Contracts: Developing A Quality Index

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Author: Tim Cummins

During a recent webinar, a participant asked whether there is such a thing as a ‘contract quality index’ – some method or algorithm by which an organization might judge its contracts.

A typical definition of ‘quality’ goes something like this: it is “the standard of something as measured against other things of a similar kind; the degree of excellence of something”. But of course for this to be meaningful or measurable, we must decide what represents excellence. And that is where the problem comes from.

Defining purpose

If I buy a car, or call a help center, I am quite clear about my purpose in doing so and can judge whether that purpose has been met. I will also be able to compare the experience with other cars or help centers. But what about a contract – what is its purpose? A recent IACCM survey illustrated the dilemma which is that contracts have multiple purposes and their relative importance depends a lot on who you ask.

However, top of the list – and therefore perhaps a good place to begin – is that the purpose of a contract is to ‘provide a record of the rights, responsibilities and obligations of the parties’. So if we use this as the indicator of quality, what measures might we use to determine success? The most obvious would be whether or not there are subsequent disagreements due to different interpretations of those rights, responsibilities and obligations. On that measure, a relatively high proportion of agreements fail the quality test and by understanding the causes of that failure, we could take steps to improve quality (e.g. was it poor drafting, poor negotiation, failure to involve the right people?). Such improvements could then be monitored, allowing a benchmark against both the outside world and against one’s own past performance.

Feature versus Function

But is a contract’s purpose really to provide a record of rights, responsibilities and obligations? On this measure, I could have thousands of perfect contracts and still go out of business. Contracts (certainly those related to sales of goods or services) are core business assets. The mark of a good contract – its function – is whether or not it generates profit. In that context, things like clarity of intent are indicators, not core purpose. Many would argue that the contract is just one contributor to profitability and they would of course be right, but there is increasing evidence that ‘good’ contracts (i.e. those of high quality) are actually major contributors. Contracts often set the tone (e.g. are they fair?) and the context (i.e. are they clear?). They set the framework for operations (i.e. are they understood?) and for managing change (e.g. are they adaptive?).

As these examples indicate, it is certainly possible to create a ‘contract quality index’ so long as you are first clear about the purpose your contract is being designed to fulfill. Sometimes, this will require healthy internal debate – for example, over the relative importance of a contract being clear and easily understood, versus following traditional structure and wording; or (even more significant) over which terms and conditions really need to be negotiated to support the defined purpose. Such debates are held too rarely – and that, of course, is why very few organizations have any real idea whether their contracts meet any form of quality standard.

Read more from Tim Cummins on the Committment Matters website.

Tim Cummins is CEO of the International Association for Contract & Commercial Management (IACCM), a non-profit organization that he founded in 1999. Read more here.

 

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