Monday, July 26, 2010

How do your forms stack up to practice?

Recently, our contract analysis work raised an interesting question: how do commercial forms measure up to practice standards? In this circumstance, practice standard is defined as the best precedent files available from a law firm's document management or file system.

In summary, we discovered model forms contain less deal variations and fewer deal specifics. In one case—an asset purchase agreement—analysis showed that the commercial form contained about 50% of the firms standard terms and clause language.

For example, comparing the sub-clauses of the section captioned Purchase and Sale of Assets, the commercial form, as shown in the table, contains the basic deal elements, while the firm standard details included and excluded assets and liabilities, together with specific price allocations and adjustments.

Commercial Form

Firm Standard

Purchase and Sale of Assets

Transfer of Assets

Assumption of Liabilities

Excluded Assets

Purchase Price

Assumed Liabilities

Excluded Liabilities

Purchase Price

Payment of Purchase Price

Allocation of Purchase Price

Adjustment of Purchase Price


The same differences can also be seen in the text of clauses. The commercial form provides minimal language for the purchase and sale of the assets.

"Purchase and Sale of Assets. On and subject to the terms and conditions of this Agreement, Buyer agrees to purchase from Target, and Target agrees to sell, transfer, convey, and deliver to Buyer, all of the Acquired Assets at the Closing for the consideration specified below in this 2."

The firm standard provides more details and specifics. For example in the case of the sale of assets of a high tech company, the clause provides great detail on all assets and provides a list of assets transferred including: (a) personal property; (b) raw materials and work in progress, (c) contractual rights, (d) claims, (e) intellectual property, (f) works, (g) designs, concepts, know-how and techniques, (h) permits and licenses, (i) books and records, (j) computer programs and associated data, and (k) goodwill.

Measuring Standards

By way of background, contract analysis software performs two principal tasks. First, it creates an aggregated outline (or checklist) from a set of documents. Second, for each outline element, it creates a clause library. As part of this process, the software identifies the best document and the standard clauses. "Best" is, of course, subjective. Contract analysis, like any other computer process defines such standard as the best objective or logical approach.

Finding the Standard Document

The most conforming document is the document that contains all standard deal elements and the least deal-specific variations. It is compares documents based on three main statistical elements, simplified here for purposes of explanation.

  • First, the presence of articles, clauses and sub-sections, namely the building blocks of a deal document. For example, the analysis identifies whether each document has survival, amendment and waiver clauses, irrespective of where they may appear in a document. It also identifies and counts the number of deal-specific clauses that do not typically appear in a particular type of document. The ratio of standard to non-standard clauses gives us the clause commonality measure.
  • Second, for clauses that have sub-sections, the analysis measures the commonality of such sub-clauses. For example, in a merger agreement, it finds and groups all possible representations and warranties and how frequently they occur. The ratio of common sub-clauses to non-standard clauses provides a measure of sub-clause commonality.
  • Third, the analysis measures the commonality of the words in each clause. The analysis identifies the common and infrequent words. The ratio of common words to uncommon words in each matching clause gives us the measure of word commonality.

The document with the highest overall score is the most conforming or standard document. It is, in fact, the document containing all the standard deal terms.

Finding the Standard Clause

The approach to finding the standard clause is not the most common or frequently occurring clause. It is the clause example that contains all required language (determined by analyzing all matching clause examples) and the least amount of deal-specific language. In plain English, it is the clause that contains the core, non-negotiated language.

As an aside, when working inside law firms, it was frequently suggested that best practice precedent should be drawn from the first—and not the last—draft of an agreement, presumable based on the reasoning that it will be the least edited and changed from base standard. Contract analysis exposes the weakness of this approach because in many cases the so-called "first draft" is in fact brought forward from the last draft of the agreement used as a starting point for the new document. The way to find the core, non-negotiated language is to examine all clauses from all documents and identify the most conforming language.

Efficient Forms Creation and Maintenance

The result of this analysis is not theoretical. It has practical value, significantly speeding up the process of forms creation and maintenance.

First, find the most conforming document. In this document, all the clauses will be drafted to work together with a conformed set of define terms.

Second, for those clauses that may be missing or divergent from the standard (in this particular document), use the clause library to supplement of replace the clause. Where the most conforming document is 90% standard, the review process need only focus on the non-conforming 10%.