Column

The Business of Contracts

In the context of the legal technology segment, the lion’s share of the effort has, of course, been focused on ediscovery and other litigation-related tools. The next most significant area probably relates in some way to contract analysis and drafting tools. These tools generally focus on the needs of law firms and law departments, analyzing various categories of contracts and using the resulting data for the particular services that the vendors offer.

In these contract analysis activities, the vendors and clients will use various “raw materials” to work from before engaging in their particular analysis. The three most common repositories of contracts used for this purpose are banks of existing firm or corporate precedents, samples gathered from the client’s document management system, and samples pulled from public filing systems (such as Edgar).

What this process does, essentially, is take complicated agreements that have been drafted by and for lawyers to discern the key content. But it seems to me that this approach sidesteps a couple of fundamental questions, namely,

  • How do business people understand contracts?
  • Who are these contracts intended to serve?

I would suggest that business people see contracts simply as a means to memorialize a handshake agreement that the two contracting parties have arrived at. In this context, the “handshake” may in fact take the form of a letter of intent or other similar document, but the key elements of the handshake are that it is relatively informal and that it contains the key business terms.

The key business terms are those that the business people really care about. The issues that the lawyers often fight about, such as choice of governing law or right of assignment, are not ones that the business people generally care much about.

One report from the recent Legal Tech conference in New York (LegalTech New York Startups Showcase a Diverse Crowd with Some Common Themes) identified three trends, one being “Contract Management and Analytics.” The start-ups identified there would, however, seem to be focused on the issues the lawyers care about and not so much on what the clients necessarily need. So even on the leading edge, the focus still does not seem to be on what business people need.

From a business person’s perspective, I would suggest, a written agreement may serve several audiences, including

  • the business itself
  • the company’s legal advisors
  • the risk management/compliance area
  • regulators
  • (possibly) judges, if the contract is ever contested

I think it’s safe to say that most contracts that one would find on Edgar are not drafted in ways that allow the business people or the compliance staff to fully understand them. Is it possible, then, to write a contract in a way that a business person can understand?

Perhaps one way to start is to adopt a style guide for use in all company documents, so that it will be clear when documents are consistent with both company style and company content and when they are not. I have written earlier, in Style Makes The … Contract?, about the use of style guides.

Today’s contracts are based on trust that the lawyers have gotten it right once they have reduced the handshake agreement to writing, containing all the necessary “legal verbiage,” which is not a term that any client uses in a positive sense! The fees charged by outside counsel are essentially insurance premiums, promising clients that everything they need is in the contract.

But if clients were able to use technology tools to crowdsource the drafting of their contracts and find out how most other business people deal with particular issues, they would be able to draw comfort from knowing that the way their contract addresses a particular issue is consistent with how their peers do so. In doing so, they can reduce their outside legal spend. And the need to reduce those expenses is not one that is going to go away any time soon.

Comments

  1. Hi John – excellent analysis, as always. It reminds me of one of my earliest experiences in business, right after college. I was an econometrician / analyst / consultant. The company sold economic and financial data and analysis. Part of my job was selling as well as building models. Periodically, when clients wanted additional work, they would send a purchase order (PO). Unlike most normal people, I read the back of the PO.

    And I did not like what I saw. I talked to my boss. He explained that I should just sign and that it did not matter what the back said. His view was that if there was a disagreement, we would make it right. Worst case, he said, we would not get paid. And since no one project was that big, he said, why bother worrying. He also said most of our clients would help make it right – and if not, we probably did not want them as clients long term anyway.

    The point – we did not care about the legalese. We were building relationships, either recurring revenue or serial projects. And we were willing to take the risk of non-payment or worse.

    Empirically, I wonder what percent of business works that way. Clearly when the stakes are higher, one might take a different view. But it strikes me that lawyers fail to distinguish between the high-value, high stakes contract and the more run of the mill ones. That is an exercise is scoping and assessing a client’s risk tolerance – something many lawyers by-pass, to the client’s detriment and their own.