Monday, February 28, 2011

Some Observations on the Nature of Contract Drafting

It is time to be more controversial. I’ll start with my favorite quote on contract drafting written by one of the greatest jurists in modern times. Lord Denning, in his Romanes Lecture, From Precedent to Precedent, given at Oxford in 1959, said:

“[Lawyers] will so often stick to the letter and miss the substance. The reason is plain enough. Most of them spend their working lives drafting some kind of document or another – trying to see whether it covers this contingency or that. They dwell upon words until they become mere precisians in the use of them. They would rather be accurate than be clear. They would sooner be long than short. They seek to avoid two meanings, and end – on occasions – by having no meaning. And the worst of it all is that they claim to be the masters of the subject. The meaning of words, they say, is a matter of law for them and not a matter for the ordinary man.”

I submit the substance of drafting lies is in the configuration of the agreement and its clauses as much as the precise choice of words. Having spent a number of years working on the empirical analysis of contracts, I can share a number of observations.

1. There are just a handful of contract clauses that are critical

These are the terms that define a transaction—the highly negotiated clauses that the parties seek to negotiate in their favor. Profusek and Ganske state the matter plainly: “Many lawyers no longer add real value to dealmaking. That's perhaps a startling and somewhat harsh allegation - especially from a couple of M&A lawyers - but we're afraid it's true.” It's Time To Rethink The Lawyer's Role In Dealmaking: Start By Facing Up To The New Realities, Metropolitan Corporate Counsel, December 1, 2007. The Jones Day partners assert that: “Half of the words merely repeat what has been said somewhere else. Really now, has anything bad ever happened because all the Form 5500s weren't filed? Half of the remaining paperwork is boilerplate, leaving only a handful of provisions that are important: the money, closing, social, and fiduciary provisions.” Supplementing this practitioner’s viewpoint, I can add that technology will soon be able to detect the valued terms, and by deduction identify the less important provisions.

2. All contract clauses have a standard set of terms

Contract analysis can find the core, pre-negotiated language by indentifying the common terms and distinguishing deal-specific or negotiated terms. Applying this technology, it can be seen that differences between individual clauses are mostly semantic—the language may differ in clarity, format and voice—but any lawyer or judge will recognize its intent, no matter how imperfectly or inarticulately drafted. Of course, there does come a point when a clause is so poorly drafted that—even if you know what it is trying to say—it cannot be given is normal interpretation, because it is excessively vague or open to too many different interpretations.

3. The clause standard is not party neutral

Standard clause language is not evenly balanced between the interests of the parties. Clause weighting in favor of one party or another varies with each agreement type. For example, the ISDA master document is evenly balanced. An employment agreement is typically weighted in favor of the employer; while an end user software license agreement is heavily weighted in favor of the licensor. For example, Florencia Marotta-Wurgler analyzed 647 license agreements, plotted their bias on a standard distribution curve, and found that the agreements are typically weighted in favor of the sellor. What's in a Standard Form Contract? An Empirical Analysis of Software License Agreements, New York University Law and Economics Working Papers, July 29, 2008.

4. Clause variations add or subtract language elements

Clause variations shift the benefits and burdens in favor of one party or another by adding or subtracting terms from the standard. For example today’s clause of the day on theContractStandards web site illustrates the options in a non-competition clause.

5. There are relatively few substantive variations for each clause

While there are an infinite range of semantic variations, there are typically less than five substantive variations within each clause.


If these observations are correct, then we can draw a couple of conclusions.

1. There is not a single, optimal clause. Rather, all clause examples represent a point on a continuum from being favorable to one party or another. While is helpful to propose optimal clause language, it is more useful to understand what is market standard and what are the optional variations.

2. Document assembly may not be the best approach to automating document production, because it is very unlikely that anyone can develop a set of logical rules in advance to set the appropriate language modifications. The final document is more likely the product of a negotiation.

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