A recent debate between two lawyers on Twitter had IP Draughts thinking about the purpose of template agreements, such as a company’s standard conditions of sale or purchase. The debate was prompted by Ken Adams kindly mentioning an old article on this blog, on the subject of insurance obligations in contracts.
One lawyer was arguing that the main purpose of an agreement is to enable a client to remove risk, and therefore detailed insurance obligations might well be appropriate. It shouldn’t matter whether these obligations added to the length of the agreement.
The other lawyer was arguing that the main purpose is often to set out clearly the terms of the deal, and to enable efficient processing of transactions. Detailed insurance obligations were often unnecessary, added to the length of the terms, and potentially slowed down negotiations.
To which, a neutral observer might say: it all depends. It depends on the situation, and on the client’s understanding of risk.
Every client is different. Some carefully analyse risk. Others work on instinct. Some want protective contract terms, even if this slows down or reduces deal flow. Others are focused mainly on the next month’s sales figures.
Some want a clean file, where they can demonstrate that they tried to achieve protective terms, even if they were ultimately unsuccessful in negotiations. Some just want “middle of the road” contract terms that should be mainstream and easy to agree.
Some are influenced by whether they have had a contract dispute in which the contract terms were important. This isn’t necessarily a good influence; the chances of a litigated dispute are low, and one event may not carry statistical significance. But it is a human characteristic (some would say a human weakness) to rely on the lived experience.
Ultimately, it is for the client to take commercial decisions, including what level of risk to accept in their contracts. Liability and insurance clauses in standard terms of business may help to reduce risk. But they are only one factor. Other practical considerations include how careful the client is to incorporate the standard terms into the contract. In IP Draughts’ experience, some clients are pretty hopeless at this.
Another factor is whether the client sticks with those terms in negotiations, or is willing to concede them in the interests of getting the deal done. And whether the client would be willing to litigate if the terms are breached.
Even if the terms are insisted on, are they actually followed up? Does the client check the insurance cover of the other party? Does it check its own insurance, to ensure there are no gaps in coverage in relation to the contract?
And has the client done any strategic analysis of its contractual relationships, that might help it to decide whether to ditch categories of client on the grounds of risk? If the answer to some of the above questions is no, this may provide some clues that the client doesn’t prioritise, or isn’t prepared to devote resources to, protecting itself against contractual risk.
IP Draughts prefers to work for clients where he can discuss their requirements with them, including their attitude to risk, before putting his metaphorical pen to paper.