Tuesday, April 13, 2010

Contract Standardization—Opinions of the Key Players

It is surprising to me how little discussion of contract standards is available. A web search finds a limited number of initiatives mostly from business, government and academia. Few law firms have weighed into the discussion; other than to express doubts that standardization is possible or even beneficial to their clients.

Despite the limited amount of information, we can characterize some of the opinions of the key players. For example, a recent post by Brad Feld on the utility and value of standardized seed documents for start-up companies portrays a range of opinions by business role.

Entrepreneurs. Business supported Feld's efforts to standardize. He reports that "all [the entrepreneurs] cheered me on, told me how much they hated paying lawyers for their seed documents, and asked if there was some way to reduce everything to a few standard pages, not unlike a mortgage document." (Id)

Comments: Building a successful business requires entrepreneurs to spend wisely. Most are very good at assessing absolute and relative value. One of the commentators reported paying $70,000 for a set of documents. On a relative scale, this fee is equivalent to the price of 2 nicely equipped family cars; or the average annual income for two families. Others commenting on the post, suggested a cap at a much more reasonable $10,000.

Lawyers. Feld reported that the majority of respondents were lawyers. Many offered to "share their seed documentation, and work to make sure that seed documents were complete and acceptable to their firm." (Id)

Some pointed out the lack of incentives to standardize. "Lawyers have the incentive to standardize their templates internally and train their staff to use them, but I don't think the lawyers have any incentive reduce our costs by 85%--$70k to $10k. Programmers and IT staff may occasionally work themselves out of a job, but lawyers rarely do.…I agree that it would take a high-profile lawyer with iconoclastic tendencies to make any splash here because they wouldn't be affected by the disincentives--they've already made it and it would increase their standing and ego even further. It could also be a prominent VC firm that standardized their own docs and encouraged others to follow. The lawyers as a collective will never do it themselves." (Id)

Others were skeptical of any effort of standardization. For example, a lawyer commenting on Richard Susskind's Article "Legal profession is on the brink of fundamental change" published in the London Times, October 19, 2007, expressed the opinion: "I can see that certain commoditised work will become more automated, and thus less remunerative for those law firms who have not adapted in response, but this may hurt the 'mega firms' who are more dependent on volume business more than others. Maybe I am deluding myself, but I cannot think of one deal I have worked in recent years that could have been reduced to a standardised computer programme, and with a few exceptions even documentation has been too 'bespoke' to be readily standardised."

Comments. The open discussion of price will have significant impacts. Under the hourly billing system, price comparison was impossible. With fixed fees and caps, cost is more transparent and fee ranges will likely settle at the lower end of the spectrum. Some will be able to provide the documents and counsel for $10,000 because of their experience; others may implement technology to reduce costs.

Venture Capitalist. Standard deal terms are unlikely to reduce the costs. While they may make sense for internal efficiencies and for training purposes, the legal documents are not the key factor in determining the amount of time required to raise capital. "This time frame is not driven by legal, it is driven by the individual investor. It’s not going to change with another set of standardized docs." (Why the world doesn’t need a standardized set of seed investment documents) Furthermore, VC's expressed the opinion that standardized documents will not reduce lawyer time. The "best lawyers need to 'add value' so they fight over every random point, because there is that one in a thousand potential circumstance where it will actually really matter." (Id) Finally, VC's argue that the documents are not a key factor in raising subsequent rounds of financing

Comments. If legal documents are not critically important to the overall business objectives, then why spend so much time and money on them? As the author points out any of the existing seed templates "are probably good enough to not blow up your next round of financing." While this is very difficult challenge for lawyers, who are tasked with securing the best terms for their clients and counsel them on an infinite range of risks, the scorched earth approach requires balance with a business sense of value.

Lawyer-Technologist. Standardization of deal documents should not focus simply on cost reduction. It is also designed to establish a standard and ensure quality. This can be achieved in a number of different ways.

First, conformity in theory may be realized through the use of standard forms; namely, a contract containing set terms and provisions. But, absent of common interest, the establishment of a single set of standard seed documents seems extraordinary unlikely. The more likely outcome of such effort would be numerous competing models, only making matters worse.

Second, conformity may also arise through the identification of comparative and market standards. As this blog will constantly assert, standards are not just forms, they are benchmarks. Standards are not limited exact words and phrases to be reapplied in rote fashion. Language—and the English language in particular—is far too nuanced for such an approach to be workable. For example, I can say. "The cat sat on the mat." Or, I can say: "On the mat sat the cat." The concept and intent are the same. Equally, we can express an indemnity provision in a variety and range of ways. They are all indemnity clauses and the range of possible variants capture different party bias and different ranges of legal and business risk.

I'll end this post with some thoughts from academia: "Traditional contract theories malign standardized contracts for increasing information costs. The usual argument is that standardized contracts hide or backload terms, confuse consumers, and raise the costs of information. But everywhere else that standardization is studied (for example, standardization in industrial manufacture, computer programming, or medical consent), standardization lowers the cost of information. Thus, the anti-standardization doctrines of adhesion and unconscionability seem adrift in an age of mechanized production and electronic contracting." The Cost Of Consent: Optimal Standardization in the Law of Contract, Joshua Fairfield, Associate Professor of Law, Washington & Lee University School of Law.

No comments:

Post a Comment