Two proven techniques for doing deals with less legal cost

When you end up with a large legal bill at the end of a transaction, the bulk of the cost was likely incurred during the negotiation of terms (lawyers exchanging markups). 

Preparing the initial documents is generally a pretty quick process. If the deal is simple, this involves just configuring a few details in a word document, which is done efficiently by lawyers familiar with the type of agreement. It can be done even more quickly using document automation.

For more bespoke or complex deals, preparing the initial contract terms may take some time in its own right. But if there is that much complexity in the initial document, it usually takes even more time to negotiate. The other side’s lawyers will have to get their heads around the complexity and analyse the implications for their clients. Usually resulting in a number of drafting changes. 

In both cases, most of the billable hours are spent negotiating (not creating) the terms. Experienced negotiators work out how to get through this process with decent terms and manageable legal spend, although it will always somewhat depend on the approach of the other party. However, there are two techniques that even novice negotiators can employ to reduce the amount of time spent negotiating legal terms.

1. Use a trusted third party template

A large part of the review and mark-up cycle can be eliminated by starting from a neutral starting point.

Whenever a lawyer prepares a new document for their client, they carefully and meticulously ensure every word puts their client in the best possible legal position. Most lawyers (myself included) find it hard to move away from this mindset, even when what the client really wants is a document that is quick and easy to agree. They feel like it is their job to protect their client at every opportunity. 

The problem is that the opposing lawyer takes the same approach to every word in respect of their client’s interest. Inevitably finding many issues that they feel duty bound to raise and try to address. 

Many of these tensions fall away when you start from a neutral template. Particularly one that has been agreed before and includes compromises both sides can live with. This changes the default position. Each party then has to justify any move away from the middle ground, reducing the number of issues raised. The efficiencies are even greater when lawyers use the same templates over and over again. They get to know the language and can focus just on variations needed for each situation.

There are many examples of template agreements being used to streamline the negotiation process. For example, in New Zealand when you buy or sell a house, you usually use a standard agreement provided by the Auckland District Law Society. Lawyers acting on the deal can just review changes proposed in any particular transaction. While selling a house still results in legal fees related to the settlement and conveyancing, it represents a very efficient legal negotiation process compared to many commercial transactions.

2. Agree commercial positions before legal terms

Drafting and negotiating legal terms before alignment is reached on commercial positions can be a frustrating waste of effort. For example, is it a mutual NDA or a one way NDA? Will new IP developed be owned by Party A or Party B? If the parties are not clear at the outset on fundamentals like this then lawyers are likely to end up painstakingly (and expensively) drafting and negotiating bespoke contract clauses that are never agreed. Using legal drafting to decide key positions is a very expensive way of going about it.

Experienced negotiators know that getting both parties to a negotiation aligned around the key commercial principles of the deal first creates huge efficiencies later. Often it’s best to do this before any lawyers get involved at all. If the parties have a fundamental disagreement about a key commercial principle, then they need to resolve that disagreement in order to do the deal at all. Far quicker and easier for the commercial parties to resolve it themselves, than waste time with lawyers going back and forth on the point.

Once the commercial principles are agreed, this also constrains and focuses the minds of both sets of lawyers. They know the parameters they need to work within - that is, they are looking to protect their clients interests within the scope of the principles agreed. This limits the number of issues raised by each side in every turn of the documents. The commercial positions can be recorded in a non-binding term sheet, heads of agreement or sometimes memorandum of understanding.

It is a good idea to talk the proposed commercial positions through with your lawyer before you finalise them (it will be hard to change them later) and to get them to confirm that the term sheet is clearly non-binding. But the input at this stage of the process will be minimal and much simpler and easier to manage.

Applying these techniques

These techniques can be applied by even novice negotiators to agree a deal with less legal cost. They can be applied across industries and transaction types (in the case of neutral templates, at least where one is available).

There is also real value for legal-tech companies in closely understanding what methods have traditionally been used to solve the customer problem you are working on. Learning more about what works and what doesn't provides a better understanding of the problem itself. It also gives you a helpful baseline which your technology solution will need to be better than to be successful. But existing methods can also actually be the inspiration for legal technology. For example, by using technology to enhance and improve a way of solving the problem that already works, rather than attempting to break entirely fresh ground.

This is what we have found at Haggle, where our approach involves combining contract automation with both of the above traditional techniques. We believe using technology to improve existing solutions to the delay and cost of legal negotiation will have a greater impact than just document automation alone.

Originally published at blog.haggle.legal on 15 December 2018