Innovative approaches to standardizing contracts
Find parts 1 and 2 of this article series here:
There are practical reasons why standardizing contract language is more relevant today than it has ever been. The world has become more global and inter-jurisdictional contracting is now commonplace. English is the most common language used in these international contracts. As many of the parties agreeing to these contracts are not native english speakers, standardizing contractual terms is one way to make it easier for parties to understand their legal obligations and to what they are agreeing. For example, the European Union is working towards integrating its member economies to achieve this it’s important their contract laws are harmonized. Having standardized contracts has been promoted as a means for achieving this harmonization.*
Interestingly, trends have been noted in contractual language written in languages other than english that show influence from English language contractual wording. Professor Andrew Godwin, who lectures in Banking and Finance at Australia’s University of Melbourne - http://law.unimelb.edu.au/about/staff/andrew-godwin, says he’s noticed this when reading Chinese contracts over the years. This suggests even across languages there may be a move towards something akin to standardization.
Approaches to standardizing contract language
Different approaches for how to proceed with the process of innovation and eventual standardization of contract drafting have been suggested. Professor George G. Triantis at Stanford University notes some of the incentives and disincentives lawyers have for working on innovation and standardization of contractual clauses. He notes that “[a]lthough standardization reduces contracting costs and yields learning and network benefits, it tends to chill innovation because adopters of novel contract terms are likely to face resistance from their counterparties and to bear the risk of surprising judicial interpretations of, or adverse market reactions to, the novel terms” and “[m]oreover, while innovators and early adopters bear these risks, they cannot capture the future gains that will be enjoyed by others if their novel terms become popular”. This is because although original contractual language is likely to be protected by copyright, other similar wording of the same idea will not be covered. Moreover, once a contractual clause is considered by a court, it is in the public domain and will not be protected.**
To get past the disincentives Professor Triantis suggests, he recommends an approach similar to that followed by Wikipedia. He calls it the “Contracts Wiki”. He suggests a “modular approach” i.e. improvements to be made to parts of contracts that can stand alone. He suggests that this approach, in a similar way to the “open-source software movement” (https://en.wikipedia.org/wiki/Open-source_movement), would attract contributors due to four categories of perceived benefits:
(a) the inherent pleasure of contributing and interacting with other contributors
(b) enhancement of professional reputation or stature
(c) learning about the product through participation; and
(d) ensuring that the product meets the contributor’s own needs as a user.
Contracts Wiki can be found here - http://ackwiki.com/drupal/about.
Entities working towards standardizing contractual language
In addition to this proposed decentralized or legal industry based approach there are governmental organizations and other industry entities that have their own working groups involved in standardizing contracts. For example, the Oregan State government in the USA has recently passed a bill to require state agencies to use standardized forms, templates and other documents (http://ow.ly/YewCg ).
Other industry bodies within the USA have formed their own working groups to establish standard form contracts. Examples include, as mentioned in an article by Professor Mark R. Patterson of Fordham Law School entitled “Standardization of Standard-Form Contracts: Competition and Contract Implications”, the following entities:
- the American Trucking Association
- the American Institute of Architects; and
- the Insurance Services Office.
These government and industry entities have their own motivations for standardization. Working together they may be able to come up with standard contracts which benefit their organization as a whole. However, these same contracts do not necessarily benefit and may actually be disadvantageous to their counterparties. Legal issues in relation to contractual fairness and competition law may apply to these standardized contracts.***
Advancements in software including Machine Learning
Some software today provides tools for identifying and creating standard contracts as well as measuring the effectiveness of the terms within them for more efficient future drafting. For example, some contract software providers such as KM Standards (http://kmstandards.com) analyse past agreements to identify common clauses, agreement structure, standard clause language and common clause alternatives to develop model forms, playbooks, contract sets or new agreements. Other effective contract management software allows for data to be gathered about the number of times a particular clause is negotiated and how long counterparties spend redrafting and negotiating it before they agree. This could enable troublesome clauses to be identified more readily as well as terms that are likely to work well. For more information on leveraging negotiating data refer to our article on How big is your negotiation data? And is your machine learning? here: http://ow.ly/Yetj1
Also Natural Language Processing (http://ow.ly/Zu7su) and Machine Learning (http://ow.ly/Zu7Ap) in the future will aid drafters of contracts. Two academics at the Australian National University, Professors Michael Cortotti and Eric McCreath, have undertaken some preliminary analysis of Australian contract language. Their vision is to influence the development of technology to assist contract drafters through natural language processing. You can read more about their work here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304652 and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1885490 .
Due to the changing business environment i.e. it becoming increasingly global, and advancements in technology, the experience of contract drafting is likely to be very different in the near future. We encourage you to get involved in the process of contract innovation and standardization of contracts so you can be a part of creating this exciting future!
What are your thoughts? Do you know of any other bodies working towards standardizing contract language? If you are involved in these bodies how do you find the experience of standardizing various contractual clauses? What are the common issues that arise in this process? What do you recommend as the best way to become involved in this process?
ContractRoom, www.contractroom.com, is the home of #PredictiveAgreement - to learn more about how you too can “negotiate less, agree more” schedule a live, free demo by clicking here:
*Mark R. Peterson 2010, Fordham Law School, “Standardization of Standard-Form Contracts Competition and Contract Implications”. William And Mary Law Review Vol 52, No.2 2010 (available here - http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1201&context=faculty_scholarship) at page 335
** George G. Triantis, “Improving Contract Quality, Modularity, Technology, and Innovation in Contract Design” 2013, Stanford Law School (available here - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2306209)
*** Fordham Article noted above