Contract Building Blocks—the low hanging fruit of standardization

One of the challenges to creating contract templates as a reference standard is that a yardstick must be built for every document type; just as we need spell checkers for each language. Nevertheless, there are shared characteristics that can be exploited across all document types.

Virtually all contracts follow the same basic structure. While we may give these elements different labels, the basic organization of bi-lateral and multi-lateral contracts can be described as follows:

• Statement of agreement and identification of the parties
• Form and mechanics of the transaction
• Representations and Warranties
• Conditions Precedent
• Covenants (ongoing promises)
• Term and Termination (Events of Default)
• Limitation on Liability
• Indemnification
• General Provisions (Miscellaneous)

With the exception of the form and mechanics of the transaction, legal agreements share many of the same terms and provisions. Furthermore, we can predict the likely degree of similarity of each building block. For example, the General Provisions will likely be more consistent across a wide range of agreements compared to Termination provisions. I would predict that the next most consistent terms can be found in the Representations and Warranties.

Consistency across all documents offers an opportunity to standardize terms "horizontally" or at least across blocks of related agreements. Then applying the wisdom of the 80/20 rule, a relatively simple 3-step approach can realize significant productivity and quality gains.

First, create a list of all clauses in each common contract section (e.g. Miscellaneous, Covenants, or Representations and Warranties).

Second, mark each clause as either standard or deal-specific.

Third, build a library containing the standard and alternative language for each clause.

Simple. However, I should disclose that I've received significant push-back on standard document building blocks. In one case, I was told that is would be impossible to create a standard Miscellaneous section of boiler-plate terms because, for example, the assignment clause requires customization to each deal. Of course, terms must be tailored to the transaction. However, the variations are predictable and can be supplied. Others have warned that clauses are dependent on the terms of other provisions and therefore cannot be read in isolation. It is true that some deal terms are conditional on other provisions, but again such conditionality can be predicted and, where it exists, it should be clearly identified to prevent mistakes in the use of precedent.

As an example, we can apply the approach to the Miscellaneous section of the set of 106 intellectual property security agreements analyzed in a prior post. The complete list contains 32 clauses shown in the chart below where the blue bar shows the commonality (frequency) of each clause and the yellow bar display the language consistency (variance), based on calculation of standard deviation.

If we focus on the 8 most common clauses appearing in at least 1/3 or more the documents, we can see that the language is universally more consistent. For the less common clauses there appears to be more divergence: some highly consistent; others very inconsistent.

In non-mathematical terms, the analysis provides additional support for the 80/20 rule, namely: in the case of frequently appearing clauses there is already broad consensus on the standard language. And, such consensus can hopefully reduce some of the political hurdles associated with contract standardization.

Latent Legal Market Revisited—A Rare Win-Win

Law firms want high value "bet-the-business" work, where no effort is spared and legal fees are not questioned. As many commentators have pointed out this market is shrinking and the number of law firm specializing in this type of work is dwindling.

Ever since I picked up a computer and started programming, I've thought about the other end of the market: the low margin business. I've pitched the concept to many firms with very limited success. And, described in terms of "let's go after low value business" lack of interest is hardly surprising.

From the Law Firm's Perspective

First, the desired high margin business is also very low volume. The seemingly less desirable low margin business is high volume. I suspect the total value of low margin business is at least as large as high margin work.

Second, another rationale for avoiding routinized work is that it may be perceived as less intellectually challenging. However, I would point out that what a simple individual representation may lack in challenge is more than supplemented when the goal is to meet the needs of all present and future clients in a systematized and packaged legal service.

Third, standardizing lower value work (NDAs, employment agreements, sales agreements, etc) is an excellent training vehicle for associates, employing underutilized lawyers.

From the Client's Perspective

General Counsel is challenged not only to reduce their outside legal fees—more likely than not comprising the non-standard, high value work—but also their internal costs. And, for every merger agreement executed by a business, they are likely hundreds of employment agreements. In order to reduce costs and increase quality, many, in-house departments, for example Cisco, have invested in standardization projects. But, such efforts still represent a small fraction of the overall volume of work.

Combining Interests

Rather than describe the opportunity as "low value" business, there are better marketing approaches. Employ law firm associates to build standard forms and document assembly systems for their clients, using the expertise of the firm's senior attorneys to ensure adherence to best practices. The law firm bills for its legal services, the client benefits from reduced cost. Moreover, if law firms fail to assist business reduce their day-to-day costs, will in-house lawyers invest in document standardization forever cutting outside counsel out from this line of work?

How large is the low-margin, high volume market? In order to estimate the cost-benefits of document standardization, I've built an ROI calculator to weigh the cost of building standard templates compared to time required to draft documents using the "last draft" method. Here's a link to the calculator. If I'm right then the cost savings to businesses are very significant and scaled up to the entire market, it's a huge opportunity for law firms.

Measuring Commonality and Consistency—Do the Numbers Tell a Story?

Those who have read a few posts in the blog know that much of my research is based on pure statistics. And, of course, we know the adage: "lies, damn lies, and statistics." But, can they tell a story? Can they offer some insight into how lawyers use precedent and how precedent evolves over time?

Where clauses are repurposed from an earlier precedent, they remain very consistent. Is that because they are copied but not substantially changed, or is it because the language of a particular contractual provision can only be defined in a relatively limited number of ways?

Early research confirmed that the consistency of legal document can be measured. The results of the analysis uncovered an unexpected conclusion: the more sophisticated the underlying transaction, the more likely the document will be consistent. A merger agreement, for example, is more likely to be consistent than an employment agreement.

In order to further test these propositions, we must distinguish between: (a) the elements of a contract and (b) how each of those elements is defined. Mathematically we can measure these values by commonality and consistency. Commonality is calculated by the frequency of a particular clause. For example, we may find a governing law clause in 90% of the sample agreements, while a severability clause may appear in 50% of the documents. Consistency is calculated by the standard deviation of a factor itself calculated primarily by the commonality of the words in the clause.

I recently ran these statistical measures of commonality and consistency for merger agreements and intellectual property security agreements. The charts display the outline organization of the agreement and for each caption, the bar chart shows the commonality of the clause in the blue bar and its language consistency in the yellow bar. You can click on the images above or the links in this paragraph to see a larger (readable?) image.

In the case of the merger agreement, we see high commonality of clauses and high consistency of language. Indeed, the presence of these two factors indicates a market standard. However, in the case of the intellectual property security agreement we see only two common clauses: grant of security interest and rights and remedies. However, all clauses (whether common or uncommon) display a high degree of language consistency.

What observations can be draw? First, there is great opportunity to standardize (and enjoy the efficiencies thereof) in the reps, covenants and miscellaneous sections. It is truly remarkable the variation in the clause selected. Second, the greatest opportunities for standardization will likely come from building deal checklists, not just clause libraries. It appears that we generally agree as to the language of a given clause, but there is less agreement on what clauses should be included.

The DNA of Contracts—identifying and tracing genetic markers in legal agreements

What we considered plagiarism in law school becomes good business in practice. Lawyers routinely repurpose internal precedent and wholesale copy documents available on EGDAR and other free and subscription sources. It has become so prevalent that transactional documents are becoming more standardized simply through the act of reuse. (See, Measuring the Consistency of Legal Documents)

Such reuse allows contract analysis to trace back lines of precedent and detect lines of similar documents having the same origin, just as we can trace relationship in the genetic code of living organisms. This post will explore two types of genetic markers in deal documents.

Last week, I studied a set of 106 Intellectual Property Security Agreements, collected from EDGAR. The set comprises 100 base clauses and between 5 and 7 distinguishable genetic lines of contract, depending on how granular you distinguish one thread from another. Most curiously, they share only two common clauses (Grant of Security Interest and Rights and Remedies) and the majority of the security agreements filed with EDGAR containing just these two clauses come from a single lender (Silicon Valley Bank).

(a) Structural Commonality

The first method of detecting shared characteristics is the structure of the documents, namely the presence or absence of particular clauses. The graphic shows the structure of 5 core IP Security Agreement models, each built from 10 or more example agreements. Clauses highlighted in green show the clauses common to all models; clauses in red are unique to each model.

While the short form, Model 01, may not predate the others, it has a foundational relationship to all the other models.

(b) Language Commonality

The second method is to look for similar blocks of text. At the end of this post, because it is a bit long, I added the text of a Power of Attorney clause from 6 different IP Security Agreements. They clearly were based on a common ancestor. And, interestingly, most have some relationship to Minneapolis.

These language markers can be even more granular. Each clause may itself be constructed from sub-elements. The approach first separates standard from deal specific language. And, within the standard language, we can see a remarkable degree of consistency. For example, within the Organization clause in the Representations and Warranties of a Credit Agreement, we can detect clause components, and statistically measure the consistency of the language.

Document 1 SECTION 3.01. Organization; Powers. Each Credit Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization , has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business, and is in good standing, in every jurisdiction where such qualification is required. Document 2 Section 4.1 Corporate Existence and Power. The Borrower and its Subsidiaries are each corporations duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation , and are each duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by them makes such licensing or qualification necessary , except where the failure to be so licensed or qualified (i) will not permanently preclude the Borrower or any Subsidiary from maintaining any material action in any such jurisdiction even though such action arose in whole or in part during the period of such failure, and (ii) will not result in any other Material Adverse Change. The Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute, deliver, and perform all of its obligations under, the Loan Documents, the Pledged Securities, the Related First Mortgage Bonds and the Indentures.

Common Language The [parties]: (a) are each duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation , (b) each have all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute, deliver, and perform all of its obligations under this Agreement , and (c) are each duly licensed or qualified to transact business in all jurisdictions where such licensing or qualification necessary .

Using the Markers

Identifying and tracing the genetic makers enables the categorization of documents into sub-types or models. Then by identifying the characteristics of each model, it is then possible to more clearly see how make the process more efficient. Rather than review 100's of similar documents, we can now analyze a small handful of representative models and determine whether these represent distinct business transactional or are more reflective or regional and personal preferences.

Example of common language markers in IP Security Agreements

Below is a Power of Attorney clause from 6 different security agreements. The caption shows the title of the agreement, the name of the lender and the date of the agreement. In the text of the clause, words in green text show consistent language; words in black text and underlined displays divergent language.

TRADEMARK SECURITY AGREEMENT
TCF National Bank (Golden Valley); October 1999
i) POWER OF ATTORNEY. TO FACILITATE THE SECURED PARTY'S TAKING ACTION UNDER SUBSECTION (g) AND EXERCISING ITS RIGHTS UNDER SECTION 6, EACH DEBTOR HEREBY IRREVOCABLY APPOINTS (WHICH APPOINTMENT IS COUPLED WITH AN INTEREST) THE SECURED PARTY, OR ITS DELEGATE, AS THE ATTORNEY-IN-FACT OF SUCH DEBTOR WITH THE RIGHT (BUT NOT THE DUTY) FROM TIME TO TIME TO CREATE, PREPARE, COMPLETE, EXECUTE, DELIVER, ENDORSE OR FILE, IN THE NAME AND ON BEHALF OF SUCH DEBTOR, ANY AND ALL INSTRUMENTS, DOCUMENTS, APPLICATIONS, FINANCING STATEMENTS, AND OTHER AGREEMENTS AND WRITINGS REQUIRED TO BE OBTAINED, EXECUTED, DELIVERED OR ENDORSED BY SUCH DEBTOR UNDER THIS SECTION 3, OR, NECESSARY FOR THE SECURED PARTY, AFTER AN EVENT OF DEFAULT, TO ENFORCE OR USE THE TRADEMARKS OR TO GRANT OR ISSUE ANY EXCLUSIVE OR NON-EXCLUSIVE LICENSE UNDER THE TRADEMARKS TO ANY THIRD PARTY, OR TO SELL, ASSIGN, TRANSFER, PLEDGE, ENCUMBER OR OTHERWISE TRANSFER TITLE IN OR DISPOSE OF THE TRADEMARKS TO ANY THIRD PARTY. THE DEBTORS HEREBY RATIFY ALL THAT SUCH ATTORNEY SHALL LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. THE POWER OF ATTORNEY GRANTED HEREIN SHALL TERMINATE UPON THE TERMINATION OF THE CREDIT AGREEMENT AS PROVIDED THEREIN AND THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS (AS DEFINED THEREIN).

PATENT AND TRADEMARK SECURITY AGREEMENT
Wells Fargo Bank NA; December 29, 2006
k) POWER OF ATTORNEY. To facilitate the Secured Party's taking action under subsection (i) and exercising its rights under Section 6, the Debtor hereby irrevocably appoints (which appointment is coupled with an interest) the Secured Party, or its delegate, as the attorney-in-fact of the Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of the Debtor, any and all instruments, documents, applications, financing statements, and other agreements and writings required to be obtained, executed, delivered or endorsed by the Debtor under this Section 3, or, necessary for the Secured Party, after an Event of Default, to enforce or use the Patents or Trademarks or to grant or issue any exclusive or non-exclusive license under the Patents or Trademarks to any third party, or to sell, assign, transfer, pledge, encumber or otherwise transfer title in or dispose of the Patents or Trademarks to any third party. The Debtor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted herein shall terminate upon the termination of the Credit Agreement as provided therein and the payment and performance of all Indebtedness.

PATENT AND TRADEMARK SECURITY AGREEMENT
Wells Fargo Bank NA; March 31, 2006
k) Power of Attorney. To facilitate the Secured Party's taking action under subsection (i) and exercising its rights under Section 6, the Debtor hereby irrevocably appoints (which appointment is coupled with an interest) the Secured Party, or its delegate, as the attorney-in-fact of the Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of the Debtor, any and all instruments, documents, applications, financing statements, and other agreements and writings required to be obtained, executed, delivered or endorsed by the Debtor under this Section 3, or, necessary for the Secured Party, after an Event of Default, to enforce or use the Patents or Trademarks or to grant or issue any exclusive or non-exclusive license under the Patents or Trademarks to any third party, or to sell, assign, transfer, pledge, encumber or otherwise transfer title in or dispose of the Patents or Trademarks to any third party. The Debtor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted herein shall terminate upon the termination of the Credit Agreement as provided therein and the payment and performance of all Obligations.

PATENT AND TRADEMARK SECURITY AGREEMENT
Pala Investments Holdings Limited (Channel Islands, Switzerland); December 12, 2007
k) POWER OF ATTORNEY. To facilitate the Secured Party's taking action under subsection (i) and exercising its rights under Section 6, the Debtor hereby irrevocably appoints (which appointment is coupled with an interest) the Secured Party, or its delegate, as the attorney-in-fact of the Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of the Debtor, any and all instruments, documents, applications, financing statements, and other agreements and writings required to be obtained, executed, delivered or endorsed by the Debtor under this Section 3, or, necessary for the Secured Party, after an Event of Default, to enforce or use the Patents or Trademarks or to grant or issue any exclusive or non-exclusive license under the Patents or Trademarks to any third party, or to sell, assign, transfer, pledge, encumber or otherwise transfer title in or dispose of the Patents or Trademarks to any third party. The Debtor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted herein shall terminate upon the termination of the Debenture as provided therein and the payment and performance of the Indebtedness.

TRADEMARK SECURITY AGREEMENT
Commerce Bank NA (New York); September 25, 2003
i) Power of Attorney. To facilitate the Secured Party's taking action under subsection (h) and exercising its rights under Section 7, the Debtor hereby irrevocably appoints the Secured Party, or its delegate, as the attorney-in-fact of the Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of the Debtor, any and all instruments, documents, applications, financing statements, and other agreements and writings required to be obtained, executed, delivered or endorsed by the Debtor under this Section 3, or, necessary for the Secured Party, after an Event of Default, to enforce or use the Trademarks or to grant or issue any exclusive or non-exclusive license under the Trademarks to any third party, or to sell, assign, transfer, pledge, encumber or otherwise transfer title in or dispose of the Trademarks to any third party. The Debtor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted herein is coupled with an interest and shall be irrevocable until the termination of the Loan Agreement as provided therein and the payment and performance of all Obligations (as defined therein).

PATENT AND TRADEMARK SECURITY AGREEMENT – PARENT
St. Paul Venture Capital VI, LLC; June 6, 2001
k) POWER OF ATTORNEY. To facilitate the Secured Party's taking action under subsection (i) and exercising its rights under Section 6, the Debtor hereby irrevocably appoints (which appointment is coupled with an interest) the Secured Party, or its delegate, as the attorney-in-fact of the Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of the Debtor, any and all instruments, documents, applications, and other agreements and writings required to be obtained, executed, delivered or endorsed by the Debtor under this Section 3, or necessary for the Secured Party, after the occurrence and during the continuance of an Event of Default, to enforce or use the Patents or Trademarks or to grant or issue any exclusive or non-exclusive license under the Patents or Trademarks to any third party, or to sell, assign, transfer, pledge, encumber or otherwise transfer title in or dispose of the Patents or Trademarks to any third party. The Debtor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted herein shall terminate upon final and indefeasible payment and performance of all Obligations.

Related Note:

Some of you might ask is it possible to trace back the lines of precedent to the original author? Probably not: we lack sufficient historical data to go back that far. Lawyers have been repurposing forms for a very long time. The earliest I can trace the development of forms is 1392 when the Worshipful Company Scriveners first employed notaries.

OK that was a bit facetious; another way to address the question is to ask whether an attorney could claim copyright for their agreements. Or, put another way; is the wholesale copying of precedent from EDGAR or other sources a violation of fair use? In most cases the answer is probably not. In order to garner protection the drafter would have to show originality—difficult when it's easy to show that vast tracks are plagiarized or show that it is a protected compilation (a reordering of existing materials)—but such recompilation could also be found in numerous pre-existing precedent. See, Copyright and the Contract Drafter, Kenneth A. Adams, New York Law Journal Wednesday, August 23, 2006.

Open Source—A Dose of Tomato Juice

A recent exchange between Ron Friedmann and Ken Adams takes differing views on the value of open source repositories of transactional precedent. Ron Friedmann proposes a thought experiment to determine whether a common pool (a Corpus) would increase lawyer efficiency. Open Source Law - How Big a Savings? Ken Adams responds by saying this approach overlooks the fact that "the Corpus would be a dead skunk in the middle of the road, stinkin’ to high heaven." Open-Source Law and Contract Drafting—A Dead Skunk in the Middle of the Road. I would like to add some tomato juice to the discussion.

1. Filtering to Core Language

We have enjoyed access to enormous information resources for a relatively short period of time. For many there still uncertainty whether is it a vast repository of expertise or just noise?

One camp argues for the wisdom of the crowds; asserting that the many smarter than the few. Others believe crowd-sourcing is inherently unreliable. Indeed, there is the good, the bad and the downright ugly. The problem is that most people of my generation lack adequate filtering tools to handle the volume of information now available. What can we do?

First, we can rely on experts. Indeed, a comment to Ron's article expresses doubt whether the Corpus can replace the tried and true approach of "walking down the corridor" and finding an expert.

Second, we can develop our personal filtering skills. For me, the professional journey has been a passage of exposure to greater and greater amounts of information. When I first started practice, my "world" comprised a few colleagues and one tax treatise. It was a wonderfully comfortable environment with hard edges and nothing beyond its narrow purview: at least as far as I knew. But, for me, this world it doesn't exist anymore and I have no intention of returning to its narrow confines.

Third, we can build advanced technologies. Imagine Westlaw or Lexis without faceted search (court, jurisdiction, subject matter etc.) or validation tools (e.g. KeyCite and Shepard's). The results would be chaotic. They might not reek, but they might have an off-putting odor.

We need different tools to manage the Corpus. Through the lens of contract analysis—virtual tomato juice—you can see that in every deal there is, in fact, a core of standard of non-negotiated language. You can also see a vast penumbra of variability. And, if all you see is the penumbra, then it will likely look very messy.

2. Checklists of Deal Terms

Of course, if the repository is in fact "a motley assemblage exhibiting, in general, deficient and inconsistent language," (Adams) then there would be little point in applying personal, editorial or technical filters on such a collection.

But it is not just a repository of legal terms; it is also—and perhaps more importantly—a compendium of business terms.

For example, it is one thing to know how to write an IP ownership provision in a software development agreement; it is equally important to understand what other business terms should be included to protect the developer, owner and licensee. We gain this experience over years of practice reading hundreds of agreements—some good; some not so good. The problem today, compared to my starting point is that there is so much information: and no librarian.

Our experience in reading voluminous precedent allows us to construct mental checklists of legal and business terms. Just as technology can be applied to vast repositories, such as the Corpus and cut through the noise to the core language, it can construct term sheets of all the different deal elements. Should you, for example, include a clause capturing derivative technologies in the software development agreement? What is a derivative technology clause?

There is a vast amount of knowledge locked up in repositories such as EDGAR. We are just now developing the keys to unlock its wisdom.

Thoughts on Building a Useful Taxonomy for Transactional Documents

One of the most important tasks in developing contract standards is to construct a taxonomy of all legal agreements. It is a daunting task. And, it probably does not have a right answer. But you have to start somewhere.

I have been fortunate to work with one of the best classifiers: Dan Dabney of ThomsonReuters. His paper—A Brief Practical Introduction to Taxonomies—is a must read.

1. Taxonomy Structure

Dan describes the three main determinates of a taxonomy. "The broad, structural issues that seem to attract attention are these: (1) how many lines should the classification have; (2) how deep or flat should the classification be; and (3) what should be the classifications at the top level or two." To summarize Dan's position: the organization should present a clearly articulated, editorialized viewpoint that captures the essence of the particular field of study. The structure is then determined by the level of specificity desired (i.e. the number of the lines in the taxonomy). Each topic page should typically contain about 10 sub-items. The rule of 10 then dictates the number of levels by "the common logarithm of the number of lines it contains". In other words for a 100 line taxonomy, you need two levels; for a 1,000 line taxonomy, you will require 3 levels.

2. Taxonomy Organization or Theme(s)

While the number of levels can be determined by objective guidelines; the organizational theme presents far more subjective challenges. A clear articulation of the organization requires definition of the core concepts or characteristics. But, there are typically many overlapping themes that cannot be separated. To quote from Dan again: "Nearly any legal idea has several aspects to it—the legal theory involved, the jurisdiction, the nature of the parties, the procedural posture, and so forth. In a browsable taxonomy the ideas are ordered in such a way that the most basic or general ideas are the principles of classification for the higher levels, and the more particular ideas determine classification for the lower levels. Setting up the high levels of a taxonomy is an exercise in deciding what is important." To some degree, you have to accept that the categories will not be mutually exclusive. In the case of legal contract, for example, some of the competing organizational themes may include:

• Type of contract (unilateral, multi-lateral)
• Nature of the bargain (sale, exchange, license)
• Nature of the asset, right or interest

3. Taxonomy Levels (Document Anatomy)

As a general rule, developing a taxonomy can be approached from both a top-down (deductive reasoning methodology) and a bottom up (inductive approach). Whittaker and Breininger offer sound advice: "First, develop the upper levels of structure into the major categories. Try not to have more than ten large subject areas; if you have more than that, it will make it difficult to navigate through the hierarchy. One structure might be to organize around major domains (products, human resources, geographies, for instance)." Taxonomy Development for Knowledge Management

(a) Top Level-Organizing Theme. In addition to understanding the theory of taxonomy development, there are a few practical tips. First, draw from existing classifications.

• Subject matter (e.g. law school: HLS Course Catalog)
• Area of practice (law firm: JonesDay Practice Groups)
• Area of business (business: GE's business departments)

Second, look to the next level in the taxonomy, use technology to help see the patterns, and group lower level by its common characteristics. I do this by creating a list of all agreement types and then running word frequency analysis on the agreement names. I've been keeping a running track of agreement types. My list is by no means complete and it probably has duplicate entries and concepts. However, should there be an interest in collaboratively developing a taxonomy, I have made the list available here. And, for those who want to try the word frequency approach, there are many macros available on the web, such as: http://www.authorsden.com/categories/article_top.asp?catid=20&id=39307).

(b) Contract Types

The second level of the taxonomy can be an organized list of agreements. This list might capture key variations, such as:

• nature of the parties (individual, trust, corporation, partnership etc.);
• nature of the asset or consideration (cash, real estate, stock, intellectual property);
• nature of the transaction (purchase, exchange or license

(c) Clause Library

The third level lists the clause elements of each contract type. Here variations might capture:

• Party weighting or bias e.g. an employer weighted severance clause
• Geographic or jurisdictional variation

Conclusion

Agreement type and clause levels of the taxonomy can be based on empirical observations: what types of contracts exist and what do they contain? The top level organization presents a much greater challenge and perhaps is best realized through discussion, identifying an emerging consensus.

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.