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Beware the traditional lawyer

July 21, 2015

In a recent article, the Association of Corporate Counsel offers its ‘Top Ten TipsĀ In Drafting & Negotiating International Contracts’.

While the items listed are worthy considerations, they miss the most critical issues and in some instances, fly in the face of good practice.

So what is wrong? Essentially, the article displays an absence of appreciation for the key risks associated with doing business internationally and the role the contract can and should play in avoiding failure. For example, many experts would suggest that the number one issue in any contract (but especially in an international agreement) is around the financials – ensuring you get paid or you get what you paid for. This puts overall payment terms and the related security provisions in the first two places – though they are missing completely from the ACC list.

Today, the regulatory environment is critical to any contract and its negotiation. Awareness of relevant regulation and appreciation of its consequences is a fundamental issue that your legal team must address, whether on competition law, data security, environment or the myriad of other local and global regulatory requirements. So I am placing this at number 3.

Closely tied to this is the whole issue of reputation risk and sustainability. Gone are the days when ‘out of sight, out of mind’ seemed to prevail for many negotiators. The networked world means that mistakes in international contracts quickly make global headlines. High performing lawyers are strongly focused on reputational issues and ensuring that the deal and the counter-party are ethical, that the business relationship is sustainable and that local customs or practices will not threaten integrity.

Competent lawyers also appreciate the challenges of speed, cost and communication when transacting internationally and consider ways to tackle these. On speed, IACCM data reveals a remarkable diversity in the cycle times required to close international business. Not only does it take on average roughly 50% more time than an equivalent domestic deal, but also top quartile performers operate roughly 4 times faster than those using the method of contracting implied in the ACC article. The smart lawyer understands that cycle times are sensitive and that failure to address this issue will damage their credibility and lead either to loss of business or to the rest of the organization working around them.

On cost, it is simply unaffordable to engage local counsel in every country or to have local in-house resources. Modern business is finding ways to address this, sometimes through use of low-cost LPOs, but more often through use of alternative dispute resolution. ADR has the effect not only of slashing the legal costs of deal-making, but it also typically cuts cycle times by more than 50%. By following this route, several of the ‘ten tips’ become redundant.

Communication is a challenging field for the jurisdictionally-trained lawyer. Especially for those from a Common Law background, they feel comfortable using specific terms and wordings which will often be alien to their counter-party. Of course it is always far easier to operate in our native language. But attempting to impose our methods and approach on an international trading partner, with limited effort to ensure common understanding to respect their way of doing things, is frequently a recipe for disaster. At best, they do not really understand what has been agreed; at worst, they view the process and the agreement as unbalanced and feel no real commitment towards it. Good contracts are increasingly designed as communication instruments, not as legal weapons.

The ACC list is interesting and certainly reflects items that should be considered by the parties. However, they focus primarily on the lawyer’s role in dealing with the consequences of failure (that old security blanket that makes us indispensable) and presume adversarial behaviours. If this reflects the aspiration of the average lawyer, it explains the challenge they face in establishing business relevance and value. In reality, top lawyers aim much higher; they want to provide legal advice in the context of business realities.

I have to thank an IACCM member for bringing this particular article to my attention. As a General Counsel, she also made the following generous observation: “It is certainly an interesting subject addressed by great experts. Their selected focus though is precisely the reason why I personally find IACCM so enriching for lawyers when compared to other corporate lawyers associations”.

5 Comments
  1. David Munn permalink

    Tim,

    I normally think your commentaries are spot on, but in this case I have to disagree with you on almost every point. Either that or I’m reading a completely different article than the one you are referring to. Here’s the link to the article I’m looking at, although you may have to be an ACC member to access it. http://www.acc.com/legalresources/publications/topten/drafting-and-negotiating-intl-contracts.cfm

    Making sure that you get paid (your number 1 point) is certainly important, but that kind of contract drafting detail wasn’t the point of the article. And I see very little in the article about the consequences of failure. To me, the point of the article was to try to get lawyers to realize that they way they approach contracts in their home country might not be appropriate when dealing with a counterparty in another jurisdiction. That’s an important lesson for lawyers to understand.

    It seems to me that many of the tips in the article are focused on the admirable and appropriate goals of ensuring that the parties understand the contract and understand each other (e.g.,Item 1 – they understand the language the contract is drafted in, 2 – the contract is written clearly, 3 – make sure the contract language is appropriate for the legal system involved, 5 – avoid terms of art that might have different meanings in different countries, 7 – understand that “boilerplate” might not be the best way to deal with certain points, 8 – make sure the parties involved in the negotiation agree on and understand how drafts will be exchanged). While each of us might have chosen a different list to put in our own Top 10, I think the article makes a lot of good points.

    As to your point about regulatory compliance, that is one of the main reasons you might consider engaging local counsel. I don’t see how using ADR would reduce the need for outside counsel, cut contract cycle times, cut costs, or make any of the tips in the article redundant. In many cases negotiating an ADR provision in the contract actually makes the negotiations more complicated.

    It’s certainly possible to streamline contract negotiations by glossing over things like differences in local regulations and local practices, and that may be an appropriate trade-off to make in many situations, but it is likely to come at the cost of less clarity in the contract and a greater potential for disagreements down the road. Both of which are things I think you agree should be avoided.

  2. My background is in buy-side international purchasing, largely on purchasing goods and services for ongoing manufacturing. Contracts run from roughly 1-5 years.

    I’ve read the underlying article. It’s focused on techniques and strategies. Tim’s post is largely focused on contract content.

    On the content side, I think the issue of what to do when exchange rates change is one of the most complex points to be defined in the contract.

    Generally, by the time contracts are negotiated, the buyer is confident they will receive what they order and there’s not a lot that needs to be said about that.

    Regulatory requirements change rapidly and unpredictably. Pinning down exact detail can lead to frequent contract changes. It’s better to let the people on the ground work out what to do when they do change.

    On the technique side, the underlying article neglects the issue of cultural differences. They show up in contracting in different expectations about the appropriate length, detail and renegotiability of contracts.

    They also appear in clauses that impugn the competency, honesty and integrity of the other party. An example is a clause to the effect that “seller warrants they have title to the goods they sell.” That’s certainly appropriate for software contracts but not for goods purchases.

    Societies that work internally based on trust and personal relationships (e.g Japan) will react badly to such clauses.

    I don’t see a conflict here between the post and the underlying article. They are discussing different things.

  3. Disclosure: I wrote for many years a column for ACC and have spoken at a number of ACC annual meetings, and next week I’m speaking at an IACCM conference, and have (once) met Tim, but not (yet) Ken or Rene.

    As someone who has been asked to write practical, pragmatic, and sometimes provocative articles (top 10 negotiating tips for major corporates, tongue-in-cheek [ish] being one), it seems to me that both Ken and Tim make some excellent points.

    Tim’s comments about payment, regulatory environment and speed/cost/communication all resonate as excellent additional comments to the original Ken/Rene article. And yes it does seem somewhat critical the way it was expressed, but actually nearly all the points are valid and useful, so putting aside apparent tone (and I ascribe nothing to that, sometimes in my experience it really is unintentional), all are useful as adding to the discourse.

    And certainly no criticism for Ken/Rene not including those additional points. There’s a certain (albeit pointless) magic to lists [disclosure 2: my conference piece next week is a list of 10 too, oops], and you can’t include everything.

    I might add, however, to one of Tim’s additional points (completely respectfully, no criticism at all), that ADR is great in theory, and often in practice, but in some jurisdictions has become more hide-bound (and expensive) than litigation. But Tim is right, when it works, it’s far better than years of litigation.

    Ditto exchanges between respected experts. Great points, all of you, thanks for them, keep it up.

    Respectfully, all, Ron

Trackbacks & Pingbacks

  1. The Minimum Standards for Discourse: A Response to Tim Cummins - Adams on Contract Drafting
  2. What is the role of a lawyer today? | Commitment Matters

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