process flushes out misunderstandings and the result provides evidence of the outcome. If needs be, contracts can also help others — like an arbitrator or a judge — settle a dispute between the parties.
If there was no risk of a future dispute between the parties, then there would be little need for a contract at all. A statement of the obvious I’m sure, but one worth reflecting on.
It reminds us that, at heart, contracts are about human relationships that are fragile and unpredictable. And in that volatile sea, contracts are an important tool for maintaining some level of order.
Also, the value of contracts is not limited to, and shouldn’t be defined by, the contract you happen to be working on. Each contract contributes to a wider, macro-benefit that can be taken for granted. There is a web of a billion contracts stopping a million disputes get out of hand. Imagine a world without contracts and you quickly realise the stabilising effect they offer us all.
So, when reflecting on our modern contracts and processes, it’s worth asking whether they help or hinder the core purpose of dispute prevention and resolution — or are they increasingly trying to achieve something else entirely?
Beyond this highfalutin talk of dispute prevention and social order, I see five key things for which we use contracts in our modern world. Five ‘functions’ if you like. You might be able to think of more (or different) functions, but this is my best attempt so far.
I think we use contracts to:
1. create Clarity
2. manage Risk
3. define Rights
4. ensure Compliance
5. provide Guidance
Let me explain each in a little more detail.
The Clarity function is about making sure that contracts capture what has been agreed and do so in a way that is clearly understood by the parties and understandable by others.
There’s lots to say about the Clarity function, but for now I’ll limit myself to a few observations, some of which are a little trite, but worth repeating.
1. Making a contract clearer is not the same as making it longer. The opposite is often true.
2. Making a contract clearer does not (necessarily) require a lawyer. Lawyers are good at spotting and avoiding ambiguity, but collectively, they are also guilty of making contracts longer and longer in a way that buries a lot of wood amongst many trees (see point 1).
3. Just because a contract is clear to one party doesn’t mean it’s clear to the other. Therefore, it’s useful to ask to what extent a contract achieves mutual clarity.
An obvious example of non-mutual clarity is where businesses sell products on standard terms that are non-negotiable — especially when selling to consumers online. In this scenario, one party to the contract may have little or no idea what the contract says (aside from the headline price).
4. What is meant by clarity, and whether it has been achieved, might look quite different depending on your circumstances. If you are a business entering into lots of similar contracts, you may achieve a certain kind of clarity by maintaining consistency across your whole portfolio, even if you sacrifice a measure of clarity on individual deals. I think of this as ‘portfolio’ clarity. On the other hand, if you are buying a business-critical and highly bespoke product, you are likely to require much more tailored contract terms.
5. Lastly — but certainly not least — the process of negotiating and drafting a contract is very often just as important for achieving clarity and eliminating misunderstandings as the contract itself (if not more so).
The Risk function describes how contracts are used to manage the potential fallout from entering into a deal, particularly the financial consequences of breaching the contract.
The most obvious example is the use of limitation of liability clauses. These cap the parties’ liability to a certain sum, even if the actual losses arising from a breach of the contract might far exceed the value of the agreed cap.
You could make a case that, in modern business, this has become the primary function of many contracts, especially for suppliers. No one wants to bring their business down because one or two contracts go badly, so it becomes critical to manage this risk. And in a rushed world where reviewing and negotiating contracts takes time, some may take the view that, for certain agreements, if the caps on liability are reasonable enough, they won’t worry too much about what the rest of the contract says (within reason).
It’s worth noting that the drive to eliminate risk can sometimes find itself in tension with the Clarity function. The temptation to cover every conceivable issue leads contracts to grow and grow, which in turn, brings us back to the problem of length becoming the enemy of genuine understanding.
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Chris is a commercial and technology lawyer - and also a ‘legal engineer’.
He has spent most of his career working in-house, first at BT and then Royal Mail. Chris now works at Simmons Wavelength - the world’s first regulated firm of ‘legal engineers’ – where he leads their contract management work with clients, helping to optimise how contracts are created, agreed and managed. Wavelength is a multidisciplinary team, made up of experienced lawyers, data scientists, operations professionals, developers and more.
Chris started his legal career at DLA Piper, where he trained and worked as an IP and commercial lawyer before moving in-house.
Outside of work, Chris is married to Ruth and has three young sons. When he’s not watching under 10s football from the sidelines, Chris enjoys playing trumpet and drums and walking in The Peaks.
0330 161 1234