Everyone on the same page: Contract breaches

Back in 1963 a study by a law professor revealed something amazing about business and contracts.

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Stewart Macaulay interviewed the heads of some major US corporations and asked them about contracts and their usefulness. What he found was that, for most of these companies, contracts didn’t matter. Contracts weren’t used often, and when they were, they were filed away forever, never to be seen again.

Of course, a lot has changed since then – and contracts are definitely more common today than they were then. But what about attitudes among business leaders about contracts and contract law – has that changed?

A recent post on the ContractsProfBlog picks up the question again and reports on the findings of a preliminary study asking the same question of modern companies: what good are contracts? (The article is part of  “virtual symposium” on the topic, which you can read more about here.)

This time, University of Southern California law and economics professor Gillian K. Hadfield and co-author Iva Bozovic decided to interview companies in the San Francisco Bay Area and Los Angeles. They classified companies into two categories – innovative and non-innovative; senior level managers were interviewed at 30 companies.

The results were interesting. Non-innovative companies said they don’t draft contracts. Innovative companies had a different answer: yes indeed they spend a lot of time drafting contracts – and reviewing them as well.

The article has more detail on Hadfield and Bozovic’s findings, but what they uncovered can be summarized this way: What contracts are really good for is finding common agreement on what constitutes a breach. This is especially so when there’s plenty of room for ambiguity (think of service providers contracting to service providers).

Their findings beg the question of many businesses: so are you monitoring contract breaches?

Without implementing a contract management solution, contract breaches may only be noticed when they become a crisis – long after when anything could have been done to prevent the problem.

A contract management solution like Contract Assistant makes monitoring important contract dates easier by (first) centralizing all contracts into a single, easily accessible database and (secondly) making it possible to attach alerts to key dates relating to contract deliverables or commitment timetables.

In fact, in a prior post, we’ve outlined the top uses and top tips for using alarms. One of the top uses of alarms was to set a “Review by” date. Not to be confused with an expiration date, “review by” alarms should be set mid-way into contracts so they can be reviewed by key stakeholders for compliance.

One thing the preliminary study authors (Hadfield and Bozovik) noted was an interesting difference in business between the early 1960s and today. Back then, the understanding of what constituted a breach was much clearer (when the economy was more hard goods and manufacturing-based).

These days, in a service-based economy, and in areas of high-tech innovation, what constitutes a “deliverable” is more complex. This makes it all the more important that contracts be actively managed, and for enterprises of all sizes to consider implementing a contract management solution.

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