In this series, we’ve indicated that contract lifecycle management (CLM), which is becoming big, is useless without good contracts. But good contracts don’t just happen. They have to be created through a careful process. A process that first creates a detailed SOW, then defines the risk, and then defines the dispute process and resolution options where both parties can agree. And that even defining all of this might not be enough to construct a good contract. And we proved a lot of details. And we are at the point where we asked if you do all of the above and everything it entails, can you finally start drafting the contract? And the answer is …

Well, you can, but if you do, the contract will be mostly harmless, and that’s just not good enough. There’s still a few things that need to be figured out first. Possibly a few dozen things, but the following is a starting list.

Performance Monitoring and Rights of Action

Specifying acceptance criteria and performance requirements of each product, service, and deliverable, as well as corrective action requirements on failure is a great start, but there should be performance improvement requirements if performance is not, or barely acceptable, in the beginning or starts to go downhill. One should not have to suffer a supplier continually being late or underperforming just because they continually correct their mistakes at the 11^th hour.

One needs to be sure to specify actions that can be taken or retributions that can be demanded if one party repeatedly fails to meet their agreement. In addition, the contract should also specify that both parties may maintain performance data beyond the contract and consider such performance in future sourcing events and contract negotiations.

Unpredictable Events

There’s force majeure, and then there is the collapse of the only mine the supplier has at their disposal, the banning of a product, component, or raw material in your target market, or some other unforeseen, and totally unpredictable event that makes it impossible for one or both parties to continue the contract.

In addition to a solid force majeure clause, there must be an explicit specification of what could constitute an unpredictable event that is contract ending.

Unalterable Order of Precedence

There will be a contract. Appendices. Statements of Work. Addendums. Etc. At some point, contradictions, real or perceived, will creep in. All your hard work to try and prevent disputes that can lead to unforgiving arbitrations or costly litigations could be for naught! Be sure to specify in a clear, and unarguable manner, which document will take precedence in the case of conflicts.

Then, you have to get in the right mindset and figure out how you will ensure the following will be the case when you actually draft the contract.

No double (or triple) negatives anywhere. NO EXCEPTIONS!

Let’s face it. The more negatives, the more opportunity for misinterpretation. A lawyer might understand a 73 word sentence with 3 negatives, but will an average person? Probably not. And if all lawyers fail to understand equally, this could not only be used as a foundation for a lengthy, and costly, litigation that could easily be settled via arbitration but also result in an extremely costly decision not in your favour.

No reliance, or lack there-of, on Oxford Commas

The lack of one single Oxford Comma cost Oakhurst Dairy millions, and it will cost you too. (Source) Every condition should be clearly specified, and where there is any ambiguity, bullets, numbers, or smaller sentences should be used. Lawyer preferences be damned.

No sentences or paragraphs that cannot be shortened for clarity.

Remember your goal that this should be easily readable, and understood, by anyone with a high school diploma. So, if you can simplify it, without losing any meaning or detail, do so.

If you can address the key issues above and figure out how you are going to meet these key drafting requirements, then, and only then, are you ready to start drafting your contract.

But are you ready to complete it? That’s a good question and the answer is …

Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out in our first post, contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

And as we indicated in our second post, good contracts are more than just specifications of product, price, and a few boiler plate T’s & C’s provided to you by legal. A good contract is understandable — by both parties, and, especially, by a party whose first language is not the contract language. And, as we detailed in our second post, it clearly describes the need, which is first captured in a detailed statement of work that the contract will be created around.

But it doesn’t stop there. As detailed in our third post, it also defines the risk, how they are dealt with, who is responsible for mitigation and management, and who has to take action — and responsibility — should a disruption or issue arise. And, more importantly, it doesn’t include an open-ended force majeure, and should a force majeure event happen, it gives both parties a way to continue business, and an out if one party just can’t recover.

But once the Statement of Work, and the risks, are defined, do you start writing?

Nope! You’re close, but you still have to figure out what you will do when things go wrong — and capture how they will be addressed, and resolved, in detail in the contract. This is more than just choosing between arbitration and court, because the choice could be both, or neither, depending on the situation. And it’s more than just specifying the method of resolution, it’s all the terms and conditions around it that specify exactly how you want it handled.

Let’s start with arbitration. Just because you specify arbitration and the counter-party agrees to it, doesn’t mean there can’t be a court case around who the arbiter will be, what powers she will have, who will bear the cost, how binding the decision will be, whether or not there can be any appeals on technicalities, and so on.

You need to figure out who will chose the arbiter, what will be mandatory for arbitration, where the arbitration will take place, and what time limits there will be in initiating, conducting, and concluding the negotiations. Who will be responsible for the cost, under what conditions, and in what amounts or percentages must also be clearly defined. Furthermore, any rules or guidelines that are to be followed by the arbiter are to be completely spelled out. As are any laws they are to be adhered to in any details of the resolution.

Then, you need to specify the terms and conditions around legal action. Legal action should be the last resort, and the contract should be iron-clad forced arbitration wherever it can, and should, be used as litigation is unnecessarily expensive and not always fruitful. Arbitration may not be fruitful, but it’s quick and much less painful even if it doesn’t go your way.

Make sure that litigation opportunities are as limited as possible and that any litigation that could have been avoided, or that is determined by the court to be in violation of the contract, is at the full cost of the party who wrongly initiated the litigation. And make sure that if litigation is authorized, damages are limited to actual monies paid or maximum amounts clearly specified in the contract. And that parties who are responsible for products or services, and any damages that result from these, have appropriate amounts in bonds or insurance to cover worst case scenarios.

And, most importantly, the dispute resolution process must be fully specified in the contract to ensure that the chances of arbitration or litigation being needed are absolutely minimal. If the process is accepted by both parties, it will be embraced by both parties, and even if both parties can’t agree, they’ll try — and each will be much more likely to live with the decision of an arbiter, since they will also have thought through, negotiated, and accepted that process as well.

So, now that you’ve figured out the SOW, the risk management and mitigation, and the dispute resolution, can you start writing the contract? Stay tuned!