When good contract language goes bad

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If a contract is primarily about compliance with complex laws, it’s possible that what may seem to be a “good” contract that protects everyone actually does the exact opposite.

A recent article posted on the Corporate Counsel website recounts an exercise to come up with “standardized” language parties can use in compliance-based contracts.

The problem, as related by author Alexandra Wrage, was to find standardized language that could work for both parties to address ever-shifting and complex anti-bribery laws. Rather than re-invent the wheel in every contract, companies that routinely had to address anti-bribery compliance laws across a range of countries and jurisdictions could benefit from some common language and standardized terms.

The exercise (led by TRACE International) resulted in some successful outcomes, Author Wrage noted, however, that organizations which had a lot of leverage over contracted partners were most resistant to changes in contract language (and we can assume that those “changes” were more-standardized language). Those companies were happy to essentially dictate terms that protected them – no matter what the effect was on their partner or a third-party supplier.

Unintended consequences

As Wrage pointed out, being overly protective can result in the exact opposite of what the contract was supposed to do. For instance, requiring contracted companies to report all violations or near-violations of anti-bribery laws can be a blanket request that creates more work than is probably justified. Unwieldy, complex contracts tend to get ignored, so instead of reporting “any” kind of violation (which may be vaguely defined too) … it becomes easier to just report none at all.

A good friend works in a consulting business and he’s told me of the same kind of boomerang effect in industrial safety. Sometimes companies looking to improve safety in industrial plants or sites try to incentivize safety reporting. Unfortunately, this often takes the form of rewarding days without incidents or accidents (think of those signs that proudly read “X days without an accident”).

However, by rewarding “days without an accident” what companies are actually doing is incentivizing the non-reporting of accidents. If you knew you were going to get a bonus for 30 days of no reported safety violations, and a safety violation occurs on day 29 … there’s a strong incentive to NOT report that violation, isn’t there?

Filed away and forgotten

There’s a broader lesson in all of this as well. People can’t really manage contracts that are difficult to implement, control or even understand. This is a theme that seems to crop up frequently among those who report on or write about contracts, too (such as contract-drafting wordsmith and expert Kenneth A. Adams).

We know from experience that companies that centralize and store their contracts in an organized database solutions, such as Contract Assistant, experience solid financial and organizational benefits. But not every organization does this, of course. Could part of the core problem be that when contracts become too burdensome or complex – they get ignored?

If a contract is written as a kind of ironclad guarantee of protection and indemnification, what are the odds that business partners would rather ignore than comply with the burdens of the contract?

In the end, you and your organization needs contracts that are not stuffed into file cabinets and forgotten, but clear, concise records that can be well understood by all parties. That, in turn, allows for easier control and management, and all the benefits that contract management brings.

Photo Credit: Omar Omar via Compfight cc

[About the author: Todd Hyten is a former business journalist who now writes about B2B topics and consults on content marketing. You can find him on Twitter and ]

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