Business Success and Problem Prevention Through Proactive Contracting

Abstract

In business transactions, everything – task allocation, price, payments, milestones, rights, responsibilities, and remedies – revolves around the underlying contract. Contractual terms, express and implied, have a tremendous impact on the outcome of transactions and relationships. They affect profitability, increase or decrease costs and liabilities, and play a major role in customer and supplier satisfaction. If contracts fail, business performance will suffer. A lot is at stake, including good-will and reputation.Businesses today want to streamline their processes, manage their supply chains and relationships, control their costs, and reduce their risks. So they need to take good care of their contracts. Many have invested in resources, tools and technologies that enable them to manage their contracts and contracting processes effectively. Many still need help in these areas. In a number of organizations, contracts could be used more effectively than they are used today, and contract failures could be prevented more often than is done today. Expensive contractual disputes endanger relationships and consume time and resources which could otherwise be used for productive work.Traditionally, the steps in providing legal care have resembled those of medical care: diagnosis, treatment, and referral – all steps that happen after a client or a patient has a problem. Care has been reactive. You get sick, you seek treatment. You encounter a dispute, you turn to a lawyer. We need to move away from that model. Both the legal profession and its clients benefit from a proactive approach focusing on how to secure success and build a protective system that makes clients strong and resistant; “immune” to the potential problems and risks, and helps them stay out of legal trouble. Proactive Contracting, as that term is used here, refers to applying proactive law in the context of corporate contracting. The focus here is on large companies which deal internationally, the author’s primary field of practice. Needless to say, this is a field where companies inevitably face legal issues of financial significance and where it is particularly easy, even for experienced people, to get into business and legal trouble. Relationships suffer, friends become enemies, and the damage caused to reputation can be permanent. This Chapter sees the practice of proactive law – proactive lawyering – as a way of fusing legal foresight and proactive (or preventive) legal skills with business management, especially with enterprise-wide quality and risk management. In this context, the traditional view of contracts as legal documents or enforcement mechanisms is too narrow. Here, contracts present themselves as tools that combine proactive law and business management: tools that help clients run their business more efficiently, with improved outcomes, balanced risk exposure, and fewer problems. Well thought-out contracting processes and documents – both online and offline – can prevent misaligned expectations and disappointments so that unnecessary disputes can be avoided. Along with other crucial elements, contracts can provide safeguards and resolution mechanisms if changes, delays or disturbances occur or a conflict situation arises.Many of the examples and ideas in this Chapter are very straightforward, even basic. At first sight, they might suggest that the need for help in the areas discussed would apply only to small or medium-sized companies and that large companies would not have problems in such areas. This is not true. Proactive law can be practiced in organizations of all sizes. People working in complex global organizations do not necessarily need skills or services different from those needed by people working in small local organizations. Experience shows that the larger the organization, the more it can benefit from systematically applying proactive law. While the individuals in large organizations may be more experienced in contracting than their colleagues in small ones, the tracking and managing of contractual risks and opportunities is never an easy task. The ideas presented in this Chapter are universal in that they apply all over the world, both in cross-border and in domestic dealings, online and offline – just as well on the sell-side as on the buy-side. While the focus here is on the corporate arena, the proactive approach is not limited to private organizations. In recent years, the number of contracts has exploded in public organizations as well, and an increasing number of public managers find new challenges in forming contract-based relationships and setting the rules by which those relationships will operate in a high-tech, market-driven world. When an organization – whether private or public – moves from purchasing goods to acquiring services or from one-time purchases to partnerships and alliances, its contracts become more complex. As our examples in Section 4 demonstrate, the proactive approach works well in public organizations also, particularly in the context of procurement and public private partnerships. In all these areas, proactive lawyers working together with other professionals can merge business and legal foresight in organizational strategy, systems and processes. When brought in early, they can act as strategic partners who add real value to management decisions and their successful implementation. The shift of focus from reactive to proactive legal care has several implications, not only for law practice, but also for education and research. Much can be gained if Law Schools which have traditionally focused on disputes and litigation make the proactive law approach part of legal education. The benefits will be even greater, if the approach is introduced to and adopted by Business Schools and other institutions which train future managers. To create good quality contracts that serve well both as business tools and as proactive law tools, organizations need the skills and strengths of both managers and proactive lawyers. As new business models and technologies emerge, the need for cross-professional collaboration and education will grow. Contractual and legal aspects must be taken into account when architecturing sales, procurement and partnering processes and offerings, online or offline. To secure a sound legal foundation, management needs to see the legal dimensions of its plans early. On the other hand, to make a meaningful contribution, lawyers need an understanding of business and the risks related to and opportunities offered by technology. When language and other barriers are overcome, the benefits will be great for both lawyers and clients. The proactive approach can then be used to promote business success, produce predictable results, manage costs and risks, avoid misunderstandings, and prevent problems.

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