Contracts Co-Creation 2.0 - Keep it Simple

Improvement Potential for Contract Creation Processes

Negotiating by E-Mail is already challenging enough. But we often additionally overcomplicate it ourselves with the inadequate application of tools. While there are contracting tools that also support the drafting of the process, most of these processes are still done using standard word processing software such as Microsoft Word et al.

Redlining - the Standard

To work in a so-called "redlining" process when (pre-)negotiating contracts from a distance is somewhat the standard procedure. It means that either side creates a first draft of an agreement, which is afterwards sent to the other party with the "Track Changes" function of the word processing software switched on. The second party then makes changes in the wording of the contract as requested. Such changes are then visible in the software in colour, which is why it is called redline, even though today it can be any colour.

Latest at this point, it is getting complicated. Nowadays, contracts are often reviewed by several people on each side. Many of the reviewers are not very well-educated in the track changes function of Microsoft Word, which is usually the software of choice. That leads to the fact that the first party, who originally drafted the contract, often gets back a mess. The reviewed document now includes unintended formatting changes, a massive amount of corrections in different colours, change requests by different reviewers of the other party, requests that are even sometimes contradictory with each other, and wording which has an entirely different style than the original draft. Set aside that there might be undocumented changes in the file. Either intended or unintended the other party might have changed parts of the text without it being visible by the track changes recording. And as if that weren't enough, there might be many non-important formatting changes because the other party uses their word processor in a different language or mistakable side comments in the file.

Now the most significant work for the first contract party is getting the overview of the change requests and do the clean-up of the file. Afterwards, it will be required to do a word by word comparison to ensure all changes have been captured. This does not sound like value-adding work, right? But even more, it is quite dangerous because this might set the focus on the formatting and wording instead of the understanding of the underlying message. What do the other party request to do differently?

Doing it better

Having been in Procurement for a big part of my life, I have a simple guideline: "There is anyway nothing to negotiate on my contract because this is what I need from my supplier". Since I am usually getting the requirements from the customer side of the business, this is indeed often true for a significant portion of the contract. Even if I would be open to changes, my existing contracts with the customers would not allow them, and if a supplier cannot stick to it, I need to find another one. Additionally, I often need to keep the main contract terms the same for different competing suppliers to make the offers comparable and keep the market fair.

I have a simple guideline: "There is anyway nothing to negotiate on my contract because this is what I need from my supplier". But let's face it: Even the non-negotiable is negotiable.

But let's face it: Even the non-negotiable is negotiable. That said, we need a solution for cases when the wording is unclear for one of the parties or there is something that needs to be adjusted to fit the business case. For these cases, I send out a PDF-Version of the contract. The supplier then gets two possibilities to raise his change requests: Either he uses the PDF annotation function to add his questions, remarks or suggestions, or he uses an empty sheet of paper, references to my section numbers and comments there. In any case, the supplier is not supposed to create contractual wording. I want to discuss content, not terminology. If we then agree on the change of a section, we, my legal person and myself, will spell it out in a language that is consistent with the rest of the contract.

This approach also solves an additional issue. Often there are too many discussions about the legal wording instead of the intention behind it. There is a saying in German: Having two lawyers at the table means getting at least three opinions. As soon as the other party involves their legal department, the trouble often starts. The legal person might not be that experienced in the governing law of the contract and thus, request wording changes that make no sense and sometimes make the legal meaning behind even worse for theirs. For this reason, the aim to discuss the substance of the contract instead of the spelling is essential.

Creating complex Contracts

There are, of course, also agreements where I cannot just draw-out my existing contract template. Whether it is a strategic partnership, a co-innovation or any other kind of one-time contract, it must be tailor-made to the requirements. Here my warning is: Do not try to safe time by taking your existing template and modify it until no one can identify it anymore. Even worse is if you take out the contract template you used ten years ago when you were with your last employer. Such an approach will most probably lead to the fact that you have plenty of unnecessary text in your contract or inconsistent wording and flow. Nevertheless, I see such an approach very often in the Sourcing and Procurement area.

For such complex contracts, I always start with a term sheet. On an empty sheet of paper, well preferably in an electronic file, I create a list of topics and how I want them to be defined. This document is then discussed and revised back and forth with the other contract party. I usually follow the same approach described above: Only one party changes the wording, to keep it consistent. Discussions are not about terminology, but about substance, content and meaning. The underlying questions should always be: What do the parties want to do? What do they want to agree? Only once the parties conclude the term sheet, it will be sent to a legal agency or department, and we let them cast it into legal terminology.

"The best contracts I have ever made, where the contracts which were no contracts."

The Silver Bullet

The best contracts I have ever made, where the contracts which were no contracts. The two parties, we and our supplier, came together and developed a term sheet having intense interaction to negotiate and clarify. When the term sheet was finalised and agreed it was very apparent how the common business should look like and the negotiation process helped the parties to gain trust in each other. Since it was so clear that and how we want to work together, we decided to rename the "term sheet" to "agreement" and sign it. By that, the term sheet became a very simple-worded, clear and crisp contract without any legal language. Was it as bullet-proof as a contract written by a lawyer? Of course not. But knowing that there are no legal pitfalls in the contract helped the companies a lot to trust each other and live the agreement in their daily business.

Conclusion

I think there are better solutions to manage contract (pre-)negotiations in writing than the mostly-used redlining process. Whether it is working with annotations in a PDF-File, a separate file with topics to discuss or creating a term sheet before writing the contract. I think all these solutions ensure better accuracy and are in the long run also time-saving compared to a redlining process.

Do you have even better ideas on how it can be done? Do you want to criticise or question my approach? I am happy to get your feedback. Please leave a comment or get in touch by direct message.

The trigger to write this article came from this LinkedIn post done by Laura Frederick. Thanks for inspiring me, Laura.

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