During their daily work many practicing lawyers spent significant amount of time reviewing and preparing contracts as well as other legal documents. Most of these contracts include, more or less, the same legal concepts expressed through different words. Reviewing and drafting contracts can sometimes be costly, time-consuming and might slow down the businesses. In recent time, we have been hearing more and more about contract standardization and its several benefits that could bring the legal industry to become more data-driven, as technology is standardizing, and automating what were once labor-intensive tasks performed by legal practitioners. Standardisation is not something new, it is quite common in many other industries.
In this article, our goal is to unwrap the topic of contract standardization, not just through its benefits but also challenges, and to present legal standardisation through examples of LegalTech solutions.
A standardized contract is a legal agreement between two or more parties, where one party has set out proven contractual terms usually prepared based on the previous business experience, while these terms are usually non-negotiable. However, one option is also to generate a repository of standard contractual clauses (instead of standardized contract as such), which give parties more flexibility when negotiating and setting contractual terms. The last example is more commonly used in legal practice. Both examples can be addressed by different contract automation tools which can enable user to either generate the standardized contract as a whole (easier to develop), or to build contract through bricks of standard contractual clauses on top of specific provisions agreed through negotiations (more challenging to develop). Such LegalTech tools empower lawyers to set their own contract process by uploading a templates, creating fill-in fields for the contract requester, and adding conditional contract clauses.
The main challenge with non-standardized contracts is that the review process is often inefficient as it might take a long time to negotiate and finalize the agreement through negotiating separate contractual terms. This is why every contracting party wishes to use its own contract template or at least standard set of clauses, so the burden of review is pushed to the other party. For example, we can find hundreds and thousands of variations of NDAs, since every company has its own version of NDA template. The lack of standardization across contracts drives lawyers to spend most of their time ‘fear-checking’ contracts in case anything has been snuck into language that expresses common functions. When a contract lands on a lawyer’s desk for review, they have no choice but to read the agreement word by word. And if they don’t have time for that? Well, then they risk including provisions that could lead to problems in the future. One solution to that could be public or private database of standardized contracts and standardized clauses where lawyers could quickly compare standard documents and provisions just to see if they are on the right track with the review. The other solution is contract review software based on machine learning technology, which is also some form of standardizing legal documents, which ware marked as risky by the computer.
II. Advantages of Standardizing Contracts
1. Saving time and costs: Imagine a time in the future where lawyers and legal departments could skip the basic contract negotiations and jump directly to capitalizing the new opportunities, which would save them a lot of time. By reducing the time spent drafting and negotiating individual contracts, more time could be spent on higher-value legal work, or negotiating only important provisions of the contract.
2. Increasing certainty: lawyers will be sure of that a standard contract template will include tested and proved provisions; which will result in reducing the risks of having the most necessary terms included in the contract template in a way to avoid ambiguity.
3. Increasing the transparency and trust between contracting parties: contracts are built from a place of mistrust to protect the rights of contracting parties. Standardizing contracts confirmed by external organization will result in providing better relationships build on mutual trust and understanding. Therefore, contracting parties do not need to worry about any possible hidden provisions during negotiations. The confidence inspired by standardization will allow contracting parties to have a solid foundation for building reliable automation to track contract dates and obligations and ensure compliance with regulations.
III. Disadvantages of Standardizing Contracts
1. Language issues: One single word change in a contract might alter the legal status. For example, use of the word “shall” has specific connotations. If a contract says that you shall do something, that means you are obligated to perform that action. It is legally binding language. If this word is used regarding an action that you feel you should not be obligated to perform, ask that it be changed to “may.”
2. Boilerplate clauses: Boilerplate clauses are typically found at the end of an agreement. It is a standardized language that most of the agreements include. Many people do not read this part as it is considered to be jargon. Even though this are standard clauses, quick read can avoid black swan the legal text.
IV. Examples of legal standardization
In several countries, the legal specialists have started to implement standard non-disclosure agreements (NDAs) and standard data processing agreement (DPAs). One of such examples of contract standardization initiatives are oneNDA and oneDPA. The goal is that the parties jointly form legal document and “agree” to use only pre-determined standardized legal documents in their practice.
NDAs can be easily standardized since they carry the same legal concept and are prepared on a large scale. OneNDA has launched Claustack, a platform for contract standardization, where legal professionals can collaborate on standardizing certain contracts by uploading their own templates, providing their feedback on projects, managing their own projects. The substantive terms of oneNDA are fixed, and parties need only to add details of the contracting entities, complete the chosen variables (the purpose, confidentiality period, governing law and jurisdiction), add the date, and issue the document for electronic signing.
The more organizations decides to use oneNDA, the more validity it might have in the legal community, and turn leading to further adoption by others. Although oneNDA offers an easy and cheap win for client self-service, by filling in the required details before sending it out and not getting the lawyers involved still has its drawbacks. It might cause high risk situations. For example, there are likely to be situations where the oneNDA is not suited in cases of strategic deals, critical IP sharing or M&A and parties may inadvertently use the oneNDA in these situations when the business needs a stronger document or a one-way NDA.
What is interesting about this project is the aim to standardize contracts as far as possible while at the same time, allowing modifications and amendments to the contract clauses. So that in a simple basic contract such as an NDA, the contracting parties would not agree to introduce amendments or variations unless necessary.
It is true that standardized legal documents are doing their magic, but the only initiatives that have been created focus on a specific area of law. General commercial contracts have not been standardized yet in scope like oneNDA and oneDPA.
In a nutshell, it is nonlogical why these days’ agreements would not be uniform. As in most business and legal contracts, clauses making up these contracts are pretty much boilerplate.
There is no doubt that the more companies would implement standardized contracts, the less contracting parties would spend time on pointless negotiations and they will save time and energy on higher value tasks.
OneNDA, OneDPAs, are the first steps in the right directions, but unfortunately not all contracts can be standardized. There will be complex contracts that require a highly tailored approach. And that would be worth paying a lawyer. However, if 90% of the current contractual terms are boilerplate, then standardizing contracts would be a win-win situation for the world of commercial contracts.
From where we are now, we will build a future of contracts we can all trust.
This article was prepared by Rajaa Dawi.