Before looking at how we, at Future Law, advise our clients on simplifying their contractual documents, it’s worth looking at the reasons for having legally binding contract terms in the first place. A contract is simply a way of trying to ensure that you get the deal to which you agreed. In our personal lives we rarely use written contracts to get what we want. As consumers we enter into many contracts, but do not pay much attention to their terms, because we know we are protected by consumer protection laws. More importantly though, we understand that a business that treats us badly is unlikely to succeed in the long run. So, on a personal level, we often invest time and money, take considerable risks, and place reliance on others, based on nothing more than an understanding of other people’s motivations and a sense of trust.
Legally binding contract terms between businesses are really nothing more than agreements between the individuals who negotiate and manage the contracts and their understanding of one another’s motivations. They are usually a combination of economics (financial motivation) and psychology (personal motivation), so in the later respect at least we start to appreciate that imposing detailed obligations on someone could prove to be counterproductive.
However, many lawyers spend hours framing conventional contracts almost entirely in the language of detailed obligations (you must do “x” and we must do “y”, or else “z” will happen). Naturally lawyers are keen to be as specific as possible, as they are taught that the more detail, the more certainty, and the more certainty, the more protection. As justification for this, lawyers will always say that they must have one eye on how a contract could ultimately be enforced by a court.
The problem with this approach is that courts are rarely proven to be great places to resolve business disputes and it is therefore from this premis that we, at Future Law, seek to draft our client’s legally binding contract terms.
In our collective experience, we advise that the most successful contractual relationships have three main features:
- The contracts are as short as possible;
- The contracts focus on incentives rather than obligations. The incentives would typically be simple and may not therefore require detailed regulation of the whole business relationship; and
- Each party would have a right to terminate on a reasonable period of notice. If each party simply has a “nuclear button” to end the relationship, rather than a selection of “sticks” to beat one another with, they tend to focus on the bigger issue of whether their personal relationship is actually working, rather than the precise meaning of words in the contract.
Conversely, we believe that certain elements of a contract seem to encourage problems:
- Detailed contracts actually seem to cause disputes. There are usually differing interpretations of what those contracts required, or differences about what amounted to satisfactory performance or breach; and
- Contracts with a medium to long-term fixed duration tend to have the most disputes. Being locked in to a fixed duration causes greater friction between the parties and often more recourse to their lawyers. On a practical level, a longer duration provides more scope for unexpected events to occur, upsetting the basis on which the contract was struck, and therefore causing unforeseen tensions.
In essence then, the combination of incentives to continue doing business, alongside the ability to walk away at any time, creates a commercial affinity between the parties that generally helps keep them together over many years.
So, the Future Law approach to drafting legally binding contract terms is based on three key principles:
- Focus on the key legal risks and value, and minimise the rest;
- Create commercial affinity, not a legal straitjacket, by avoiding the imposition of detailed obligations and instead focus on incentives, coupled with the ability of either party to walk away; and
- Rely on the inherent fairness of the general law rather than trying to impose sanctions.
So if you would like to talk to us about how we can achieve thess outcomes for you, and help you build long term business relationships and growth, please call us on 0844 209 8500, we’d love to work with you.