The Cost of Legalese: A “Lawyer Tax” on Doing Business

The benefits of simplified and streamlined contracts are clear. They reduce negotiation times and minimize disputes. Plain English “agreements [take] a whopping 60% less time to negotiate than their previous legalese-laden versions did. Some customers have even signed plain-language contracts without a single change. Customer feedback has been universally positive, and there hasn’t been a single customer dispute over the wording of a plain-language contract.” Why It’s Time to Kill Legalese, Shawn Burton, Harvard Business Review, 2018.

The current process of repurposing prior agreements and copying and pasting blocks of text from other documents, all heavily laden will legalese, produces contracts inconsistent quality and waste billions of dollars.

Contracts are the language of business. They document our business relationships. Their purpose is to record the terms of an understanding agreement in a manner that is enforceable by law and to instruct the parties on their obligations and rights under the agreement. Unfortunately, many professionals (including lawyers) confess that they do not understand the terms of many agreements they sign or administer.

A written contract, when executed properly, is supposed to perform two functions: 1) act as instructions for both parties on how to perform the agreement, and 2) act as evidence that an agreement took place. But if the contract is unreadable and impervious to understanding, either or both of those purposes could be frustrated.

1. Reasons for legalese...none good

  • Tradition...it’s always be done this way.
  • Important sounding: gravitas (legalese terms “Know ye by all present,” In witness whereof.”)
  • Tested: May be true for certain phrases (defend and hold harmless”) Language complexity (sentences over 1,000 words in length)
  • Vagueness: Handling Uncertainty (future unknowns)....better off with insurance where risk can be spread over many deals. Of course, you can’t buy insurance for all contract types and potential liabilities. ...stratify agreement types.

Readability scores. B2B contracts should target a readability score between grade 15 and 16, namely college level. However, most contracts written by private law firms score grade 24 or higher, with some coming at a ridiculous 44 grade level. Agreements prepared by corporate legal department (absence of contract simplification) score between 17 and 19. THese range are partially explained by the complexity of the agreements and the level of effort, if any, applied to simplify agreements.

2. Cost of legalese...a high tax on transactions

Time: Attempting to handle all possible contingencies in a contract will very likely increase the time and costs needed for the parties to reach agreement.

Direct cost of preparation and negotiation. Cost: Lawyer tax: cost of reviewing agreements. The amount of time required to draft, review legal agreement as a percentage of the value of the agreement. Of course, many agreements (such as an NDA) have no inherent value. They are often signed as a precursor to a future transaction. Buying insurance is a better way to handle...from the one to the many. As a general rule, for contracts with a quantifiable value, negotiation time ranges from 2 to 4% of contract value. The relative percentage increases for lower value agreements, which are typically also executed more frequently than higher value agreements.

Indirect cost of opportunity lost cause by delay in realizing the benefits of a contract. For example, the costs of three month delay in executing a $1,000,000 contract over a 5 year contract life cycle is more than 50,000 or 5% of the contract value.

3 month interest (@cost of capital: 12%) = $30,000

Future value (5 years) = 52,870

3. A Proposal for Simplification

Clear, plain, and simple. Not always the correct approach. It would not be wise to use a highly simplified, short contract for a multi-million dollar software development project. But this doesn’t mean that that are situations where a simple agreement will suffice. 

If you are buying or selling a multi-billion dollar company it may make sense to wordsmith the documents to the nth degree. However, you might be better served with a simple, clear contract backed with an insurance policy. It makes no sense to draft overly complex agreements for routine acquisitions. Clearly define the specifications and back it with an appropriate warranty. No other contract terms with offer the same degree of protection to ensure you get the benefit of you bargain. A good standing or compliance with law clauss is unlikely to get you your money back in the event of non-performance.

Commodity Acquisitions: where goods and services are commercially available, fungible and replaceable. It is projected that 40% of B2C and B2B contracts fall into this category….use a highly streamlined contract (1-2 pages)

Specialized or Customized Acquisitions:  where goods or services are commercially available but may have limited sourcing or need to be tailored to particular needs. It is projected that 50% of the B2B contracts fall into this category...use a template, customized from a standardized clause library

Innovative Acquisitions: for goods and services that have yet to be commercially developed. It is projected that the remaining 10% of B2B contracts fall into this category...if necessary customize and wordsmith the contract documents, but, draft clearly and without jargon.

Kingsley Martin

Kingsley is a founder of Akorda. He holds law degrees from Oxford University (First Class Honours) and Harvard Law School, and has 30 years of experience in the practice of law, software design and development, strategy, and management. Kingsley pioneered the new discipline called contract analysis. He is a founder of KMStandards and has developed software capable of automatically analyzing legal agreements and creating contract standards.

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