Why We Should be Using Standardized Contracts

How Standardization is Innovating the Way We Negotiate Contracts by Electra Japonas for Contract NerdsAccording to The World Contracting & Commerce, 90% of the clauses that make up a 20 page contract are actually boilerplate. Very few clauses are drafted entirely from scratch yet we tinker and we amend until it’s just right.

Do we really need to be doing this?

Is the cost-benefit ratio proportionate?

How can we start off closer to the finish line?

As lawyers and contracts professionals, we read hundreds of thousands of contracts in our lifetime. Most of them say more or less the same thing, expressed in different words. Legal language is a matter of personal style and opinion, when in fact, it should be standardized — because it is there to serve a function and protect the interests of the contracting parties.

Honestly, the complete flexibility we currently have to draft our agreements adds little value because the terms do not always translate to mutually agreeable terms for both sides.  If we were to utilize standardized contracts, we would start the contract negotiation way closer to the end. Saving us all lots of time.

The Problem with Non-Standardized Contracts

 Non-standardized contracts often create massive inefficiencies because they are too slow and too risky.

Too Slow

One of the major problems for lawyers and businesses alike is that contracts take too long to negotiate and finalize. A leading cause for this is that commercial contracts are completely non-standardized. Everyone wants to use their own template, playbook, go-to clauses, terminology and words. There are hundreds, if not thousands, of variations for a mutual non-disclosure agreement (“NDA”) intended to cover the standard customer-to-vendor evaluation phase. When in reality, most of the NDA should be the same. Aside from a handful of variable data that would depend on the specific circumstances of the deal, such as party names, effective date, etc.

Too Risky

The lack of standardization across contracts drives lawyers to spend most of their time ‘fear-checking’ agreements in case anything has been snuck into language that expresses common functions. But things should not be snuck in. It shouldn’t be possible. People should know what’s in an agreement without having to read each word and being worried that unwanted provisions have made their way in. 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. At the moment, many in-house lawyers are prepared to take that risk with ‘red flag’ reviews for agreements under a certain threshold. Because reading all the words would just take too much time. If that’s not telling of a broken system, I don’t know what is.

Reducing Negotiation Ping Pong

Some of the redlines to a contract are substantial, but many are stylistic. After all, we have complete flexibility to express ourselves in any way we please when it comes to contract language. Lawyers are masters of crafting language and if they see something that they think could be drafted better, even though it might not change the function of the wording, they’ll often be tempted to change it just to play the game.

The outcome of the ping-pong match is that the parties finally agree on a position they can both live with. This ping-pong match we all take part in is costly, laborious, and creates real life problems. Several commercial agreements die a slow death because the NDA took too long to negotiate. And the relationship was irreparably damaged alongside it.

Other Industries are Already Doing It

There are several standardization initiatives that have saved businesses millions. Examples of standardized documents are prevalent in the finance industry (ISDA, LMA), the construction industry (SFoC), in property law and data protection regulation (SCCs). Standardized legal documents work wonders but the only initiatives to create such standards have been focused on a specific area of law or industry. General commercial contracts have not been standardized, yet.

A Case Study: oneNDA

oneNDA is an attempt to introduce standardization into general commercial contracts. It’s a legal-community-led initiative to create an open-source, standardized form for the most common and low risk agreement of them all — the NDA. We just launched version 1 of oneNDA which covers your standard NDA needs for commercial conversations. The next phase is to build on it to create more functions that we can layer on top of oneNDA to make it fit for a broader use-case (like M&A or sensitive IP protection).

Open-Source Drafting

The process of creating the oneNDA was a three-phase drafting process. In the first phase, a baseline NDA template was created. The parties agreed on the text of the oneNDA document itself. During the second phase, the parties determined how to put oneNDA into practice and create the House Rules to govern its use and protect its integrity over time. The parties also collated feedback from the wider community on the first version of oneNDA.

In the third phase, oneNDA was launched alongside a suite of other artefacts that explain how it should be used, when to use it, and why the party on the receiving end should not redline it.  Finally, organizations, like PwC, were invited to formally adopt oneNDA as their internal template with the goal of expanding reach and optimizing usefulness.

Community Adoption

The more organizations that use oneNDA, the more validity it will have in the legal community, in turn leading to further adoption by others. As of the date this article is published, oneNDA has already been adopted by over 100 organizations and their objective is to get 1000 companies to adopt it as their own house template by December 2021.

The Future of Standardization

It is a no-brainer that the more companies that adopt standardized commercial contracts, the less time everyone has to spend on pointless negotiations, and the more time we’ll all have to add true value to our companies and to the legal community as a whole. Likewise, the more organizations use standardized commercial contracts, the more validity it will have in the legal community, in turn leading to further adoption by others.

oneNDA is a step in the right direction, but not every single legal provision can be standardized. It’s just not possible. There will be elements that require meticulous draftsmanship and complex, bespoke agreements that need a highly tailored approach. That’s worth paying a lawyer good money for. But if 90% of the current contractual language is boilerplate, standardizing that would be a huge win for the world of commercial contracts.

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