How to create a modular framework for your contracts and agreements
Recently Professor Michael L. Bloom from the University of Michigan Law School together with Andrew Alvarez and Zack James wrote an article in Corporate Counsel about “Lean Contracting”.
They suggest an alternative approach to the contract assembly process/drafting contracts that involves creating a master template and adapting this template to specific situations. The alternative he suggests is taking a “modular approach”. If you think of a contract as being made up of various pieces, perhaps in the form of terms and conditions, with a modular framework approach your master wording is not in the form of an entire contract but rather in small pieces which can be assembled together to create a contract that is most appropriate for any individual situation.
They suggest this alternative approach may help avoid many of the problems when adapting a master contract, such as redundant and inapplicable wording that could cause more friction and inefficiencies when negotiating with a counterparty.*
This approach definitely merits consideration. But what would the process of developing pro forma modular framework agreements look like? Professor Bloom, Alvarez and James suggest there would be a few steps in the process. These include:
- Identify what terms are the “base terms”. These are terms that are common to every legal contract. Examples may include those relating to dispute resolution i.e. terms outlining how a dispute is to be handled, those relating to payment i.e. the details of how payments are to be transferred, those relating to terms of warranties and perhaps terms relating to the jurisdiction which applies. You may have different base terms for different types of contracts but some base terms may also apply across different contexts.
- Identify terms which only apply to specific contexts. These will be the terms which are not the base terms. Some possible examples are the terms relating to the specific description of the item you are purchasing or a clause describing a particular set of circumstances upon which the contract is conditional. Bloom, Alvarez and James suggest these terms should be included as appendices to your agreements (in the contexts in which they apply) with the base terms forming the foundational part of the agreement.
- Once you have separated the base terms from those which apply only to specific contexts you may notice that you have several versions of the same terms with different wording. In order to simplify your contracting process you will want to set a standard term for each of your base terms and terms for specific contexts. You may have some data you can access to work out which versions of these terms are the best. For example, you may know from experience that one version in a few past negotiations received a lot of redlining from a counterparty, whereas a different version of the same term slipped through the negotiation process unnoticed.
If you complete this inventory you will be in a good position to create contracts for any situation while avoiding the possibility of including superfluous wording that could confuse a counterparty or stall a negotiation process.
This seems like a lot of work but fortunately there are some tools that can assist with this process.
- ContractStandards (https://www.contractstandards.com) holds a repository of thousands of contracts which have been analyzed with sophisticated software to determine what clauses and compositions are best for particular circumstances and also provides standard checklists that can be used in determining how best to draft contracts;
- KReveal (http://kreveal.com) can scan and analyze your pre-existing contracts, extract data terms and provide reports so that you can easily identify where all your different clauses and contracts can be found;
- KResolve (https://kresolve.com/resolve_site) can automatically compare any of your agreements to the ContractStandards templates or your private standards, and discover which clauses are matching, potentially missing or are non-standard.
There’s also some good software systems which help you in building contracts from the individual terms and base modulars for future agreements. You can configure these systems so they can build different types of contracts from the individual terms based upon the answers to a series of questions about the context of the contract you are working upon. They can also assist with A/B testing of different versions of base terms or terms for specific situations. These are advanced contract lifecycle management (CLM) systems. Such systems should be able to capture both transactional and behavioral data about these terms e.g. you will be able to not only determine how often a particular term is used, you will also be able to determine which version of the term attracts the least amount of redlining and push-back by counterparties. By utilizing the term which is the most suited for negotiations, you will be making the whole deal-making process more “agreeable”.
So there you have some thoughts about an alternative approach to building templates for contracts - a modular approach. What are your thoughts? Do you think this approach will be more effective than more “traditional” approaches such as creating whole contracts? Why/Why not?
ContractRoom is a negotiation and CLM system/ contract management software system that has the document assembly building functionality allowing for modular framework agreements. It also helps users close more business faster and smarter by predicting the most successful business terms and legal clauses for their prospective industry, creating the path of least resistance to a close - Predictive AgreementTM. For more information about ContractRoom and/or to schedule a free demo, click here: