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Will regulation eliminate the need for contract negotiation?

April 8, 2014

Take a look at this article describing the terms that are now impacted by regulation in the financial services industry. The list is so extensive that the scope for meaningful negotiation appears severely reduced. Already, we are seeing pressure for the creation of industry standards (and indeed, IACCM is working with a large group of international corporations on exactly this topic).

Where finance leads, it seems likely that other industries (and regulators) will follow, leaving the quality of contractual obligations far less to chance or the relative power of the negotiators. So does this mean that contract negotiation will steadily become a thing of the past, replaced by a set of formulaic standards?

I believe the answer is that the focus of negotiations will change substantially over the next few years. Time spent on liabilities, indemnities, intellectual property, data security – essentially, the clauses seen as ‘legal’ – will diminish or disappear because responsibility for risk consequence will become largely non-negotiable. As a result, the parties will become far more concerned with the terms that affect risk likelihood – that is, the more technical aspects of scope, performance criteria and change management – and those that motivate performance – price or charge mechanisms, financial incentives, governance systems.

In this environment, front-end skills in deal or project structuring and back-end skills in contract management become of fundamental importance. Indeed, they are almost implicit in the regulations. Financial institutions must be able to show they have invested in competency in these areas and their suppliers will be challenged to show their capabilities as a requirement of selection.

Elements of these changes are already visible. Many banks and insurance companies are developing their contract management organization and tools; several are inserting questions about supplier commercial capability in their RFPs and selection criteria. But we are still at the beginning of the journey – and the question remains, to what extent will regulators start to drive similar changes in other industries as part of overall improvements in corporate governance?

 

 

2 Comments
  1. The world might be a decent laboratory on this issue. I believe there is much less emphasis on negotiating “legalities” and more negotiating on business issues in code law countries than common law countries.

    That’s a good thing.

  2. This Wired.com article seems relevant to this discussion: A Futurist on Why Lawyers Will Start Becoming Obsolete This Year http://www.wired.com/2014/03/geeks-guide-karl-schroeder/
    “Schroeder points to efforts like the Ethereum project, [https://www.ethereum.org/] which uses block chains—the technology behind bitcoin—to create smart contracts. Such contracts live online, beyond the control of any single entity, and anyone can check their operating parameters at any time.”

    Given that I still deal with parties that won’t even use an electronic signature system (e.g., DocuSign), I don’t think lawyers or even paper contracts are in danger of becoming obsolete in the next six months, but in the long run I expect that many trading relationships will be built on standard agreed-upon building blocks that will largely take contract negotiators out of the picture. I can see this resulting in significantly reduced transaction costs and significantly reduced implementation costs (e.g., the parties can choose from a menu of a small number of standard data security protocols rather than each customer expecting each vendor to comply with the customer’s own proprietary requirements).

    This could also eventually result in standardized representations of contract clauses and contract data, allowing easy interchange of data between different systems and much simpler contract administration. I also see this as a good thing.

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