Professors Helena Haapio and Thomas D. Barton are on a mission to educate organizations on how to create “business friendly” contracts – without giving up safety or security.
A chapter by Haapio and Barton in the recently published Liquid Legal: Transforming Legal into a Business Savvy, Information Enabled and Performance Driven Industry highlights the need for contracts to be used as business tools rather than legal tools, and as business enablers rather than as obstacles.
Haapio (Assistant Professor of Business Law, University of Vaasa; International Contract Counsel, Lexpert Ltd.,) and Barton (Louis and Hermione Brown Professor of Law, California Western School of Law) argue that contracts must ensure that an agreement can be legally enforced, but contracts should also be written using language that is comprehensible to everyone involved in forming and implementing the exchange.
The chapter stresses the value-enhancing possibilities of contracting relationships that are collaborative rather than adversarial and shows how simplification and visualization can make creating “business friendly” contracts a reality.
They write: “By changing the design of contracts and the ways in which those contracts are communicated—through simplification and visualization, for example—legal and business operations can be better integrated. Contracts can then be more useful to business, and contract provisions can actually become more secure by becoming easier to negotiate and implement.”
So, by changing the design as well as the parties’ contracting mentality, “legal and business operations can be more strongly linked; hidden value may be revealed; and contracts can become more secure even as those new opportunities are explored.”
Haapio and Barton cite the International Association for Contract and Commercial Management’s (IACCM) contracting “pitfalls” that lead practitioners into traditional contracting practices such as risk-shifting, limitation of liability, penalties and indemnification, rather than encouraging collaboration, win-win mindsets and value sharing.
The building blocks of business-friendly contracts are simplicity, visualization and collaboration. In short, keep the contract language as simple and clear as possible, enhance understanding by employing visual images to supplement the text, and collaborate so that the parties are working as partners. Some points to consider in fashioning business friendly contracts, according to Haapio and Barton:
Lawyers and business managers should, “realize the destructive impacts of jargon-laden, self-protective contract language. Such language can: (1) impair implementation of the contract; and (2) lead eventually to missed value and opportunities in the economic exchange itself.”
The way in which concern for security is addressed ends up “undermining opportunity.” The opposition between security and opportunity is not inherent or necessary.
When lawyers draft contracts, they often focus too strongly on imagined courtroom settings, rather than the far more immediate business settings.
Lengthy negotiations and missed opportunities “often stem from the difficult language that is routinely used in contracts. The language can needlessly isolate lawyers and business negotiators from one another, because business negotiators cannot readily participate fully in creating the legal agreements that should be memorializing the discussions among contracting parties.”
What happens when these approaches are employed? Haapio and Barton state contract security is enhanced through greater understanding, clarity of purpose, flexibility and trust.
They also point out that the traditional contracting style often results in repetitive errors, losses and value erosion. They advocate for incorporating more Proactive and Preventive law (PPL) methods into the contracting process to eliminate the dysfunctional cycles that generate recurring losses. They write:
“Preventive Law focuses on dysfunctional cycles that generate recurring losses. It seeks to identify and understand the conflicting elements of a system, as we have done above, that, unless somehow resolved, will continue to generate problems. Proactive Law adds a focus to achieving positive goals and value. Together, PPL can alter mentalities and harness tools toward smoother operations and successful outcomes.”
Bottom line: Incorporating PPL methods add much needed relational aspects to the contracting process. Haapio and Barton write, “A relational focus will expect occasional disruptions in contractual implementation. This focus will also accept the need to be flexible and accommodating, based on a reservoir of trust and long-term mutual benefit.”
Music to my ears, and very much in line with our work at the University of Tennessee on the Vested business model for creating highly collaborative relational contracts.