commercial contract lifecycle solutions

The Pros & Cons of Diagram & Image-based Contracting Agreements

Undermasthead Shape

The way humans collect and share data has undergone a constant state of evolution for thousands of years. The first recorded method of sharing in writing being the Sumerian Writing System, used around 3500 – 3000 BC, originally used to simply combine two types of signs which were pressed into clay tablets representing numbers. This was utilised to collect data on a scale greater than the typical human brain could remember in order to record the payment of taxes, the accumulation of debts and property ownership.

Human’s methods for storing information progressed and grew far more in complexity as the information stored became greater and more complex. For example, in more modern times, the European Law Journal contains millions of words and statistics and can now be accessed from anywhere using the internet.

As a result, visuals, including diagrams and images, have been adopted across international business relations into the process of constructing contracts; used to depict processes, illustrate timelines and provide formulas for key performance indicators. Although a picture can paint a thousand words, there are still questions as to whether the inclusion of visuals can really make contracts easier to understand, less ambiguous and easier to enforce. This article will summarise some of the pros and cons of image-based contracts, specifically in the context of international contracts.

The Pros

  • Visualisation means simplification

With simplification, prolonged negotiations may be preventable. Contracts are often long, complex and demanding documents and do not always tend to be straight forward or clear, especially when parties to the contract communicate using different languages. Images and diagrams are much more translatable than long pieces of text and more transparent. For example, diagrams showing dependencies and responsibilities graphically with arrows for inputs and outputs or showing critical path visually over time are very efficient ways to shorten long pieces of text.

  • With images and diagrams, contracts can act as instruction manuals.

In today’s economy and in today’s volatile business environment, contracts are being referenced regularly and quite possibly quoted wrongly. The evolution of image-based contracts may bring clarity and certainty to business to business transactions. It is fallacious to believe contracts of the modern world are used as documents for legal professionals alone, such documents ripple down through an organisation including instructions to carry out tasks and to derive who does what and in what order or who is reliant on what, from whom. Thus, contracts should not be constructed holding the assumption that lawyers and related professionals alone will read them. Contracts are used internationally as a means of business communications by many stakeholders (including executives, managers, lawyers and employees). Therefore, many individuals through an organisation will translate and interpret contractual documents into actions, sometimes more successfully than others and leading to discrepancies and inconsistencies. The simpler a document is, the better and more consistently it can be understood and then implemented by all (not just lawyers alone).

  • Prevent downfalls caused by language barriers

International organisations often do not share a common language. Although English is the shared language of most international organisations, the English understood by non-native speakers differs from that used by native speakers. There is a larger gap, for example, between English citizens who have lived, studied or worked within the UK for decades and, say, a German employee of a large corporation who has only spoke German Deutsch all of their lives. Legal documents scripted by legal professionals tend to use long and complex sentences, increasing the possibility of misinterpretation by English speakers, let alone non-native speakers. By presenting information through visuals, images and diagrams, the comprehension of contracts may be enhanced for all. Jay. A Mitchell, writing in the paper Visual Communication in Commercial Contracts,  gives examples of how to include visuals into contracts, including:

  1. Parcel maps and plans;
  2. transaction structure diagrams;
  3. technical drawings;
  4. funds flow charts; and
  5. compliance timelines.

 

  • Better contracts mean better social and commercial relationships.

An IACCM study on contract visualisation claims that contracts are often misunderstood, even by key people who are professionals in the contract specific field resulting in costly mistakes, non-performance, sour business relationships and even litigation. An understandable contract does a better job at supporting a stronger business relationship and as visual contracts elicit more positive emotions, such contracts can possibly boost the brand of a company by communicating transparency, openness to collaboration and innovativeness.

  • Prevents disputes

With lengthy and demanding documents being more difficult to comprehend, the likeliness of misunderstandings are high, and such misunderstanding may lead to disputes, ultimately damaging both parties reputation and wasting time and resources at all ends of a contract. A Survey conducted by the International Association of Contract and Commercial Management (IACCM) shows that only 1 in 10 agreed that contracts are “easy to understand” and only 17% were satisfied with the agreement process.

  • Incorporating images into contracts minimises the length of the contract process

Cumulative evidence from the study ‘Diagrams in Contracts: Fostering understanding in global business communication’, gathered a number of time-saving advantages that follow image-based contracts. The advantages include faster task completion, less comprehensive mistakes, faster learning, more positive user attitudes, greater guidance of readers attention and finally images and diagrams reduce cognitive load. So, the majority of individuals require less mental energy to understand images.

The Cons

Simplification is difficult.

Despite image-based contracts bringing simplicity to an agreement after it has been formulated, the process of creating such documents requires careful examination of the agreement to make sure all images and diagrams accurately reflect the commercial operations of the contract and the risks attached. This process may, therefore, conversely, lengthen the time it takes to construct a contract. However, it can be argued that the time taken is well spent to construct such contracts is beneficial considering the improvements it adds to the international communicative competence. Further, a study by CIPS (The Chartered Institute of Procurement & Supply) stated that adding images to a contract only shortens the time taken to understand the documents not necessarily to draft the contract (including the diagram) in the first place.

  • Some individuals learn more efficiently from reading/writing

The most efficient cognitive styles of learning differ from person to person and although long text can be challenging for some, many others more efficiently understand contracts when reading long documents of text. Therefore, one could argue the benefits of incorporating images and diagrams into contracts are limited to people who are considered highly visual spatial learners who might prosper with this type of learning. Nonetheless, visual contracts add clarity to international agreements where there is no common language, as images and diagrams are arguably easier to translate to non-native English speakers than long, complex documents. The combination of both text and images can be assumed to work best for most people on average.

  • Images and diagrams allow room for misinterpretation

The English language is so complex and may be misleading at times but words and sentences efficiently structured can be crafted carefully to leave little room for interpretation. Thus leaving no gaps for the reader to attempt to fill themselves or to second guess, albeit making this a difficult read to the lay person. Images may paint a thousand words but if too simplified, leaving open to translation, this can introduce confusion and lead to misconstrued contract terms.

  • Visuals used in drafting a contract makes it more time consuming

The Financial Times reported that Shell’s Marine Business took over 1 year to implement visual contracts and reported that including visuals made every stage of drafting a contract more time consuming including:

  1. Benchmarking;
  2. engagement with stakeholders;
  3. interviews with those affected by contract clauses;
  4. amendments;
  5. simplification;
  6. visualisation; and
  7. the sign off.

However, if the use of visuals in contracts grows, it is likely this industry will grow and more tools, technology and software’s to enhance the process will be available across all markets.

  • Diagrams and images may alter the consistency of a contract

The visual diagrams and images provided must be consistent with the terms of the contract which can be difficult to achieve for all interpreters and parties to the contract. This may even cause problems in the event of a dispute, where lawyers and judges may find inconsistencies within a contract as the images included mismatch with the text. As pictures creep their way into contracts, there are likely to be mistakes made in the first stages of evolution so we should be mindful of this risk in the early adopter stages.

Ultimately, despite some downsides, the contract management process can surely be enhanced by presenting contractual terms in a more visual fashion. Supplementing or even replacing long, complex text with images and diagrams, especially within an international business setting, offers greater clarity and simplification.

If visuals are provided in addition to sophisticated, elegant and well-structured text, then surely this gives the benefit of image and diagram based contracts and offers the best of both worlds?

Does this lead to less reliance on lawyers and more on the ability for the technical people who best understand the requirements and the solution to craft a diagram that describes what is contracted? We touch on this in the fourth and final piece in this series. “Disintermediation in contracting: Intermediary versus Trusted Adviser?”.

Also see the first article of the current series ‘The growing use of risk-based profit assessment in making key business decisions – How do we assess less tangible elements?’.

Follow our LinkedIn page to be notified of new articles released. Next week we explore:

‘The use of artificial intelligence & big data analysis to predict behaviours leading to ‘inflection’ in the normal course of a contract – Where does it start to go off course?’.