Will Simplified Contracts Catch On?

Will Simplified Contracts Catch On?

18th December 2019

Will Simplified Contracts Catch On?

By Manpreet Dhillon, Head of Legal Transformation at ContractPodAi

From the 1970's onward, contracts have grown. From a philosophy of developing long term relationships and relational contracts, we shifted to an exclusively adversarial model. It is no longer considered the fact that it was meant to bring clarity to the relationship. Rather, it became the legal transaction between two entities. And so, it evolved into increasingly complex documents. Complex contracts attempted to capture every nuance, eventuality, and possible condition that an unscrupulous adversary might attempt. It also legitimately attempts to capture significant issues that may come up, like force majeure issues.

Generally, attorneys are conscientious people. They try to do their job as best as possible. Much of that is to mitigate risk for their client and company. While it is understandable to want to cover every risk possibility, this mode of thinking is costing the business world. Just from looking at the cost of a contract, the IACCM found that the cost of everyday contracts has risen to $6,900 USD. But compare that with a complex contract, which rapidly rises to an average of $49,000 USD, and well beyond for many cases. And, this does not count the fact that most employees are unlikely to want to read, and be versed in the obligations they must deliver - from that complex phone-book sized contract.         There is a rising push for simplified contracts.

Instead, there is a rising push for simplified contracts. Simplified contracts being those that use plain language, they eschew obfuscation, and in some cases, even use diagrams, icons, and cartoons to exemplify points. While it will strike at the heart of every lawyer as a highly risky direction, isn't it at least worth a try?

Simplified Contracts Approach

Simplified contracts came up as an important issue at the recent IACCM Americas Conference 2019. Whether it is an intellectual property agreement, NDA, SLA, MSA, partnership accord, non-compete understanding, MOU, sell-side or buy-side agreement - there is room for improvement throughout. We must remember that contracts are the lifeblood of the business world. In Sally Guyer's words (CEO, IACCM), "we must look at contracts as economic instruments for business."

Guyer continues that “unfortunately we have tried to cram every possibility into the contracts. And unfortunately we have taken the wrong approach. You CANNOT create certainty in the contract. You have to create an environment that can deal with uncertainty.”

Contract Economics

In one workshop guided by Kingsley Martin, CEO KMStandards, and Sally Guyer, we discussed the economic aspects of business contracts. Research by Martin showed that a typical 50 page, high complexity contract could cost an average of $51,500 USD to generate.

He then took a simplified contracts approach. If you reduced the document length, and simplified the contract terms and contract language - there was a positive impact. By improving the readability score by 10%, the price fell to $21,000 to generate that same contract. His findings showed an astounding 59.2% reduction in the cost of the contract creation merely by reducing the length by 10% and improving the readability by 10%.

Amusingly, and anecdotally, Martin shared that in his research the longest contract sentence he found was 1,314 words long. This clearly exemplifies a stark need for adopting the philosophy of simplified contracts. Long or short, complex or simple, the contract itself will not impact the underlying contract law. Martin also pointed out that, "the contract does not really affect price. So what is it doing?"

Adopting Simplified Contracts

The cost of everyday contracts has risen to $6,900 USD.Whether your Flesch-Kincaid reading ease score is low (10-20) or on the high side (80-90+), a contract management system like ContractPodAi's will handle it. The technology does not discriminate. It will put it into the common repository, extract key terms, dates, and condition, and it will even run that AI driven analytics without fault. The systems aren't the issue. They can handle complexity or ultra simplicity. But it is the human and relational impact that matters here.

As a lawyer, I don't advocate using simplified contracts where complexity doesn't make sense. Recall the quote by Albert Einstein that, "everything should be made as simple as possible, but not simpler." Don't take on additional risk, just because you wanted to simplify the language as much as possible. Rather, it must be a balancing act. To Einstein's point, our contracting philosophy should be to create simplified contracts that are easier to read and understand, but not to the point where they lose the core meaning and impact.

Will They Catch On?

As to whether simplified contracts will catch on… that still remains an open question. For the good of businesses around the world, the answer should be a resounding yes. If you are considering this option for your own organization, run a small test with one or two of your contracts. Watch it. Monitor it. Then form your own conclusions. Please do share your results and thoughts with us.

Whether you agree with the simplified contracts philosophy and approach or not, your contracts need a home. That home is a robust, top of the line, end-to-end contract lifecycle management (CLM) system like one from ContractPodAi. For a quick discussion or demo, just ask. We love contracts and all things contract management, so reach out to discuss your needs.

AUTHOR:

Manpreet DhillonManpreet Dhillon
Head of Legal Transformation
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