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Do you negotiate words or principles?

May 3, 2017

New technologies provide us with the ability to discover things we never knew. This promises to be especially valuable in the world of contracts and negotiations.

Until now, many aspects of contracting have been based on a mix of accepted wisdom and personal experience or preference. For example, classical legal theory told us that the more powerful party should transfer as much risk as possible to the counter-party (and research increasingly tells us that this is no longer true). When it came to negotiation, many people espoused win-win principles in theory, yet found a variety of reasons why this didn’t happen in practice.

While most of us have firm views about what works and what doesn’t, what is important and what isn’t, these are essentially based on opinions, not facts.

Technology is starting to alter the balance. For example, last week I reviewed some work we are doing for an IACCM corporate member to assist their efforts to become more agile, to reduce cycle times and increase ‘ease of doing business’. As part of that initiative, we have been using technology to undertake review of more than 150 Master Services Agreements and exploring two key aspects:

  • to what extent do the terms in a Master Services Agreement vary and what variations are caused by customer industry?
  • which terms are most negotiated and what impact does negotiation have?

In this particular example, it turned out that 78% of the terms are broadly ‘in common’ and less than 20% are subject to regular negotiation. The most interesting point was that the 78% ‘in common’ varied very little in terms of principle; the difference was primarily choice of words – essentially, it was down to individual preferences in drafting.

Does this variability add any value or confer competitive advantage? There is little to suggest that it does. In many cases, it creates complexity and avoidable confusion, often leading to negotiations that are more about wording than about principle. A quick search showed that there was no evident impact on the frequency or success of litigation, although there is some positive impact on cycle times if the contract has been simplified through a focus on design and wording.

So what exactly is the reason that organizations cling to their specific drafting style, their particular choice of words or contract structure? I think the answer is simply custom and practice – it is a consequence of contracts being based on the personal preferences of an individual lawyer.

Our increasing ability to undertake this type of analysis will surely soon shift the approach to contracting. We will steadily develop standards of wording for contract terms and shift our focus to the principles and values – for example, the period of the agreement, the volume to be acquired, the amount of liquidated damages. In other words, contracts will be rapidly assembled from pre-established and common clauses, with sensitivity to regulatory or jurisdictional variations, and negotiation will focus on ‘filling the blanks’ around the items of specific value.

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