Desktop version

Home arrow Sociology arrow A short guide to contract risk


When making a contract, the responsibilities accepted and those entrusted to the other party are accepted and entrusted by choice—at least this is the assumption in most cases. Contracts are a record of what has been agreed. They should communicate the deal and its terms clearly so that future disputes over their meaning are avoided. If they do not, their language (and lack of language) can contribute to major misunderstandings and lead to false expectations and negative surprises.

An ideal contract matches the parties' business needs and reflects their true goals. Such a contract is capable of being implemented within the allotted time, with the resources that have been allocated, and within budget. The designed solution matches the priced solution, which in turn matches the solution that is described in the contract and will be implemented. Ideally, the supplied solution will meet the customer's requirements, while the project will satisfy the supplier's need for profitability and risk management.

With a complex project in mind, Figure 3.1 shows contracting as a puzzle of technical, implementation, business and legal parts, all of which must be consistent and coordinated. if— and only if—correctly assembled, the pieces of the puzzle form a complete, synchronized picture.

Capturing the required knowledge and crafting such contracts is seldom an easy task. The parts of the puzzle do not always fit together and create a successful business deal and relationship. Mindsets such as "contracts are legal documents,” along with preconceptions and misconceptions, often prevent managers

The contracting puzzle

Figure 3.1 The contracting puzzle

and subject matter experts from contributing fully to the precontracting process and documents and later to the review of contract proposals and texts.

If management thinks that lawyers are in charge of contracts, the parties' goals and objectives, along with the technical and business aspects of contracts—and the related risks and how to respond to them—may receive too little attention. A lawyer not experienced in complex deals may see the legal element as if it is the whole puzzle and not just one piece. This can lead to failure of the lawyer to encourage people with knowledge about the scope, requirements, milestones, payments, dependencies, and so on, to join the team. the ultimate outcome is that some pieces of the contracting puzzle are missing, other pieces are not aligned and glued together properly and, when it comes to implementing the contract, the pieces will fall apart.

In complex projects, communication failures easily occur when people from different cultural and professional backgrounds work together. Problems may arise, for example, in relation to a technical specification or a statement of work. While these are key documents, they do not always receive the attention they deserve. Unless they are reviewed and aligned with the content of the remainder of the contract, inconsistencies and ambiguities can exist and cause problems during implementation. Even scope-related technical points should be expressed in a clear, concise way. This is as true in construction contracts as it is in technology contracts. Related to the latter, Mark Grossman, who has litigated many It project disputes, once noted that a recurring reason for such disputes is communication failure, "which easily occurs when you have techies, business people, bean counters, and lawyers in one room pretending to speak the same language.”[1]

Indeed, even if the people negotiating a contract share the same native language, they often only "pretend to speak the same language.” Communication failures can occur inside and across multi-professional negotiating teams. These communication failures may lead to omitted and unaddressed issues and "self-evident” expectations that experts in the field feel no need to articulate. These can easily lead to disappointments and feelings of injury, bitter disputes, and contract interpretation issues. Another challenge in contracts is their growing complexity.

For a young lawyer just out of law school, the goal of contract drafting may be the creation of a legal masterpiece, a contract as close to "perfect” as possible: one that is legally binding, enforceable, and unambiguous, and provides solutions for all forseeable contingencies. In contrast, the business community requires a different approach. According to a quotation attributed to Voltaire, "the perfect is the enemy of the good.” Pursuing the "perfect” solution may end up being less beneficial than accepting a solution that is "good enough” and effective. Rather than perfect contracts, businesses need usable, operationally efficient contracts; these may be more helpful for achieving desired business goals and reasonable risk allocation at an acceptable cost. In fact, for businesses, successful implementation is the goal, not the contract itself. Signing a contract is just the beginning of the process of creating value,[2] so the core of contract drafting should be securing the performance the parties expect, not just a contract.

While many tend to favor plain language in contracts, conventional contract drafters still consider legalese superior. They talk about the benefits of language that has been "tested” and that has a clearly established, "settled” meaning. Change could be risky. But this is language that has been litigated and raises the question: why rely on language that resulted in litigation in the first place? Several studies confirm the benefits of plain language and its preference among different groups of readers—not only business users, but also lawyers and judges.

Contracts do not make things happen—people do. People need to follow the game plan that is spelled out in their contracts. But contracts are seldom easy for their users in the field, mostly non-lawyers, to understand and to implement. Their language and complexity may overload readers' cognitive abilities. If this happens and contract implementation fails, it would be wrong to assert that those contracts are "perfect” or even of reasonable quality, fit for their purpose. Quite the opposite; even if they are legal masterpieces, they fall short of their ultimate purpose.

In the words of Professor Thomas D. Barton, Coordinator of the National Center for Preventive Law at California Western School of Law, one recurring barrier to successful contracting is the "exaggerated and largely unnecessary separation between the business goals that clients seek to achieve, and the legal methods by which contractual relationships are created and managed.”[3] Adding to the challenges is the fact that year after year, contract drafters seem to add rather than remove text. The challenges of complexity are not limited to legal issues, of course. Contracts are created in a business environment that has become more complex.

As will be seen in the chapters that follow, lean contracting and contract visualization offer promising new ways that can provide clarity and ease of doing business while removing barriers that prevent contracts from being understood and used to their full potential. As stated in Chapter 1, management's attitude towards contracts determines how these new approaches will be used—or whether they are used at all.

  • [1] Grossman, M. (2000) Contract negotiation crucial before website development. The Miami Herald, November 6, available at
  • [2] Ertel, D. (2004) Getting past yes: negotiating as if implementation mattered. Harvard Business Review, 82(11), November, 60-8, p. 62.
  • [3] Barton, T.D. (2012) Collaborative contracting as preventive/proactive law. In G. Berger-Walliser and K. 0stergaard (Eds.), Proactive Law in a Business Environment.Copenhagen: DJOF Publishing, pp. 107-27, 108.
< Prev   CONTENTS   Source   Next >

Related topics