Contracts are often called Agreements – and for good reason: The whole basis of a contract is that it represents the agreement which has been reached between the parties. So the first question to spring to mind might be – why is the other party starting out upon their relationship with me by behaving like a bully, and does this behaviour really bode well for a successful working relationship? In contrast, the second question might be ‘What does accepting these terms say about how I value my contribution to this arrangement?’

In reality, (leaving aside the minority who are greedily looking for short-term gain over long-term relationships,) most people neither want nor actually understand the complexities of ‘clever’ contracts. So, this type of problem is often caused by the advisers, some of whom engage in ‘contractual one-upmanship’ – who can impose the most unreasonable clauses – either as part of an ego trip, or because it’s what they feel their clients want.

In these situations, what tends to happen is that the parties lose patience with the negotiation process. This leads to one of two outcomes: Either the whole deal falls through, or the parties start working together outside of the agreement which is being negotiated – ie, under their own unwritten rules.

Good contracts lead to profitable long-term relationships because they accurately record the details of the agreement which the parties have reached in a way both parties understand – preventing the disputes which result from a failure to properly manage expectations, and which end up destroying reputations. However, to create a good contract, you need to start from a position of trust and reasonableness.

So, in the situation described above, a good start would be to arrange a round-table discussion rather than batting emails backwards and forwards. Explain that you don’t want to ‘play games’, and that you simply want to achieve a contract which is fair and reasonable, and which reflects what BOTH parties actually want. Having the other party present for this helps them to understand your point of view (something which won’t be passed on if it’s their adviser causing the problem), and having your own adviser present means that there’s no opportunity for the other adviser to blind you with (legal) science.

Of course, being ‘fair and reasonable’ doesn’t mean giving all your rights away. It simply means understanding that there will be risks to both parties in any potential arrangement and that the best course of action is to balance those risks with the benefits to be derived under that arrangement. Accordingly, knowing your risks – and to what extent you are prepared to accept them – as well as thinking the position through from the other party’s perspective, will be good preparation for your negotiation.

By working together collaboratively in this way, all parties achieve the ideal solution – a win:win situation leading to long-term trust and a reduced likelihood of disputes. The whole process is also much faster and less expensive than playing ‘contractual one-upmanship’. So, if it’s your contracts that are causing the problems, now might be a good time to re-assess what they are saying about your business.

There are several things which may stand out as being ‘not OK’ or unacceptable in a contract – unreasonable liability provisions, restrictive covenants etc – but these can sometimes pale into (almost) insignificance, if we ask a different and wholly more important question: “Does this contract achieve what I want it to?”

In the last few days, I have looked at three separate contracts in relation to which the anser to the first question was ‘yes’, but the answer to the second question was a loud and definite ‘NO!’

In 2 of the 3 cases, whilst in totally different industries, the agreements effectively involved the clients setting up supply chain arrangements under short-term agreements. On the face of it, whilst there were some drafting issues, these could easily have been resolved. However, on digging deeper into what the clients actually believed they were signing up to, I found that in both cases, they were expecting long term, exclusive, product supply agreements – with a long term income stream to match. They were therefore quite shocked when I explained what their contracts actually meant and how limited their rights would be.

In the third case, I was being asked to review terms and conditions, and these were generally ‘OK’ in relation to the products which the client sells. However, the client’s greatest source of income comes from the provision of services – and these were not even mentioned.

As well as creating a huge amount of uncertaintly, the above examples highlight a common problem – which is the tendency to focus upon what a contract contains, rather than what is omitted. This is an especially easy trap for lawyers with no practical commerical experience, and business people with no legal experience, to fall into. It is also a serious side-effect of cut and paste drafting (as to which, see my earlier article: The Cut and Paste Trap.)

So, when reviewing or constructing a contract or a set of terms and conditions, what is the best approach?

Firstly, put any drafts on one side, and get a blank piece of paper!

Write down your own understanding of the arrangement (in English, not ‘legalese’), and try to think chronologically. Then ask how long the arrangement will last, and what each party hopes to get out of it. Finally, think about what the other party (or their successors!) could do which would make the arrangement less profitable or acceptable to you – for example, using your ideas to create a product of their own, or not providing you with the information you need to be able to provide your services on time.

Once you have a clear structure, it is much easier for your or your advisors to answer that all-important question: Does this contact achieve my objectives?’ – and to suggest amendments based upon ensuring that the opportunities for misunderstandings are minimised.

This approach results in a win-win situation and is the basis for building great business relationships – which is the objective of all of us in business!

I have come across the following example today of a ‘circular’ definition:

Definition: ‘Protocol’ means the protocol which the supplier must provide to the client in accordance with Clause 2

Clause 2: The supplier will provide the client with the Protocol

This definition creates a perpetual loop. As the supplier, you would read to clause 2 and see that you have to provide a Protocol – you would then look to the definition to see what it means, and find that it is the document you have to provide under clause 2!

As a lawyer who focuses on the practicalities of contractual agreements – and on making them as short as is reasonably possible – if I was re-drafting this, I would firstly decide whether a definition was required at all. If it was, I would probably re-word it along the lines of the following:

‘Protocol’ means a protocol in the form set out in Schedule 1, or in such alternative form as the parties shall agree in writing from time to time.

The first part of the wording gives the parties certainty as to what is meant, and the second part gives them the flexibility to make future changes.

Do you have definitions in your agreements which don’t make sense to you or go around in circles? If so, I’d be pleased to hear about them.

Whilst solicitors do an excellent job of protecting their clients’ legal interests, I still come across too many examples of unnecessarily long-winded contracts, full of complex legal phraseology, and which do not reflect the practical needs of the parties.

Sometimes this type of contact is simply the result of sloppy drafting – the ‘here’s one I prepared earlier’ approach. However, mostly, it’s down to the fact that the solicitor does not know enough about the nature of the businesses and the transaction involved – and the client can’t afford the time it would take for him or her to find out – to be able to draft a better document. In either case the client, not being legally trained, won’t realise the limitations of the document – unless and until it is too late.

I’ve therefore decided to share some examples of poor drafting I come across and to look at how these can be remedied. (Confidentiality is obviously paramount though, so certain details will be changed where necessary.)

So, to start:

Last week I reviewed an 8 page (yes, 8 page!) confidentiality agreement for a client. It had been drafted by reputable and expensive lawyers, but they clearly did not understand the structure of the client’s organisation – and the client did not understand the complexity of the agreement.

This created 2 major problems:

1. Much of the information to be disclosed by my client would not have been protected because it belonged to organisations not covered by the agreement;

2. Disclosure of the other party’s confidential information to my client’s associated companies – which was always what was intended – would have put them in breach of the agreement.

In other words, the agreement was utterly and totally useless for the purpose for which it was intended. 8 pages of wasted rain forest!

Ideally, it would have been better to have had separate agreements with the associated companies, but – let’s get real – this was never going to happen. Accordingly, remedying the contract involved drafting tighter definitions, and providing rights for the associated companies to be able to rely upon the terms of the agreement under the Contracts (Rights of Third Parties) Act 1999.

More examples to come. Watch this space!