There must be a convoluted logic to this, but why is it that commercial contracts are written to relentlessly appeal to our appetite for senseless destruction?
We were animatedly discussing ‘Business Purpose’ clauses at my ‘Understanding Joint Ventures’ workshop last month when I realised that practically everyone in the room believed that the solution to all contractual disputes was arbitration! As we delved into the subject, it became clear that most participants did not see insoluble contractual issues as arising out of either differing perceptions or irresistible commercial compulsions. The majority viewed contractual breaches as ethical issues: in terms of right and wrong, black and white. Retribution seemed a logical corollary. This struck me as especially odd because business executives make up the majority at these workshops and you wouldn’t think of the business community as litigation centric in its mental orientation.
Perhaps this shouldn’t be a surprise. Most people – legal or commercial – tacitly agree that contracts are meant to apportion rights and liabilities between parties. Regardless of whether that is true, most contracts are certainly written that way. Commercial people make a deal; lawyers rewrite the obligations in legal-speak and back it up with threats of dire consequences. The problem is that if you write contracts this way, contracts become self-fulfilling prophecies. If you think they are out to get you, you would want to get them first and will act accordingly. When they figure that out, if you haven’t already gotten them, they are certainly out to get you. QED. I have always believed that a lot of contracts run into trouble because of the way we write them.
Take the celebrated example of the Dabhol project that went down despite an air-tight contract you couldn’t touch. Shorn of the polemics, it came down to a deal that one party could not sustain and the other could not back down from. Let’s face it, Dabhol was a take-or-pay contract at extortionist prices. The buyer faced the choice of paying and going broke or not paying and getting sued. What would you do if you were the buyer in this contract? And what kind of savvy seller would you be if you made this deal?
How then should contracts be written? To answer that question, we would have to ask ourselves how we view our commercial contracts. Are these documents records of immutable promises that we must in perpetuity keep? I think not. How many of us who ride the matrimonial bandwagon keep our promises exactly the way we have promised at the marriage ceremony? Relationships are dynamic animals, as people are: to demand that people keep to immutable promises is to ask contracting parties to stand still in a world that runs at speed.
It just makes more sense to think of contracts as constitutional documents for commercial journeys: roadmaps of shared relationships. A contract should make a precise declaration of intent, and then find mechanisms to smooth the passage to the contractual goal. This is not as hard as appears at first glance. We know what broad issues any commercial activity will throw up: if we can proactively anticipate and provide solutions, we take the art of contract writing to a totally different level. Let us illustrate.
Regulatory approvals are frequently a condition precedent to any contractual obligation. In any complex transaction, both parties have to obtain a variety of approvals. Who gets them is always a moot question but this also raises other associated questions. How much time does a party have to get these approvals? What happens if the approval is not received? If we speak of a simple Retailer contract, getting sales tax registration is a no-brainer but reality changes a bit if we are talking about lender approval to capitalise a company… or Sebi’s approval to buy into a listed company. The truth is that parties to many contracts have critically altered their position long before they apply for regulatory approvals. If they don’t get the approval, neither is in a position to simply roll back and go home. Yet all too often, we do not provide for alternative strategies to circumvent approval failure though such strategies are well known. What prevents us from having Change-in-law clauses in our contracts? Or an appropriate Plan B?
Take the case of a technology and Product Development Agreement. Assume that one party wants to manufacture a hybrid car and the other is going to develop the hybrid drive train for the manufacturer. This kind of contract throws up a multitude of very typical questions of management and logistics. When and who will develop the basic specifications sheet? Who will have it validated by a third party expert? Who will resolve issues pertaining to conflict between specifications where achieving one makes the other uneconomic? Who will finally approve both the specs? Who will translate optimal technical drawings and data to their production and shop floor specs? What about delivery times, delays, mechanism to adjust production schedules, notification obligations… Let’s face it, commercial activities are primarily about cooperation, not conflict. It takes two to tango nine tenths of the time. Predatory relationships are unsustainable over any meaningful time span. If two parties are to cooperate, they must have comprehensive contractual roadmaps that will optimise cooperation. It does not help to forget about the roadmap and focus on what we will do with the ostensible villain when it all comes crashing down.
That we do not see commercial disputes as paradigm differences is part of the problem. There is no single ‘right’ way to do things. People can always disagree on what is the best ‘right’ way. Take large construction projects. There are several efficient ways to skin a common cat, especially one of a species that has been skinned a thousand times before. But build a plant and there will be as many views on the engineering issues as there are issues. How many construction contracts have an efficient mechanism to resolve disputes arising out of technical issues? In 23 years of law practice, I have overwhelmingly seen standard clauses where the dispute is first kicked up stairs to CEO’s. And when that doesn’t resolve the problem, parties promise to go to arbitration. Is it a good idea to ask a retired high court judge with a B.A.LLB degree to determine if the operating characteristics of application software controlling the ramp rates of a LNG turbine generator should be this or that?
Again, there are well-known, credible, user-friendly alternatives but they are not employed. All we need is a pre-agreed short list of experts. When a dispute arises, parties can choose amongst them (employing a veto procedure if necessary), refer the dispute the residual expert, share the cost and have a decision in days to which they are bound.
Even if we assume the worst – that one of the contracting parties is running to a narrow agenda replete with greed, insecurity, ego, and so on – retribution still cannot be the primary response because justice cannot be the primary goal. Examples of large business houses losing value rapidly as they battle each other, or within the body of dominant shareholders, can be multiplied endlessly. Who has the time to take efficient business decisions when there is a fragile ego to be nursed, or a carpet bombing mission to be savored at leisure? The near universal belief that litigation means the business goes to hell is true only because people with counter insurgent mindsets write contracts, not because a better way does not exist. If contracts rewarded people to preserve rather than destroy, wouldn’t we be the better for it?
In sum, I do not see retribution as a primarily solution to contracts gone bad. In which society has the death penalty prevented murders from occurring? Or vice versa? The key commercial challenge for us is to find ways to write contracts that encourage cooperation, that factor in changing business realities and that preserve value in the middle of conflict. At the end, we need to find ways to ensure that parties have few if any reasons to encourage or participate in wholesale destruction as part of their commercial agendas.