So which contract clauses are the subject of hard-fought negotiation between lawyers, contract managers and the other people who negotiate contracts? That is the title of the wide-ranging survey run by WCC and Icertis, answered by almost 1,000 organisations across the world, making it one of the most comprehensive surveys in contract management.
A. What lessons can we draw for negotiating contracts well?
This comprehensive and highly instructive study brings to light many concepts and insights. Among the many take-aways it offers, we have picked out the following:
First, that the podium of the most negotiated clauses, whatever the size of the company, is still held by:
- limitation of liability clauses (80%),
- price clauses (75%), and
- indemnity matters (72%).
Next, that the podium of the clauses that give rise to (pre-)disputes during contract performance is made up of:
- price,
- scope/specs, and
- delivery.
Finally, that the podium of the clauses contract negotiators consider most important is almost identical to that of the clauses giving rise to (pre-)disputes, namely:
- scope/specs,
- price, and
- delivery.
Why have we chosen to highlight these three podiums? Quite simply because the mismatch between, on the one hand, the time spent negotiating certain clauses up front (the most negotiated clauses) and, on the other, practice, namely the clauses that are actually argued over during performance (the clauses giving rise to (pre-)disputes), underlines how much the operation and the field matter.. but also how far removed negotiators' work is from the reality of a project!
Another key figure from this study illustrates that mismatch: the fact that only 16% of contract negotiators believe that negotiation focuses on the points that really matter. This telling figure highlights the importance of contract management for companies, and more particularly its role as a bridge between legal departments and operations departments.
The study also offers interesting insights into international contracts, with comparative analysis of negotiating practices according to the legal system used by respondents. It shows that negotiators of English, US and French law contracts are fairly homogeneous and have very different concerns from negotiators of Indian law contracts, who prioritise liquidated damages and acceptance clauses, or from negotiators under Islamic law, who prioritise limitation of liability, dispute resolution and governing law.
B. What does this mean for contract negotiation and for the contract manager's job?
As we touched on in the previous section, this study highlights a gap between two worlds: contract drafting and negotiation on one side, contract performance on the other. The bridge between these two worlds has to be the contract manager. At Prime Conseil, we see this study as a tremendous opportunity to assert the usefulness and the leadership of contract management within companies.
In an age of standardisation and automation, and in the light of the progress CLM tools have made with Gen AI (see in particular BirdsEye or Gino LegalTech), the contract manager must (re)position themselves in the value chain and bring expertise in identifying what really counts in a project's success. During negotiations, the contract manager must be able to identify, prioritise and favour the clauses that contribute to a project's profitability, manoeuvring shrewdly between corporate rules and other bureaucratic delights.
What is more, just as our companies' business is becoming more international, the study highlights differences in behaviour and in negotiating priorities among contract managers, according to the size of their company but also to the region of the world they are based in. This reinforces the need for contract managers to keep training, to practise and improve their English, and to work on the agility of their contract management practice so that they can adapt to different ways of doing contract management, whether the differences are cultural or regulatory.
C. Putting these insights to work to build tomorrow's contract management
The study closes with a few insights that invite us to step back and think about how our contract management practices might be improved. At Prime Conseil, we take away four main pillars:
i. Teams have to be diverse
At Prime Conseil we often discuss the question of backgrounds, whether in articles or in interviews. In our view, the effectiveness of diverse teams, mixing backgrounds and functions, no longer needs proving.
At every stage of the contract lifecycle, contract management that feeds on plural expertise is a must-have: it helps pin down what really counts in a contract, identify risks and opportunities in a meaningful way, and create value while taking a multitude of parameters into account.
ii. Operational stakes and risk management must be aligned
This study illustrates it once again: risk management (too) often takes precedence over the operation at every stage of the contract lifecycle, and over negotiation in particular. This risk aversion, explained above all by the weight of the financial stakes inherent in complex projects, all the more so in uncertain times, absolutely must be tempered and challenged by the life of a project, its constraints, its stakes and its opportunities.
Contract management is one of the keys to creating the right conditions for this alignment, by demonstrating an ability to absorb both contractual and operational data and to produce from it an analysis of risks and opportunities that is relevant to the company's constraints, objectives and ambitions.
iii. Adapting contracts to fluctuating market conditions
For many years now, projects have been hit by one contingency after another, whether interest rate swings, changes in shipping conditions and freight rates, or supply difficulties in the wake of various conflicts, not to mention the global COVID pandemic: these events, which we call contingencies, must today be treated as part of the baseline scenario for how a project unfolds.
At every stage of the contract lifecycle, contract managers must therefore factor in a reasonable probability that a contingency of some kind will occur. Raising that probability level must also go hand in hand with drafting contracts that include mechanisms encouraging cooperation and agility, so as to deal with these contingencies effectively.
iv. Rethinking standard processes and templates to fit the context
We recently wrote an article explaining why contract templates are often a bad idea. This study bears out our point, since it highlights how concerns and stakes differ according to the size, the country and the industry of the contracting parties.
While they remain useful working tools, templates, processes and other corporate guidelines should therefore be handled with care and challenged in the light of the context, the project and the contracting party or parties. So, rather than trying to formalise, frame and codify everything within organisations, we recommend:
- training and raising the awareness of as many stakeholders as possible in contract management;
- formalising the best practice, customs and processes that smooth and clarify working methods;
- leaving the contract manager some agility (some "slack"), which can save time and improve effectiveness in negotiation, in performance and, more generally, at every stage of the contract lifecycle.