Monday, August 9, 2010

Contract Analysis—A Force for Contractual Bloat or Streamlining?

I would like to believe a significant event took place over the weekend in San Francisco—contract analysis moved beyond static surveys to serve as an interactive tool to evaluate and guide best practices.

In a session at the ABA Conference, John Murdock, a Partner at Bradley Arant Boult Cummings LLP and I presented an analysis of 105 Intellectual Property Security Agreements. I provided the statistical analysis; John presented the legal analysis of the documents. John titled his talk: "Did 29% of the lender's get it wrong; or did the rest of us blow out some IP." Here are links to John's and my presentations.

Our process as part of a Task Force to develop a model form was to:

(a) determine the structure of the form by identifying required and optional elements of the agreements;

(b) determine the content of each element by identifying the range contractual language; and

(c) establish a procedure for members of the task force to express their opinions as to why each optional provision and term should be included or excluded from the model.

For example, in the case of the grant clause, 100% of the agreements contain a grant of the security interest. Each optional additional elements is shown in italics and its frequency is displayed in parenthesis.

Borrower irrevocably grants to Secured Party a continuing security interest in and

pledges, (42%)
assigns, (23%)
hypothecates, (19%)
mortgages, (12%)
grants a lien upon, (5%)
and grants a right of setoff against, (9%)
the Collateral
with power of sale (8%)

The discussion raised the interesting question, will contract analysis tend towards producing ever longer agreements or will it be a force to consolidate language? I hope it is a means to rein in language bloat. Indeed, this is process we hope to put in place.

The mechanisms to push toward comprehensiveness and streamlined agreements both exist in the software. The tools to create the agreement structure will find all standard contract elements and all deal-specific variants. The tools to examine the contractual language for each provision identify the core, non-negotiated language and all variations. Whether the tool is used to find the model that seeks to address all possible contingencies or succinctly and clearly address the specific needs of the transaction is in the hands of the user (or committee).

Contract analysis tells you what provisions are required—they appear in 100% of the documents—and what provisions are optional. The Task Force plans to review each provision and all language and justify why each term needs to be in place, rather than simply take the approach that others have used the terms, therefore they must be important under some circumstances and should not be removed.

The capacity to review and analyze legal agreements has always existed. We can read large sample sets of documents, tabulate and publish the results. Automated systems can do it much faster (KIIAC can process the 105 agreements in less than 2 minutes). It can do it across all deal terms and in great detail. There is, however, a more subtle difference.

Computer analysis does not simply collect information on the frequency of occurrence, it gives us the capacity to easily examine the full range of alternatives and make judgments about which will deliver the better results. The observation might simply be that best practices are more easily identified when we are exposed to a dynamic and interactive medium compared to viewing static survey tabulations.

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