Building Collaboration Into Contracts.

Building Collaboration into Contracts1

By Kiri Parr March 2021

Introduction Collaboration is the current buzz word being thrown around in legal circles. Collaboration is touted as a solution to adversarial relationship and the pathway to better project and business outcomes. It is a particularly popular term if you are practising in the areas that relate to project delivery, procurement, and construction law.

But what are we really talking about when we talk about collaboration and when and how do we build collaboration into our day-to-day legal practice?

The goal of this session is to explore: •

What we mean by collaboration and why it might be important to your practise and the organisations you work for.

•

What are common barriers to collaboration.

•

When and how we can build collaboration into contracts and our in-house legal practice.

Context We should start with acknowledging that our legal training has taught us a lens through which we see the world.

This lens is what we use to assess legal liability. We see relationships between entities through legal structures and in turn we see how liability flows up and down and through these structures.

Those matrixes can be simple to extremely complex.

A simple example might look like this:

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The paper is written for a Legalwise seminar delivered on 17 March 2021 in Brisbane.

Owner

Contractor

Trade contractor

Trade contractor

Engineer

Façade Specialist

Over the top of these contractual frameworks, we also layer tortious, equitable, statutory, and other legal liabilities.

At times, our focus may narrow to the most immediate upstream and downstream relationships.

These frameworks become more and more complex the more macro the view we take of the system we are operating in.

This legal lens has the consequence that lawyers tend to see everything and everyone in neat boxes with clear delineation between tasks and responsibilities.

This perspective deeply influences our thinking. It reinforces hierarchical, command and control structures and assumes that it is always possible and preferred to rigidly define scopes and responsibilities.

This legal lens also reinforces an “us versus them” mentality which normalises using disputes and litigation to solve problems.

Peter Coring describes this as the “Tribalism Trap” and says of this element of human behaviour: “One of the great contradictions of human psychology is our notorious double-standard with respect to how we treat others, as a rule. If a person is viewed as being one of “us” – a member of our group, or our religious faith, or our nation – we are predisposed to cooperate with them, to empathize with their hardships, come to their assistance if needed, and sometimes even sacrifice our lives for them. Because they are members of our “tribe”, we view them as sharing a common fate.

Yet, paradoxically, our sense of solidarity and “patriotism” comes to an abrupt halt at the “waters’ edge” – to re-use an old expression about our foreign policy. People who we identify as “they”, or “them” are, by definition, outsiders – not one of “us”. They are likely to be perceived as “different” from us and even undeserving. Our attitude toward them can range

from indifference to fear and even hatred. We may see them as strangers, aliens, parasites, competitors, a mortal threat, or maybe even sub-human.”2

In addition to this, there are a range of cognitive biases which we are all influenced by.

The Law of the Instrument is a cognitive bias that involves an over-reliance on a familiar tool. Abraham Maslow famously said in 1966, "I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."3 Other cognitive biases4, that are worth consideration in the context of legal practice are: Loss Aversion – we are driven more strongly to avid losses than to achieve goals.

Hindsight Bias – leads observers to assess the quality of a decision not by whether the process was sound, but whether the outcome was good or bad.

Availability Bias – we retrieve more frequent information more readily and tend to substitute or make decisions based on the available information.

Taking into account how we are taught the law, the legal lens, and how cognitive biases work, it is not surprising that legal practice is dominated by risk aversion, an adversarial approach, and thinking which assumes and plans for the worst. This is what our training and skill set primes us to do.

But the legal outcomes being achieved on projects and in our businesses are less than satisfactory.

Commonly touted frustrations include: • • • •

Poor outcomes and limited productivity gains Misalignment of interests Blame game, not problem solving.

Inefficiency

To provide two recent market examples which talk directly to this frustration:

Example 1 – Australian Construction Industry The latest report into the construction industry in Australia (the Health of the Australian Construction Industry Research report published September 20205) does not speak favourable of the outcomes being achieved in the construction industry in Australia. The key findings include that: •

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55% of respondents do not believe that the Australian construction industry is healthy; and

“Us versus them: The Tribalism Trap” by Peter Coring, Sep 7, 2018, Institute for the Study of Complex Systems, https://complexsystems.org/335/us-versus-them-the-tribalism-trap/ 3 https://en.wikipedia.org/wiki/Law_of_the_instrument 4 For a detailed exploration of these, please refer to ”Thinking, Fast and Slow” by Daniel Kahneman, 2011 Penguin books 5 Authors: Professor John Sharkey, Phillip Greenham Dr Mathew Bell, Wayne Jokic, Julia Korolkova, Didi Hu.

•

Risk allocation is the most commonly nominated issue facing the industry, with a recurring sentiment expressed around burdensome risk allocation.

In relation to the role of lawyers in this industry, the report’s findings disturbingly include: • • •

Lawyers are a real problems when it comes to contracts – they are too risk averse Lawyers draft to respond to a problem Lawyers are their own worst enemy – the are responsible for the unhelpful length and complexity of contracts.6

Example 2- Onenda.Club7 This not for profit launched in March 2021 to: Imagine a world where you don’t have to review another mind-numbering NDA. Our mission is to create a universally standardised and agreed upon NDA that will reduce legal work, increase transparency, and speed up business dealings.

The issues this organisation states it is trying to address are typical of the frustrations expressed with legal practice: • • •

we are trained to win, a good job is getting the most favourable outcome for your organisation, wasted resources invested in the negotiation of these contracts.

Collaboration The emergence of the concept of collaboration and collaborative contracting can then be seen, at least in part, as emerging from frustrations with the outcomes being achieved, wasted resources and frustration with traditional legal approaches.

Collaboration is also framed as a response to a “VUCA” world. VUCA stands for Volatile, Uncertain complex and Ambiguous and it is posed that the tools developed for predictable simple situations are inadequate in complex systems.

A significant amount of work on collaborative contracting has occurred in the construction industry which has for decades been struggling to improve productivity and projects outcomes.

Collaboration was identified as the first commitment in the NSW Government’s 10-point commitment to the construction industry 8 published in June 2018. Similarly, the UK Government’s

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Ibid p 19 https://onenda.club/ 8 https://www.infrastructure.nsw.gov.au/media/1649/10-point-commitment-to-the-construction-industryfinal-002.pdf 7

Construction Playbook, published in December 2020 sets out 14 policies to reform and modernise aspects of the public sector and cites collaboration as central to its aims, 9 “One of the most effective ways to deliver outcomes is to create contracting environments that promote collaboration and reduce waste. Contracts should create positive relationships and processes designed to integrate and align multiple parties’ commercial objectives and incentives.”

The frameworks developed for that market provide us with a useful set of tools which we can use to assess any collaborative approaches we are seeking to implement.

The UK’s Constructing Excellence in 201510 published detailed guidance on collaborative working and defined it as “working together in a seamless team to common objectives that deliver benefit for all through mutually-beneficial (in including commercial) alignment.”

Their model identifies three overriding principles – common vision and leadership, collaborative culture and behaviours and collaborative processes and tools - and identified the following six critical success factors to collaboration on projects: •

Early involvement

•

Selection by value

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Aligned commercial interests

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Common processes and tools

•

Performance measurement

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Long term relationships

David Mosey, in his textbook Collaborative Construction Procurement11, published in 2019, identifies four interconnected themes critical to the success of collaborative teams:

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•

The ways in which collaborative working can be established and supported at all stages in a project or programme of work, from team selection through to project completion and operation, while avoiding disputes and delivering improved economic and social value

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The procurement and delivery models through which early contractor involvement can create a foundation for collaborative working, while remaining grounded in the commercial common sense on which safe and intelligent working practices depend.

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The ways in which the development and exchange of data, for example through digital technology such as Building Information Modelling (BIM) can support collaborative working.

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The ways in which contracts can support collaborative working on individual projects and on multiple projects and term appointments.12

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/941536/ The_Construction_Playbook.pdf 10 Constructing Excellence Hymn-Sheet 2015 https://constructingexcellence.org.uk/wpcontent/uploads/2015/01/CW-Hymn-Sheet-FIN2.pdf 11 John Wiley & Sons, UK 12 Ibid at p.20.

David Mosey further identified 6 principles that should be applied to drive collaborative working: •

Strategy – develop objectives and how they can be met based on feedback

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Membership – identifying participants and the skills required

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Equity – everyone is fairly rewarded for their work

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Integration – cooperation and building trust

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Benchmarks – setting measured targets that drive continuous improvements

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Project processes – establish standards and procedures

•

Feedback – capture lessons learnt to drive strategy13

And, identified what looks different in a collaborative contract: •

Specific duty for all parties to deal fairly with each other

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Duties of teamwork with shared financial motivation

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Clearly defined roles and responsibilities in an integrated set of documents

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Taking all possible steps to avoid conflict

•

Incentives and exceptional performance14

Practical Collaboration Whilst the construction industry is actively exploring collaborative contract models (which is beyond the scope of this paper to cover) I think it is also useful to explore practical ways to bring collaboration into day to day in-house legal practice.

It is noteworthy that a lot of the themes in this section align with current trends to improve business outcomes. Shifting businesses from hierarchies to networks, from control to empowerment, from planning to experimentation and from privacy to transparency are typical of the transformational changes many organisations are engaging in.

Supporting collaboration as part of our in-house practice is a clear way we can support broader organisational changes, both internally and externally, and to create better places for people to work in.

1. Clear and Simple Drafting A UK commentator on contract drafting, Sarah Fox, puts it this way:

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Ibid at p.22 Ibid at p25.

“Simple Contracts enhance trust: a simple contract manages expectations and leaves no room for nasties hiding in the small print.”

Yet day to day practice is filled with: •

Bespoke drafting.15

•

Legalese

•

Belts and braces (comfort drafting)

Harvard Business review put it this way in a 2018 article on the case for Plain English drafting. “What do you call a dense, overly lengthy contract that is loaded with legal jargon and virtually impossible for a nonlawyer to understand? The status quo.”16 The consequences of such practice are: •

What is intended by the drafting is unclear and uncertain, even to the lawyers involved.

•

Our drafting is not focused on the busines purpose of the agreement and clarity for the people responsible for performing that contract, but on legal strategy and counter-strategy.

•

Wasted effort and time – the growth of in-house legal departments could be argued to be fueling ever larger in-house legal teams as we try to out lawyer each other and engage with each lawyer’s personal contract preferences.

By way of example: •

a professional services contract includes an additional warranty that the services will be carried out “in accordance with best practice”. However, it is possible poorly understood that best practice assumes that a situation has occurred before and that the process for dealing with that situation is known. Best practice cannot apply in new, novel, and complex situations. An obligation of best practice therefore creates uncertainty and becomes a constraint as it looks to past solutions to past problems. So, was the introduction of this additional warranty necessary and understood?

In the HBR article I referred to above, they included a case study from GE Aviation who embarked on a 3 year effort to promote Plain English contracts. They shaved 50% off the time they took to negotiate their contracts.

Pursuit of collaboration in day-to-day practice therefore asks us to rethink our organisation’s contracts and review them - with our users - to: • • •

Remove unnecessary content and legalese.

Make them understandable and useful to the users.

Build certainty and repeatability over the long term with your contract suite.

2. Build Relationships.

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Refer to my article on the arguments for standard contracts posted on Linked in on 11 November 2020 linkedin.com/pulse/argument-standard-contracts-kiri-parr/?trackingId=TfciyutsK2cSk8B%2FuyIU5w%3D%3D 16 https://hbr.org/2018/01/the-case-for-plain-language-contracts

Every element of how we work as in-house counsel is an opportunity to build relationships and understanding.

The more complex the project is, the greater the effort should be put into building those relationships because those relationships are what you will need down the track to solve problems.

There are a lot of small day to day behaviours and negotiating tactics which build frustrations and shut down relationships. Common examples include: • • • • •

Exclusive use of unwieldy departure tables for negotiations.

Refusal to negotiate, such as requirements to withdraw contract changes in order to be considered.

Not allowing key people to be at the negotiating table.

Sending documents in pdf without the mark-ups shown.

Introducing substantive changes in the final round of negotiations without acknowledging the consequences of doing so.

And to provide two common contract drafting approaches which can frustrate relationships: •

Clauses which remove or limit an Owner’s roles and responsibilities, or which remove fair dispute resolution processes. This common contracting approach, intellectually framed as getting the most favourable terms for my organisation, reinforce hierarchy and command and control relationships. For example: o “Where the Consultant is granted an extension of time with respect to a Compensable Cause, the Consultant will be entitled to be paid (as an adjustment to the Fee) the additional costs determined by the Owner.”

•

Clauses which make the Owner’s requirements vague or the responsibility of the counterparty to find out, such as: o “Any purpose that may be implied from this contract or advised to you by the Owner from time to time”. o “You will take all steps necessary to inform yourself of the Owner’s requirements”.

By comparison, an example of a procurement model designed to build early engagement and relationships is the ECI (Early Contractor Involvement) model. It is a two-step procurement model for construction projects, which involves the preferred contractors early in the design process to flush out constructability issues and delivery risks. At the end of the design phase, the parties negotiate a traditional hard dollar contract. One of the core benefits of this model is that the relationship formed during that first phase becomes the foundation for the parties to solve future problems.

3. Focus on Decision Making The faster and quicker issues come to light and decisions are made, the more likely it is that those issues can be successfully resolved. If issues are not addressed early, they fester and escalate until they become beyond the capacity of the parties to handle and consequently lead to dispute.

Good decision making is supported by: • •

Common Information and availability.

Timeliness.

• •

Aligned purpose.

Independence, diversity, and expertise of the decision makers.

In other words, “Bad News is Good News”17.

On a day-to-day basis, we see many barriers to issues and problems being identified and handled.

From bonus schemes that mean one individuals’ personal rewards are misaligned with best for project outcomes to harsh contractual consequences for errors.

A not uncommon drafting approach in extension of time clauses for example is to remove time frames for decisions to be made by the principal. An extension of time clauses might then operate as follows: •

The Contractor must submit is claim for an extension of time within 2 Business Days of the delay first occurring,

•

The Owner, must with respect to an extension of time claimed by the Contractor, issue its determination,

•

The Contractor must continue to perform the Works,

This approach however gives rise to the situation where the Contractor is forced to continue to perform works whilst issues relating to EOTs (including cost) are effectively held in limbo. Whilst legally designed to protect the Owner from any consequences of delay on its part, it practically gives rise to significant uncertainty and ultimately exacerbates the likelihood of disputes.

By contrast Dispute Avoidance and Adjudication Boards are a governance structure that has been developed for construction projects (and which are now included as standard in the FIDIC suite of Contracts) which establishes a neutral, independent, diverse, and experienced board whose purpose is to find and resolve issues on projects along the way.18 Their track record is impressive.

4. Think about what people will do?

The last issue I want to raise is the value in thinking about how legal advice impacts how people behave.

Will a particular structure create a strong team culture that is motivated to deal with issues, or does it inhibit risk taking and drive conservatism, a keep your head down culture where problems are left to fester?

To illustrate this point, as part of the privatisation of a hospital in Victoria, a decision was made to outsource the cleaning and food services to save money. Legally, this would have been straight forward – a range of personnel issues to handle and a procurement process and contract to engage the new providers. But 18 months into this new contract the private contract was terminated.

Why? Staff morale had dropped driven by feelings of insecurity, fear, and a lack of trust. Ill-defined roles led to confusion and divided staff. The low morale then spread to other parts of the hospital,

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Sydney Dekker, author of the Safety Anarchist For further information refer to Dispute Board Manual, A Guide to Best Practice and Procedure, 2019, Dispute Resolution Board Foundation, Spark Publishing.

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worried they were next in line for privatisation. What followed was the return to in-sourcing the cleaning and food service.19 As a further example, consider what the consequences might be of drafting a professional services contract for your next project which contained a broad non default based indemnity which extended to the benefit of third parties, a fitness for purpose warranty (with an open and changeable definition of purpose) and a clause that excluded your client from all liability, unless due to their breach of contract or negligence: • • • •

Would parts of the market walk away and does that serve your business?

Might your advisors start using subsidiary company structures to contain risks?

Might your advisors take a more conservative approach in their advice to you and not offer up more innovative but higher risk solutions?

Would costs go up over time to cover increase insurance premiums and contract negotiation and administration costs.

What is interesting about so many of potential consequences direct energy and results away from achieving better outcomes for your business.

Collaboration therefore means that is not enough to consider whether a legal structure is possible, but that we must go further and explore whether the people within that structure will behave in a way that is aligned with the businesses’ goals. This is also why so much of the discussion surrounding collaboration is not focused on legal concepts but about people.

Conclusion Collaboration will take many lawyers out of their comfort zone, but it can harness skills and strengths organisations needs to handle ever more complex scenarios and support improved business outcomes.

It is the in-house lawyer’s role to support the achievement of your organization’s values and goals.

That role necessitates carefully review of the legal strategies we commonly adopt and to consider of whether they are in fact those strategies are in fact achieving your stated goals.

Different results, after all, cannot be achieved by continuing to do the same things as we have done before.

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Case study taken from The McKell Institute “Risky Business. The pitfalls and missteps of hospital privatisation”. November 2014.