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As litigation increases, what should we be doing about it?

December 5, 2011

Last week, I was asked to present on trends in international contracting. It was a lively session, with excellent participation from an experienced audience. One of the key points I made was that the growth of international business has not been accompanied by sufficient thought about contracts and contracting practices. In particular, I suggested that there has been an increase in disputes, but that many of these could have been avoided if we improved our approach to contracting.

A report on litigation trends by law firm Hogan Lovells, in conjunction with Legal Week, proves timely. Their survey confirms that international disputes are on the up, with commercial / contractual issues leading the list in terms of added workload. Regulatory issues are in second spot, with fraud / bribery in fourth. Not surprisingly, the research indicates that the recession has increased the workkload for in-house counsel and, with budgets remainign tight, they are under pressure to reach resolution faster.

An aspect of the report that I find especially interesting is the absence of discussion about dispute avoidance. There is focus on doing things more cheaply and on speed, but nowhere does anyone ask “Is the increase in volume avoidable?” And that brings me back to my presentation, in which I highlighted that today’s contract terms and practices contribute to disputes, rather than assisting in their reduction. To give some simple examples, we know that the biggest sources of dispute relate to disagreements over scope or over changes to the agreement. Yet these topics are not among those that top the list of most frequently negotiated terms. Lawyers and contracts professionals spend far more time debating the clauses that govern when things go wrong – liabilities, indemnities, jurisdiction. So our contracts are being designed for disputes, rather than establishing a framework to reduce their likelihood.

In addition to focusing on the wrong things, contracts are also designed for litigants, not for day-to-day users. Most contracts (especially in international transactions) are structured and written in a way that renders them almost useless to those who are charged with their implementation. We take situiations where clarity of communication is key and then offer instruments that are composed by lawyers, for lawyers.

If legal and commercial staff spent more time up-front ensuring that there was clarity of intent and process, they would spend far less time dealing with disputes and failure.

 

One Comment
  1. Say Amen, everyone. I advocate falling back and thinking about the reasons for contracting in the first place, To me, there are two general purposes: document agreements and being able to bring a powerful third party into a dispute. Going internationally, for production goods contracts, the first purpose is more important than it is domestically and the second purpose is less practical.

    If you accept that the major purpose is communication, then ask if the contract document helps or hurts communication. Simple attention to
    -grammar (run Flesch Kincaid tests)
    -attractive typography and layout
    -removing irrelevant national-focused issues such as the US EEO programs
    -avoiding insulting the potential supplier’s integrity or honesty

    will help immensely.

    Also understand that there are cultural differences that make contracts more or less detailed and that code-law trained attorneys are inherently suspicious about the wordiness of common law contracts and common law attorneys are uncertain about relying on codes.

    But the key words were

    “So our contracts are being designed for disputes”

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