By Janelle M. Lewis, Attorney, Business & Legal Strategic Consultant

“The only thing that is constant is change.” That is why it is important to draft contracts that bring value by valuing change

Using Contracts to Value Change

“The only thing that is constant is change” is one of the famous quotes from the Greek Philosopher Heraclitus. This quote, however, extends much further than philosophy and has become a reality for those in business. The year 2020 has brought the new reality of uncertainty and how businesses respond to the new normal. Within the context of business, change impacts the business relationships and transactions that are shaped by contractual agreements. In order to adapt to the uncertainty of the new reality and the fact that change is constant, supplier and service contracts that are more vulnerable to disruptive events should be short-term and more specific to the unique business relationships and transactions of the contracting parties.

In order to adapt to the uncertainty of the new reality and the fact that change is constant, supplier and service contracts that are more vulnerable to disruptive events should be short-term and more specific to the unique business relationships and transactions of the contracting parties.

Short-term Contracts Are Preferable in Times of Change and Uncertainty

Short-term contracts are preferable to long-term contracts in supply and service relationships because they allow parties to continuously revisit the business deal. Businesses are then more able to determine whether the contractual relationship continues (or can continue) to provide value to the underlying business relationship and transaction. On the buyer side, short-term contracts provide businesses with the opportunity to pivot to new technology, suppliers or service providers. On the supplier side, short-term contracts can provide businesses with the ability diversify their consumer base and their offerings. For all parties, short-term contracts offer the ability to maintain resiliency and flexibility in the face of uncertainty while mitigating the risk of breach or non-performance, which can be greater in a long-term contract.

…short-term contracts offer the ability to maintain resiliency and flexibility in the face of uncertainty while mitigating the risk of breach or non-performance, which can be greater in a long-term contract.

Shorter Contracts Can Make Business More Resilient and Adaptable to Change

Short-term contracts also bring with it shorter contracts that speak to the actual legal issues that are salient to the specific legal relationship between the contracting parties. What is sometimes lost in contract drafting and negotiations is that contracts are private laws between the parties to the contract and as a result, contracts can be as specific and unique as the needs of the parties. Notwithstanding legal requirements of formation and/or enforcement that are specific to the jurisdiction under which the contract operates, contracts only need those provisions that speak to the business relationship and subsequent transactions they guide. Including provisions that are not salient to the underlying business relationship and transaction being governed by the contract can be as detrimental to the parties of the contract as not including provisions. In other words, a long contract does not in itself mitigate risk. Shorter, more specific contracts provide businesses with greater resiliency to adapt to disruptive events that affect contract performance.

Including provisions that are not salient to the underlying business relationship and transaction being governed by the contract can be as detrimental to the parties of the contract as not including provisions. In other words, a long contract does not in itself mitigate risk.

Contracts Can Be a Source of Competitive Advantage

Finally, short-term contracts that are more specific and unique to the business relationship and transactions between the contracting parties are a source of competitive advantage. Such contracts can create a unique value to the parties that are rare, inimitable, in which no substitutes exist because the contract reflects the specific, unique needs of the parties that can be revisited. In other words, short-term contracts that are more specific and unique to the business relationship and transactions can be a source of competitive advantage.

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