One Size Fits All: Great for Socks, Not for Contract Templates
There’s a good chance your company uses contract templates in support of its day-to-day commercial legal needs. In fact, most companies will templatize common, recurring agreements as a time- and cost-saving practice. However, this practice has its limitations. First and foremost, not all contracts can be converted into templates. Moreover, without the right coordination and oversight, the use of templated forms can expose a company to a number of unforeseen consequences. In this 2-part series, we will explore the basic advantages and considerations when developing contract templates, and then discuss best practices for building an effective template library.
Advantages of Contract Templates
Simply put, well-drafted templates can save your company both time and money, especially when they are drafted with a balanced perspective in mind. For example, if your customer contract template is strongly one-sided in your favor, its terms are more likely to be heavily negotiated. If you’ve ever received a template like this from a counter-party for a simple matter, then you understand the amount of time and resources that will be required to redline the document, which will likely be followed by rounds of revisions, wasting even more valuable time and resources. The same unfortunate scenario can play out when the wrong template is used (e.g., a template for the supply of products in a transaction involving services) or if a template is so poorly drafted that vast portions of the agreement must be redrafted. The point here is that one-sided, mis-used or simply bad templates will not meet your organization’s need for speed, efficacy and efficiency. When a contract feels like a “win-win” from the start, negotiations can be limited, or in some cases, avoided, resulting in quicker turnaround, less involvement by legal counsel and reduced legal expenses.
Templates also help to ensure consistency across an organization. First, by offering stakeholders access to company-approved forms, they are less likely to “copy and paste” another company’s forms, which can open a pandora’s box of potential issues. Moreover, when templates are accompanied by drafting guidance (e.g., marginal annotations on the template or notes from an internal training session), they are more likely to be used appropriately (the template suits the transaction) and consistently by stakeholders throughout the company. Finally, a coordinated approach to template use lends support to the company’s brand by projecting a more cohesive, professional front-facing image.
- Risk Mitigation
Templated contracts can play a role in a company’s overall risk mitigation effort when they are drafted with compliance obligations in mind and include all relevant and required federal and state compliance provisions. A prime example of this is the inclusion of applicable data privacy and anti-bribery requirements in your templates. Likewise, templates can help to minimize risk within a particular transaction by serving as a “deal completion checklist” which stakeholders can reference when dotting their i’s and crossing their t’s before closing a deal. Benjamin Franklin was certainly spot on when he said, “an ounce of prevention is worth a pound of cure.” It is always easier to avert a problem than to try and repair a problem.
A well-drafted template can “live and breathe” alongside a company’s changing needs. Not only can its provisions be more easily tailored to suit deal-specific conditions, but also, in the event of organizational changes impacting the contract’s terms, revisions to key terms are easier to make. This flexibility is a considerable value-add; and when considered in the aggregate, a set or “library” of contract templates is a valuable company asset.
A Few Key Considerations:
- Limited use
As mentioned earlier, only certain types of legal agreements are suited to a templated form to be shared outside of the legal department. Common, recurring agreements such as customer or vendor contracts, confidentiality agreements and consulting agreements suit this purpose best. That said, even these may require some tailoring from time to time, depending upon the specific circumstances of a transaction.
- Sourcing concerns
Quality concerns are another drawback to the use of contract templates. Before adopting a template for use by your company, take the time to learn where it came from (your legal department vs. another company), who may have drafted it (a lawyer vs. a copy/paste job by an employee), and when it was last updated (recently vs. 10 years ago). For example, a sales contract prepared for a company in a different industry may not contain all of the provisions which are considered standard in your own industry. Likewise, companies from the same sector may have unique, operational differences. If a template is not properly vetted, it may leave your business exposed to unnecessary risk.
- Exposure to risk
Compliance plays an essential role in ensuring the ethical stewardship and success of today’s businesses, especially for those in highly regulated industries where the consequences of non-compliance can be hefty. If a template’s provisions do not reflect the most current version of applicable laws and regulations, a company may find itself subject to monetary penalties, reputational damage or worse for failure to comply.
- Brand detractor
Believe it or not, corporate branding can suffer when a company fails to use templated contracts in a coordinated or intentional way. For instance, if a company’s forms contain duplicative or superfluous language, these deficiencies will be glowingly obvious if and when compared with more carefully drafted forms. On purely aesthetic level, if a company allows its stakeholders to use a potpourri of templates sourced from various places, without any effort to reflect the “look and feel” of its own brand, the lack of consistency is certain to reflect poorly on the company.
In sum, by taking the time to prepare well-drafted contract templates, a company is more likely to avoid the pitfalls associated with template use. That said, to optimize the benefits of contract templates, a company may wish to consider creating a library of contract templates, along with a playbook to guide stakeholders in their use. This process should be a collaborative one, involving stakeholders from across the organization. Developing and implementing a library of templates is an investment of time and resources. However, if done correctly, your ROI will pay back in spades. If your company is ready to tackle this project, stay tuned, you don’t want to miss Part 2.
If you have questions about the use of contract templates or commercial transactions in general, please contact Michèle Linde at firstname.lastname@example.org or 302-256-4724.
Michèle Linde is a Member of our Mid-Atlantic team with more than 30 years of in-house and private legal practice experience in the life sciences industry, including work with branded and generic pharmaceuticals, medical devices, academia, cosmetics and the champagne industry. Prior to joining Outside GC, Michèle served as EVP, Global Corporate Governance, Chief Legal Officer & Corporate Secretary at Virpax Pharmaceuticals. She can be reached at email@example.com or 302-256-4724.