PATHCLEARER
An explanation for business colleagues[1]
By the in-house legal team
1. Introduction
Pathclearer is a name we have given to a new approach simplifying and streamlining legal advice and entering into commercial contracts.
Pathclearer can be applied to most contracts that businesses such as ours enter into.
In this paper, we explain generally how it works and how it applies to a few typical commercial contracts that your businesses enter into, such as procurement contracts, distribution agreements or marketing contracts.
2. What is Pathclearer?
The Pathclearer approach involves:
· Sweeping away the usual legal verbiage, so that the really key points of a business proposal can be seen clearly, and then
· Creating short, simple contracts which contain the bare minimum of words needed to deal with the key legal issues, rather than pages of turgid legal “boilerplate”.
Contracts can secure extremely valuable rights for businesses. But we believe that in today’s business world, lawyers are using overly detailed contracts for too many business relationships.
This is not only slowing down businesses, and costing them more money. It is also introducing new risks, because many commercial contracts have become so long and complex that businesses do not fully understand what they are entering into.
Pathclearer is much quicker, cheaper and simpler than the conventional approach which lawyers tend to take.
It’s also more effective at managing legal risk, because it frees lawyers and business people from reviewing hundreds of pages of words, which allows then to think more clearly about real value issues and risks.
Pathclearer has been developed by your in-house legal team based upon years of experience and frustration with the conventional approach.
It has been successfully introduced into many parts of our business.
We try not to apply it in a dogmatic fashion – if there are strong reasons for using a conventional, detailed contract then we will do so. We just start with the assumption that we should use a short, simple contract, and we ask anyone who disagrees to demonstrate why the more detailed approach is truly necessary.
3. It sounds obvious, so why don’t all lawyers deal with contracts this way?
To answer this, we have to look at how lawyers have historically come to be involved in commercial contracts in Anglo-Saxon countries (USA and UK) and in Continental Europe.
3.1 Anglo-Saxon Countries
Going back about 100 years ago, lawyers in Anglo-Saxon countries generally did not get involved in commercial deals.
Business people often entered into legally binding deals merely by a handshake. The concept of “my word is my bond” was widely accepted as being as strong as any written contract.
Where written contracts were used by businesses, they tended to be created by the business people themselves rather than lawyers. Business people did not perceive that lawyers could add any value to their deals.
Back in these days, lawyers spent most of their time doing conveyancing of real estate, wills and executries and assisting barristers in litigation.
It’s not clear when lawyers started to get involved in the world of commercial deals. However, it seems likely that as soon as one business involved its lawyer, other businesses felt the need to involve their lawyer, in order to “fight fire with fire”.
There are now few areas of business in Anglo-Saxon countries where lawyers do not get involved.
As a result, doing business in Anglo-Saxon countries has undoubtedly become much more complex, time consuming and expensive than was previously the case.
Some of this additional complexity has been unavoidable – it has been caused by the need to pass laws to regulate the more complex relationships that have arisen from our more developed economies and technological advances.
For instance, laws to regulate international mergers, the handling of personal data, money laundering, sophisticated financial transactions and the protection of employees have all increased hugely over the past couple of decades.
However, a large part of the additional complexity has been caused by the over-detailed approach that Anglo-Saxon lawyers take when they get involved in commercial deals.
This is what Pathclearer seeks to sweep away, in order to ensure that in these increasingly competitive and fast-paced times for businesses, commercial deals can be done quickly, simply and cheaply.
3.2 Continental Europe
Meanwhile, in Continental Europe, businesses and lawyers took a much more sensible approach!
Until very recently, commercial contracts in Continental Europe tended to be very short and straight-forward. Lawyers tended to allow their clients to rely on the “common law” which is generally set out in a fair amount of details in commercial codes of law (deriving from Roman law) in Continental European countries.
Unfortunately, across the water, the Anglo-Saxon law firms were making so much money out of their Anglo-Saxon clients, by focussing on minutiae and creating excessively long contracts, that they were able to take over many of the law firms of their Continental European cousins!
Firms like Baker & Mackenzie of the USA and Freshfields and Linklaters of the UK started to buy up large law firms in France, Germany, Spain etc. They then introduced their Anglo-Saxon approach into these firms.
Even the Continental European firms that remained independent were contaminated by the Anglo-Saxon approach. Either they felt obliged to do what the big firms were doing, because it was perceived as “best practice”. Or, more cynically, they realised that they could also make much more money if they used longer, detailed contracts which required more lawyer time!!
3.3 Summary
Therefore, there are 2 possible answers to the question “Why don’t all lawyers deal with contracts in the Pathclearer way?”.
· The innocent explanation is that lawyers, particularly Anglo-Saxon lawyers, have convinced themselves that businesses need long, detailed contracts to protect themselves from the various things that can go wrong in business. We explain below why this is generally not true.
· The cynical explanation is that lawyers make an awful lot of money out of doing it the conventional way. For them to change unilaterally and voluntarily would be like turkeys voting for Christmas! This is why in-house lawyers and business people need to press of this change. Instead, we encourage the use of incentives, rather than compulsions. In other words, if the supplier offers tiered discounts, which give our company higher discounts for higher volumes, then this is likely to achieve the goals of both parties more effectively and without any friction in the relationship.
4. But don’t we need detailed contracts to protect ourselves?
To answer this, we must first consider what the purpose of a contract is.
4.1 What is the purpose of a contract?
The only purpose of a contract, as opposed to a general statement of what a business intends to do with its business partners, is to ensure that the obligation of each party can be enforced in Court.
Put even more bluntly, the essence of a contract is the ability to get a Court to force someone else to do something they don’t want to do, or obtain compensation for their failure.
Lawyers tend to view the ability to enforce obligations in Court as being the only way to ensure that a business gets the deal it has been promised. Lawyers therefore advise clients that they need detailed, watertight contracts that foresee as many potential future scenarios as possible.
But this approach ignores the fact that:
· Firstly, there are more effective ways for businesses to ensure that they get the deals they have been promised. Carrots are often more effective than sticks.
· Secondly, there are many drawbacks of detailed written contracts.
We identified an intangible yet powerful force in successful continuing business relationships, which we named “commercial affinity”.
Commercial affinity arises in mutually beneficial commercial relationships. It is the attractive force which keeps the parties together. It results from the desire by each party to continue doing business with the other, because it is economically sensible to do so.
A customer will have commercial affinity with a supplier who constantly strives to meet its needs and who demonstrates that it is the best supplier in the market.
A supplier may not have any legally binding commitment to continue to supply at a particular price, or at all. But it will have the strongest motivation known to man – namely, a desire to continue doing business in order to earn more profits.
If the customer ceases to be satisfied for any reason at all, it simply tells the supplier ant they try to find a solution. If not, they just walk away from the relationship.
There is seldom any need for detailed KPI’s and penalties to be drafted into the contract. The same effect can be achieved more effectively with commercial affinity and this ability to walk away.
Another way to think of this is that if you are a customer and you have a big nuclear button (i.e. the right to walk away, depriving the supplier of future business) then you don’t need a myriad of tactical rights and obligations in a contract.
If you are a supplier, you may not like the idea that your customer could walk away at any time. But you have to face the realities. Would you really want to try to force an unwilling customer to continue to do business with you? Would it not be better to accept that the only way you will ensure that a customer continues to give you its business, is if you continue to delight the customer with your product and price?
The concept of MAD (mutually assured destruction) applies equally in commercial relationships as in global warfare – neither party is likely to be trigger happy with the nuclear button, because walking away is likely to cause significant disruption for both of their businesses.
But 9 times out of 10, the fact that either party could walk away from the relationship is enough to keep the other party honest and keep the relationship running. The fact that there is nothing in writing to state what must happen in a particular situation means that the parties are free to agree a mutually acceptable solution, failing which they can walk away without any impediment.
Clearly, it’s always necessary to capture in writing the key terms of a deal – the price, specification etc. This applies whether you are buying a company, entering into a lease, taking out a loan or selling widgets.
However, it is often not necessary to go further and provide detailed contract terms that place rights and obligations on each party, and micro-regulate the relationship.
In any continuing business relationship – whether with a supplier, distributor or customer – it’s actually very difficult to force a partner to continue with a long term relationship if the contract ceases to be mutually beneficial.
So, if either partner in a continuing relationship ceases to believe that the deal they originally struck is in its best commercial interests, then regardless of what a contract may say, the other party would be well advised to address that imbalance rather than simply try to compel the first party to perform its contractual obligations.
This may sound defeatist. But consider the alternative: you force your contract partner to do something it does not wish to do. At best, you will get begrudging performance or work to rule (e.g. a service provider may deploy its weaker staff if it is being screwed down on price, or a distributor may sell just enough of your products to prevent you from terminating). At worst, you have to take your partner to Court, with all the problems that entails (see section 5.10 Going to Court below).
In a continuing relationship, neither of these scenarios is satisfactory.
In our view, it’s often better to simply leave a continuing relationship entirely to the irresistible forces of free market economics, rather than place continuing contractual obligations on each other.
In other words, commence doing business together, but make no commitments about the duration of your relationship or the level of business you will transact together. Simply accept that for so long as the relationship remains mutually beneficial, you will continue to do business. It if ever ceases to be mutually beneficial, you will part company, but you will give a reasonable period of notice to enable an orderly transaction.
This approach simply recognises the fact that economic forces are too powerful to be restrained by contracts.
If a contract blocks a person from doing something that is economically necessary for his business, the contract will be overridden. This may be done lawfully – it’s amazing how easy it is to create credible legal arguments against apparently watertight clauses (some of the ways in which clauses can be challenged are set out in section 5.10 Going to Court below).
Or it may be done unlawfully – just breach the contract and face the consequences.
Either way, it’s unsatisfactory to get into a situation where the contact forces either party in a continuing relationship to do something they do not wish to, because it does not make economic sense for their business.
The key thing to acknowledge is that contracts are unlikely to offer any real solutions when you are faced with an unwilling contract partner in a continuing relationship. It’s almost always better to simply walk away.
5. The drawbacks of detailed written contracts
Conventional wisdom from the legal profession is that detailed written contracts are necessary:
· To have certainty of the rights and obligations of each party
· To avoid future disputes over what was intended
· To provide compensation if either party doesn’t do what it said it would do
We discovered that in the vast majority of our business relationships, these assumptions about the role of contracts were largely wrong.
Here are 10 reasons:
5.1 Certainty
The apparent certainty and protection of a detailed written contract is often illusory. Our experience showed that the more detailed a contract is, the greater the likelihood that there will be ambiguity or internal inconsistency within it.
Given the chance, lawyers are often keen to demonstrate their drafting skills by trying to predict and provide for every conceivable situation. Yet man’s foresight is limited and attempts to draft for the future often looks laughable in hindsight.
This leads to highly complex lengthy contracts which can only be understood by the lawyers. So the lawyers win twice: they get paid for drafting the contract and they get paid each time they have to advise on what it means!