Secrets of Contracting in 2023: How to Avoid Mistakes and Show Value
In 2023, the goal of many companies has been to maintain profitability by cutting spend, slashing budgets, laying off employees, eliminating certain benefits, and closing unused office space.
This has put both Finance and Legal teams at the forefront of many decisions. While Finance is responsible for giving the red or green light on decisions, Legal has had to make sure all actions carried out are done in accordance with legal and contractual obligations.
But with costs under so much scrutiny, Legal must also find ways to get more done with less.
Despite the challenge, this is Legal’s chance to shine and assert its role as the company’s strategic business partner. The opportunity to cut contract costs, amplify the value of contracts, and make a material impact on the company’s bottom line has never been more timely.
In addition to good data management, we gathered insights from several clients and legal experts about how they work with contracts to generate more savings and revenue for their organization.
The Cost of Mistakes
A mistake – no matter how incidental it is – is still a mistake. In the best-case scenario, it’s laughed off with no harm done.
However, history has shown us that courts won’t show leniency if a mistake incurs massive financial damages, even if it was by pure chance.
As one lawyer from Australia described, “It’s always the same mistake: Not reading the contract, and not knowing what’s in it before you sign it. Finding out the brutal truth when you are sitting in a courtroom five years later and about to be bankrupted is really the wrong time to discover what the contract says.”
Here are a few other historical examples of costly mistakes in contracts:
UK Companies House
In 2009, when the company Taylor & Son went out of business, the UK’s Companies House inadvertently added an extra “s” to the end of the company’s name. The mistake was corrected three days later.
This might not have been a problem had there not been a company already named Taylor & Sons. Once word spread that Taylor & Sons was supposedly in trouble, the company lost its clients, creditors, and contracts, causing the company to go into bankruptcy and more than 250 people to lose their jobs.
In 2015, the UK High Court ruled in Taylor & Sons’ favor, citing that Companies House owed “reasonable care” when entering information. The case would ultimately be settled in 2017 for tens of millions of dollars.
US Tariff Act of 1872
The US Tariff Act of 1872 also featured a costly typo, specifying “foreign fruit, plants” as exempt from tariffs instead of “foreign fruit-plants”. The error was eventually fixed by Congress, but not before it lost the US government over $2 million (about 0.7% of the national budget at the time).
Adjusting for today’s $6.27 trillion budget, if a similar mistake were to occur and cause the same financial impact, the US would lose almost $439 billion dollars.
Companies experience their fair share of costly errors as well. For example, JPMorgan lost $6 billion when an employee copied and pasted the wrong information from one spreadsheet into another.
Other business and organizations like Barclays and TransAlta have also suffered their share of mistakes when managing data.
Correcting Mistakes in Contracts
As one of our clients put it, there’s no such thing as a 100% error-free contract. According to them, “Even if you wrote the best contract in the world, a court or appeals court might disagree with you for many subjective reasons.”
Despite our efforts to make a contract’s language as objective as possible, language is still very subjective and ripe for debate. If a contract can be voided or overwritten, this means that not even the best contracts in the world are completely ironclad.
If there is a mistake, parties have the option of working together to rectify the contract and fix the error. In cases where a mistake gives an advantage to one party, the disadvantaged party may bring legal action to force contract rectification.
Not only is the latter solution more costly, but it has the potential to ruin the business arrangement. That’s why it’s always preferable to come to a mutual agreement to fix the mistake.
Contract Secrets to Avoid Mistakes in Contracting
It’s estimated that poor contract management can cost an organization up to 9% of its annual revenue. In numbers, if your company’s revenue is $1 million, this means your company automatically loses $90,000 because of poor contracting.
Many mistakes occur during the drafting process. To limit the number of errors in your contracts, here are a few contract secrets you can put into action:
- Exercise caution when creating contracts from old templates – The biggest hazard of using templates has to be copy-pasting. Countless companies have lost millions due to simple copy-pasting mistakes. The chance of these happening skyrocket when working with templates. Also, templates are often built using stock language that can apply to most situations. But the keyword is “most”. You’ll want to review the contract and update any sections of the template that won’t apply to the current deal. Lastly, if the template is too old, it might no longer reflect the latest government regulations and corporate policies.
- Proofread, proofread, and proofread – As the adage goes, the worst proofreader of a text is its writer. Even if you’re the best lawyer in the world, it’s wise to have a second (and third) pair of eyes look over what you’ve written. In one client’s words, “Your emotions and business matters will probably cloud your best judgment on certain issues, so it’s best to have someone outside the situation have a look.”
- Watch out for grammar and names – The most expensive errors are somehow also the easiest ones to avoid. As the stories above about Taylor & Sons and the 1872 US Tariff Act illustrate, costly disasters happen due to something as simple as a misplaced comma or miswritten name.
- Keep language simple – English comma rules are already challenging enough without reigniting the Oxford comma debate. A simple solution to avoiding the chaos of commas, periods, semi-colons, en-dashes, and em-dashes is to make sentences short, maintain simple sentence structures, and avoid modifying clauses as much as possible.
- Consider legal meanings – One retired lawyer said that one common mistake is “Reading the contract with ordinary, literal meanings of the words instead of their legal meanings.” This can be particularly challenging for non-native speakers of a language. Take English for example: many use the terms bankruptcy and insolvency interchangeably, but they apply to different situations. Other common words like damages, injuries, and slander are also frequently misused.
- Use automation – Automated contract drafting can greatly reduce the risk of human error. A good drafting engine will make sure you always use the most up-to-date, legal-approved templates. It will also walk you through the drafting process by asking simple questions whose answers are used to fill in the document. It even eliminates the chance of copy-pasting mistakes by saving data and auto-filling it for all other documents within the same project.
These aren’t the only tactics at your disposal to dramatically reduce the chance of contract mistakes. More importantly, leveraging legal technology like contract automation engines and CLM systems will help you speed up contract management and reduce contracting issues, netting you a positive ROI.
Strategies to Amplify the Value of Legal Through Contracting
With the global economy on the brink of recession, companies are racing to discover value or unearth savings wherever possible. By simply putting into place contingencies that prevent mistakes from creeping into contracts, Legal is able to unlock significant cost savings for their organization.
As one executive vice-president phrased it, “Contracts are often negotiable, so don’t just assume that when someone hands you a contract to sign it, it’s ‘take it or leave it.’ It never hurts to ask for more, or to eliminate some burdens in there.”
Legal has several more weapons available in its arsenal. Here are a few extra actionable steps for Legal to demonstrate their value through contracting:
- Never hesitate to revisit a contract – So long as the contract allows the possibility, one easy way to generate greater from a contract is to try and renegotiate its terms. According to Evan Bolick of the Cato Institute, “More often than not, other businesses are willing to make concessions.” Case in point, sports teams revisit and renegotiate contracts every year as they try to free up space under the league salary cap.
- Create a contract playbook – As Bolick suggests, “Develop a clause library that you use to propose important terms into an agreement in a quick and easy fashion.” And once the terms are finalized, you can easily swap in clauses in one click. To speed up clause drafting, you can turn to GPT-3.
- Use your time strategically – All contract negotiations should weigh the costs and benefits of every decision, especially with regards to time. One of our customers says, “Don’t spend months arguing over a contract worth $5,000, but don’t rush through a million-dollar contract either.” In other words, while it’s important to give all contracts thorough consideration, you should pay greater time and attention to contracts of greater value.
- Find out what’s important to your client or employer – If you are your own employer, then you just need to sit down and figure out what you want. But if you’re working on behalf of someone, you should learn about their priorities. A client of ours explained, “Sometimes it’s a good idea to put in provisions you know you’ll take out during the negotiations so that you can keep provisions you do care about.” It’s very similar to the expression aim high, shoot low. If you include everything you want in a contract, then by the time a compromise is found, you should hopefully have everything you need (and maybe a bit more).
These are just a few of the many ways legal teams can tap into their potential as a key strategic business partner.
Reducing the risk of mistakes and negotiating contract terms are some of the options available for Legal to show their value. ContractWorks CLM makes it easy for legal teams who want to drive more revenue to pursue not just these value-generating options, but many more.
Book a demo to learn how ContractWorks can help your team unlock more golden opportunities.