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Standardization of contractual language - the pros and cons

Feb 17, 2016 11:34:51 AM

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The arguments for and against standardizing contractual language

It seems everyone in the contracting world has an opinion about how a contract should be drafted.  We recently published an article by Seattle Lawyer Jordan Couch, “The 3 Rules of Contract Drafting” - http://blog.contractroom.com/the-3-rules-of-contract-drafting.  This article attracted more visitors and comments than most articles posted on our blog.  While many readers agreed that Jordan Couch’s rules were good guiding principles, many offered alternative opinions similar to that of Contract Manager, Andrew Milchem from Milchem Group in Adelaide Australia.  He posted this comment on the IACCM Group on LinkedIn for Contract & Commercial Management professionals:

I’m afraid that I don’t agree with many of the points of the article or the examples given.  The fact is that good contract drafting is not a cookie cutter process.  I have written very simple one page contracts through to contracts running into hundreds of pages depending on the risk and complexity of the matter.

So with so many differing opinions about how to draft a contract how do people feel about contract standardization?  

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When you talk about standardization of contact language you will usually encounter two types of people:

  1. those who are for it and for whom standardization cannot come soon enough; and,
  2. those who are more hesitant and concerned about the possible negative impact of such a change.

Let’s take a closer look at the arguments of those on each side of this fence.

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For/Advantages/Pros

  1. Cost savings - Contractual standardization would lead to contracting companies saving money as there would be a lower transaction cost as each contractual clause and contract would not have to be negotiated and renegotiated every time a company wants to contract.
  2. Productivity - Proponents of contract standardization argue that it would increase contract managers’ productivity.  Less time would be spent in drafting and negotiation and more time could be spent on other contractual management tasks such as tracking and building stronger relationships with contractors.
  3. Efficiency - Standardization of contractual language leads to more streamlined and centralized processes for fulfilling obligations under the contract.  There is less confusion about what needs to be done and more time for making it happen - making the whole contracting process more effective and efficient.
  4. Certainty - Standardization of contracts would lead to there being greater certainty about contractual terms.  The clauses in these contracts will be more tried and tested due more frequent use.  Also, a contract that is commonly used is more likely to be interpreted similarly and easily by courts leading to even greater certainty about its meaning.
  5. Predictive Analytics - It is easier to compare contracts with standardized language for contract management systems as well as leverage machine learning for predictive analytics. These sophisticated contract management systems can analyze past and current contract data in aggregate to provide all negotiators with useful information/feedback that can be leveraged for what we call, Predictive AgreementTM.  Such data includes the length of the closing time with a certain customer or vendor in past agreements or the amount of consideration agreed upon for certain types of contracts. A system with predictive analytics ensures you spend less time negotiating in the future and arrive at agreement more quickly and simply with your counterpart.  #Negotiate Less. Agree More! 
  6. Automation - Converting obligations under the contracts into tasks is easier for contract management systems that leverage advanced technology.  There is less room for error - i.e., there is less chance it will misinterpret obligations and provide incorrect prompts as any variances or anomalies will be ironed out through the standardized terms being tried and tested over time.
  7. Risk Mitigation - Standardizing contracts makes it easier for contract managers and their staff to ensure they have "ticked all the boxes" in the contracting process.  Some workers in this field refer to checklists to ensure all the required elements of a contract have been met.  If the same wording is used as is used in the checklist there is less room for error in this process.

Against/Disadvantages/Cons

  1. Does not allow for variation - Standardization does not allow for variation in what you actually are agreeing to.  There are subtly different meanings for different words.  If you standardize contracts too much the true meaning of what was intended to be agreed upon could be lost and there could be confusion about the obligations of the parties who agreed to the contract.  
  2. Prohibits innovation - Contractual standardization does not allow you to come up with better ways for writing the same thing and for slowly improving the way clauses are written over time.  This stifles competition in the drafting of contracts.*  
  3. Contract drafting is not something that can be automated but is an art - This is the argument presented by Andrew Milchem in his comment noted above. He objects to idea that a “cookie cutter” approach can be applied to contractual drafting as how a contract is written depends upon the risk and complexity of each case.
  4. Loss of jobs - If you automate contracting the knowledge of this craft will disappear as people with expertise in this field will be lost.
  5. Benefits will take time - The benefits of standardizing language will take time.  A lot of data will need a lot of data before contracting parties can reap the benefits of predictive analytics technology.
  6. Benefits don’t justify the trouble - Dissenters argue that the increased ROI that could come from contract standardization is not worth the trouble of changing how the practice is already performed today.
  7. Legal issues - standardizing contractual language presents legal issues relating both to competition and contractual law. For example, if an industry group gets together to draft standardized language for contracts they intend to exchange with customers there is a chance that they will “collude” to draft terms that advantage themselves but disadvantage consumers.  In working together in this way they may breach competition laws and draft contracts that are unenforceable due to contractual law principles such as fairness.

*  this is an interesting argument because without a system that analyzes contractual data for specific clauses any innovation that may come from competing clauses does not seem likely.  You can use modern contract management software to analyze different clauses to determine which ones are the most productive in the process for deciding which clause to make the standard - i.e., which clause takes less time for parties to agree upon, etc.

Conclusion

So there you have some of the arguments for and against standardizing contract language. It will be interesting where contract standardization goes in the next decade and how the development of contract management software technologies influences this!

What side of the fence are you on in relation to standardizing contract language?

ContractRoom is the home of  Predictive AgreementTM and #HappyContracting and are advocates for the standardization of contract language where and when appropriate.

Click here for a free demo of our contract management software: Request Demo

Katie Cook

Written by Katie Cook

Katie Cook is the Director of Marketing, Communications and Legal Standards at ContractRoom. Originally from the east coast of Australia, she has a background as an Attorney having practiced in both public and private practice in Brisbane and Melbourne. While working as an Attorney Katie completed studies in journalism and is now combining her legal and writing skill sets in her role at ContractRoom.

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