The old adage “if it isn’t broke, don’t fix it” was never meant for contract templates. Businesses and business processes are always changing and evolving, and contracts need to change and evolve along with them. Over time, your contract will diverge from your marketing materials and sales proposals, the current operational reality of your business, and/or your company’s current risk profile. When that happens, the contract may slow down a fast-moving customer sale by prolonging the negotiation cycle as you work through the inconsistencies or outdated commitments, or worse, a client or customer may look to hold your company to perform obligations you can’t satisfy as written. Refreshing your contract template helps ensure you are keeping the negotiation cycle as short as possible and ensuring what you commit to contractually aligns with your actual performance under the agreement, which contributes to a positive client/customer relationship.
Setting Refresh Goals. The first thing to do when starting a contract refresh cycle is to ensure the business and legal teams are aligned on the goals of the contract refresh. In most cases, the goals include:
- To ensure the contract template accurately reflects the operational reality of the business;
- To shorten and clarify the contract template;
- To make contract negotiations go more quickly and smoothly;
- To remove as many ambiguous terms from the contract template as possible; and
- To ensure the contract template is as fair and balanced as possible while protecting your company’s interests.
Once your goals are set, the following steps can help you get the most out of your contract refresh. Keep your refresh goals in mind as you go through each of these steps.
- Re-evaluate (and if needed, optimize) the contract model. Take a look at the core model of your contract. Is it a Master Services Agreement with Statements of Work, Project Assignments or Service Orders? One single contract containing terms for all products and services offered by the company with a checklist and pricing to select the products and services to be provided? The first step in a contract refresh is to ensure the contract model is the best one for your business and the business offering. The contract model should present the terms for your product or service in the simplest way possible, while allowing for flexibility of adding on services if needed. Your current model may be the right one for your business, but it’s important to ask the question. For example, if your clients/customers consistently try to push their own paper on you with a different contracting model, think about whether their model (or elements of it) might make sense for your business.While you want to ensure your agreement anticipates how you’ll do business generally for the next 12-24 months, be careful trying to “future-proof” your contract by adding terms for service offerings you plan to roll out in the future. You don’t want to make the agreement longer than it needs to be, and until the service offering is finalized the terms relating to it may change, meaning the terms you put into the contract will need to be changed anyway. In this case, design your template with add-on services in mind so they can be added later. Also, consider whether on-line terms, or an online policy such as an acceptable use policy referenced in and incorporated by reference into the Agreement, may help streamline the contract and allow for greater flexibility in changing those terms to reflect changes in your business.The appearance and readability of your contract matters just as much as the content and model. Ensure the contract is readable — use a common font and a readable font size. Be sure to use headers and footers with page numbers and a confidentiality legend if appropriate. If you don’t use version numbers on your templates, consider adding version numbers to make sure you can easily track different versions of your contract templates (e.g., v2016.02.24 for the version released on February 24, 2016). Consider running your template by your marketing department for their suggestions on making it look good.
- Confirm alignment with the sales proposal and marketing collateral. It’s a good idea to compare the contract template against the sales proposal and your company’s corporate website and marketing collateral. While there is always marketing fluff in sales proposals and marketing, ensure that the contract accurately reflects the proposal terms and commitments in marketing materials. If there are inconsistencies, ensure they are resolved. Few things will cause a contract negotiation to bog down right out of the gate than the other side thinking the terms in the contract don’t match the terms in the proposal or the company’s marketing collateral that led them to want to do business with your company.Consider gathering all of the pricing and key business terms into one section or appendix. Having pricing and key business terms scattered throughout an agreement can be very confusing. The pricing and key business terms in the contract should match up to those in your sales proposal or deal term sheet, and where possible should follow a consistent format, structure and layout. That way, when the other side receives your contract and compares the contract terms to the proposal or term sheet, they’ll see a 1:1 match which can help keep positive momentum going.
- Review previous redlines, look at previous business disputes, and talk to sales personnel. Quite often, there are standard compromise or fallback positions that become commonly used in negotiation as the contract template diverges from the operational reality and/or company risk profile. Go back through previous redlines to identify compromises or fallback provisions that are agreed to on a regular basis. Consider whether that fallback provision should become the new standard provision in the agreement to remove it as a common negotiating point. Also, look at any business disputes you’ve had with your clients/customers that arose from or related to an ambiguity or issue in the contract, and look at any resulting operational changes that were made. Consider whether revisions to the contract would help avoid similar disputes in the future or better reflect the revised operational process.Talk to sales personnel involved in the negotiation of agreements based on the template, either individually or as a group, for their input on what sections are most frequently negotiated. Identify terms or provisions in the agreement that are regularly negotiated – e.g., the non-solicitation provision, press release language, security and data breach language, termination for convenience language, indemnities, limitation of liability, etc. Look at those terms/provisions to see if there is an alternative provision, or alternative wording, that works for your company and will eliminate the need to negotiate that point every time. For example, if your contractual payment terms are net 15 but most parties ask for net 30, and you don’t really charge interest on late payments until they are at least 30 days past due (45 days from invoice date), it may be worth changing the payment terms to net 30 in the contract to eliminate this negotiation point.
- Streamline and simplify the template. Review the contract template to streamline and simplify it as much as possible. Don’t say something in three sentences that can be said in one. Use a defined term to avoid having to repeat a lengthy phrase throughout the agreement. Avoid including fluff in the agreement, such as a full page of WHEREAS clauses, unless there’s a compelling need for it. Ask people at your company who don’t normally read contracts to read it and highlight any language that seems confusing, and see if clarifying revisions make sense. Avoid legalese wherever possible. Ensuring your contract is as clear as possible helps avoid disputes with your clients/customers by minimizing the chance that an ambiguous term is interpreted differently by the parties (or worse, that a party relies on that interpretation to take a particular course of action that can’t easily be undone).
- Validate the pricing and terms/obligations with stakeholders. Obtain (or make) a list of all of the department heads and business owners in your company whose team/group/division has operational responsibility for terms in the agreement (for simplicity, we’ll call these department heads and business owners “stakeholders”). The review should include not only the business terms with business stakeholders, but also the legal and risk allocation terms (e.g., representations/warranties, indemnifications, disclaimer of warranties, limitation of liability, etc.) with legal and compliance stakeholders.Mark up a copy of the template to identify which pricing and business terms and obligations are tied to which stakeholders. Circulate the draft to each stakeholder, and set up a meeting with each to review, modify and obtain sign-off on contract language and provisions related to that stakeholder. If you’ve already identified potential changes to streamline the contract (such as in #3 or #4 above), review those with the stakeholder to obtain buy-in, and ask the stakeholder if they have any additional suggestions on ways to streamline and simplify the agreement terms relevant to that Stakeholder. If a stakeholder indicates that your company doesn’t really do what a particular contract provision says, either remove the obligation from the agreement or ensure the stakeholder commits to the company’s performance of that obligation.
A few closing thoughts:
- Once the contract refresh is complete, determine who needs to sign off on the new template before it’s introduced for use, and obtain their approval to start using the new template.
- Consider using communication plan to introduce the refreshed template to personnel involved in negotiating the agreement such as your sales and Finance teams. Also consider whether the creation of a companion explanatory document such as a contract FAQ, or embedded comments in the draft itself, would help your clients/customers better understand your agreement and further shorten the negotiation cycle.
- If you are updating a set of online terms or an online agreement where the changes will automatically apply, ensure you follow any notice requirements for amendments or changes to the agreement.
- Make sure you archive a copy of the contract template being refreshed. You may need to refer to it later, e.g., if there is a client/customer dispute involving the older template.
- Finally, set a regular review cycle (ideally no less than once a quarter) to check with Stakeholders and ensure there have been no major changes from a business or legal perspective that require changes to the agreement template.