After the first piece in this series, with a legal review policy as a solid foundation, and having a better grasp on what contracts your legal team should spend time on, and what contracts it should not spend time on, it’s time to turn your attention to another fundamental pillar of efficient contracting – contract templates.
The CLM Simplified Contracting Framework
Designing and using templates is often the easiest place to start for legal teams that want to streamline their company’s contracting work. They are easiest because they fit precisely within the skillset of the attorneys. Attorneys know the words that go into contracts; actually, they know lots of words (maybe too many). Therein lies much of the problem.
Contracts are complicated, and generally not very user friendly. So, bad templates are often the source of contracting woes. But a simple, easy to read, and reasonable template will go a long way to making the contracting process more efficient.
Template considerations:
- Make sure the template terms are within the normal ranges of what is commonly acceptable by both parties. Note that as with many other aspects of contracting optimization, what can be accomplished with templates depends on several factors.
- Not all contracts should be templatized. Bespoke agreements are by their nature, well, bespoke. So, they will need custom terms and special nuanced provisions. I know that no attorney drafts contracts from a blank paper, but the starting point for specialized contracts is often a prior executed contract (or a few) and is pieced together much like a puzzle.
- Focus only on the contracts that recur in the legal department. These are the higher volume, repeatable types of agreements that land on legal’s desk over and over again, sometimes in what feels like a never-ending deluge of work. They are exactly the types of contracts that need templates.
- Another consideration, besides sheer volume, is where the bargaining power lies. If your company has a difficult time using their own templates and you are most often negotiating from third-party paper, then you are likely better off spending time developing negotiation guides or playbooks.
- Even if rarely used, templates are a worthwhile exercise because it forces the legal team to contemplate their positions on key terms and come to a consensus on the right level of risk tolerance. There is no better forcing function to finally decide on the appropriate limit of liability than when everyone has an opportunity to voice their perspectives, with the understanding that a decision must be made. Thus, even a rarely used template is a useful document as a reference guide that defines the preferred terms for the company.
- Templates help expedite the contracting process because they speed up the initial production of the starting contract, and because they enable the business to handle certain contracts independent of the legal team.
How templates are used, formed, stored and retrieved will vary, so there is no one right way of doing this. Every legal team should embrace the approach and policy guidelines that fit their culture, resources, and processes.
Template tips:
Before beginning the actual work of drafting template terms, take an inventory of the types of contracts that the department regularly deals with. Create a simple spreadsheet view that outlines commercial categories of contract types, such as procurement, real estate, services, etc.
Templates kept in the protective hands of the legal team should be more than business self-service documents; they should be used as starting points for more complex contracts where the legal pro is crafting some original language or pulling pieces of applicable templates together to form a new bespoke contract as a starting point. (A bespoke contract will naturally become a sample, but that is different from a template.)
Once a template is formed and has some comments or notes to explain certain aspects of the document or perhaps offers guidance on negotiating positions, it does not end there. A template, to be useful, must be maintained and regularly reviewed and updated based on where negotiations actually end up after using the template as the starting point. That’s how the legal team learns whether the template has value: if a template is regularly negotiated and significant portions are revised, then it is likely that the positions taken in the template are not very realistic.
Clause libraries
Another form that legal-facing templates take is the collection of contract clauses that are commonly used. Clause libraries often come alive when automation is introduced into the contracting process. To automate template creation and initiation of contracting, clause libraries are the first step. Without a library of approved clauses and some logic on how and when to use them, it is extremely difficult to automate contract creation.
Clause libraries can also be used for simple, common terms like governing law. There may be only three to four acceptable governing law combinations of jurisdiction and venues, which makes it easy to simply “copy and paste” the right combination into a contract. Or a force majeure clause (increasingly important in the post-pandemic world) is one that can be easily used as-is in a variety of contract types, in which case the clause library is used as a repository of clauses that can be applicable across contract types, lines of business, and perhaps even some geographies.
While someone using the clause library still requires a substantive understanding of the contract where a clause is added, having the pool of clauses to pick from will exponentially speed up the drafting (aka the “contract creation” phase of the CLM) process.
NDA Templates
Until such time that the commercial world agrees to a universal NDA, every law department must have an NDA template for use by the business without legal involvement. An NDA template must be short, simple, and contain mutual obligations. It should be created in such a way that changes to the terms are not allowed and only a few core fillable sections are open to the business.
Once the C-suite understands that the legal team is not a gatekeeper for all contracts, it is very helpful to set that tone from the top down. Often, Legal feels it must protect the business from itself, and thus over-functions on every aspect of contracting. But with the right leadership, the business can be empowered and accountable for when some contracts either slip through the cracks, or simply aren’t negotiated in an ideal way.
Finally, More Template Tips:
- Don’t create too many
- Consider the difference between a sample and a template
- Pick higher volume contracts to templatize first
- Make templates for those engagements where your company has negotiation leverage at the start
Templates are not a magical answer to the contracting problem, but they are a great start!