Aug 122009

Stuck in Legal

Stuck in Legal

If I had a nickel for every time I heard from someone on our sales or business development team that a critical contract, to which both sides had agreed on the fundamental business terms, was "stuck in legal," I'd be rich.  Maybe not rich enough to pay all the world's legal bills, but that's a separate story.

I completely understand the need for contracts and lawyers to review them — and sometimes, they do have to be long and complex.  But here's what I don't understand:

  • Why companies' legal departments or outside counsel aren't directed to be as efficient in doing their work as their other departments
  • Why companies insist on using their standard form of agreement if they're going to staff a legal department to review contracts anyway (this clearly wouldn't work if everyone in the world behaved this way)
  • Why lawyers insist on answering questions with "because that's how all our contracts are" instead of applying their brains and logic to situations
  • Why business people seem to have no leverage with their legal departments, especially in larger companies, therefore surrendering the negotiation of business terms and the timing of relationship launches, technology usage, etc. to lawyers
  • Why in-house lawyers make the same dumb changes to wording and formatting that lawyers who bill by the hour make

I'm not generally a conspiracy theorist, but much of our encounters with outside lawyers leads me to believe that there's some oath that lawyers take to keep their profession vibrant by creating work for each other.  Someday, I'll write a similar post about procurement departments at big companies.  But it might be as simple as a global find-and-replace on this one!

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Filed under: Business, Leadership

38 responses to “Stuck in Legal”

  1. Dave says:

    Hallelujah Matt! -DLS @ Return Path

  2. ericfriedman says:

    My question has become; if you can bake into a legal agreement who will pay for which legal fees and have a fuse attached to a agreement, why can't you also have a "time to close" part of the agreement as well as a to-do list once the contract has been signed. That is when the real work begins and it seems all the legal work stops. Getting these things into docs slowly will make them the standards in the future.

  3. Interesting thought, Eric – of course different types of contracts take on different lives (e.g., M&A vs. financing vs. client contract).

  4. fred wilson says:

    nice post matt. i "tweeted it up"

  5. Joshua Baer says:

    In choosing a lawyer, I look carefully for ones who facilitate business rather than roadblock it. As a business owner, I want a lawyer to give me options and risk analysis, not ultimatums.

  6. The culture of law is 'bespoke'. Lawyers never think of anything they do as a commodity let alone that the process of commoditization is in their clients interests.

    Intelligent, well-meaning, friends – who happen to be lawyers – look at me like I'm nuts when I talk about standard contracts and defined processes. They are trained to believe it is a dereliction of duty to fail to review even standard contracts (in so far as they exist).

    Closing our seed funding, we started from a standard contract, neither side negotiated, and yet the lawyers still scrutinize every term – which is an expensive exercise for a seed-funded business.

    There is a big opportunity for someone to start an open-source law firm.

  7. Great post. 100% agree. I operate search engine startups in the music and news space (double trouble!) and we have been sued 4 times in the last 6 months. Each time we have ended up working with the companies involved on projects so all is good. But it is still really annoying to start relationships with other companies via legal threats when a simple phone call or email would achieve the same outcome. Strange days indeed.

  8. Further after all this wrangling there are always oversights, ambiguities, and things that mistakenly "left out." I often feel that simple letter agreements would accomplish much of same function with a fraction of the frictions.

    Further, if things "go bad," all that time in legal almost never prevented or resolves this issues easily. So again you're about as well of as you would have been if you did a simple letter.
    -Jon Steinberg

  9. Hello Matt – I've been involved in numerous contracts negotiations with ESP's and various digital vendors. This is always the case in the major corporations I have worked at. Try getting a contract signed when the Legal dept. is on vacation, in the summer, the whole summer!

    I have, however been involved in the process and details with Legal and can say that certain elements that become "sticking points" are usually the same ones every time. It may seem tedious, and I have pulled my hair out as well, but when the contract goes bad or the relationship sours, everyone is looking at those documents that took so much time to construct and are normally pointing a finger at the Legal team or negotiator of the contract.

  10. Matt- Yes, you really hit the nail on the head; my experience is very similar to yours. I think many companies use legal for a different purpose than actually facilitating deal flow. They use it as insurance where there is no benefit for success, only a penalty for failure (ie getting sued for not having full protection). Legal gets no credit at a company for a big deal they speed through only blame for mistakes, so they have taken the natural approach based on the reward system: kill anything that might have exposure. The crazy part is that while this makes sense (theoretically) for outside council, for in house council it is a complete perversion of what we business people think the role of legal should be. *sigh*

  11. I’m not saying lawyers and contracts don’t have a purpose – I’m just saying they don’t function the way business people do and frequently don’t exercise good common sense.

  12. Hey, Seth – good to hear from you.  A friend of mine calls in-house legal the Business Prevention Department.  There you go!

  13. That’s certainly true.  My former company MovieFone had a 200+ page joint venture agreement, and when it blew up, they spent over 5 years and thousands of CEO/COO/CFO hours in litigation to clear it up.  A handshake might have been better in the end.

  14. It's funny…because it's true…

  15. druce says:

    every profession is a conspiracy against the laity

    the first duty of every profession is to make more work for itself

  16. Chris says:

    "there's some oath that lawyers take to keep their profession vibrant by creating work for each other"

    This made me laugh out loud – I've often wondered this as well!

    Procurement would be a good one next – but what about accountants who don't care about predicting cash flow? They seem to be rampant…

  17. Venkat says:

    Ah, the business folks are from mars, lawyers are from Venus post…

    You make a bunch of great points, but I've never bought the whole "unwritten code to increase legal work" theory. For a couple of reasons. Most importantly, reasonably sophisticated clients are able to quickly see through any self-serving recommendation to spend a bunch of additional legal resources. Although there is a huge variance in billing among lawyers, more often than not, a matter escalates because the client buys in to the lawyer's approach.

    The best thing companies can do in my opinion is to haul in their lawyers (whether in-house or outside counsel), have them conduct a seminar on typical contractual provisions, and work with lawyers to set up a protocol for legal review of deals (e.g., what default and alternative terms are and when further approval is required). Most lawyers would be willing to do this, because it makes their jobs easier.

    The legal profession is changing. Firms have come out with term sheet generators for deals, similar tools for other transactions are probably not too far away.

  18. tomhaney says:

    To create a deal focused culture it is necessary to have quick turnaround from legal. I like to see the practice of using outside counsel to improve turn around time when deals get backlogged. This keeps deal flow going and helps to judge the right size for the legal staff. Outside counsel can be measured on speed for the less complex deals while the internal group can be measured on strategic impact for the more complicated efforts.

  19. Carl W. says:

    Of course, the flip side is how many times do the business guys toss the deal to the lawyers at five minutes before midnight and say "you have to sign off on this, everybody wants it."

    Suggestion: have a lawyer on the deal team from MINUTE ONE and give them a piece of the action. They can be your liaison with the legal department and outside counsel, and they will make sure everything gets in a timely manner, because they will have a vested interest in getting the deal done.

  20. That’s very important – the more complex the deal, the more important

  21. Devon says:

    Some comments from a former GC (Part I):

    1)Unless a legal issue is clearly black and white (rare), I don’t say “accept/reject.” I point out risk and empower the business person to “make the call” on whether to include my suggestion. You’ll be amazed how business people become risk averse when they know that they will be accountable for ignoring the legal department’s suggestions if things should go wrong. A good lawyer makes sure the business person makes an informed decision.

    2)Lawyers “over-lawyer” because over the years, non-lawyers have an incredible ability to exploit any gray area or ambiguity in a contract. This is why contracts for simple deals are 50 pages and make your eyes water due to the legalese. Business people will look for any loophole to terminate an agreement, argue breach, avoid their responsibilities, etc. A lawyer never wants to hear, “why didn’t you address this in the agreement?” after a deal implodes.

  22. Devon says:

    Part II

    3)I hate the “this is our form contract” excuse. I usually reply, “Oh really…why don’t you send me all your contracts so I can confirm that this is the case.” If my client is paying the money, I’m not afraid to say, “If you want our money, you’ll need to change the agreement, period.” 99% of the potential vendors will change their tune and revise the agreement after hearing this.

  23. Doug says:

    If I had a nickel for every time the "business people" sent me 5 bullet points and told me they "had agreed on the fundamental business terms" I'd….Well I'd have the same amount of money I have right now, because that's almost always the case.

    Note to "business people": telling the lawyer that the agreement has a "three year term" does NOT mean that you have covered all of the issues surrounding term and termination.

    If you want to close all your deals on a hand shake be my guest. Lets be honest here. The reason the business people want legal review is so they have someone to blame when things go wrong and an issue — which wasn't covered by the all encompassing business terms — blows up.

    It's easy to bust on the lawyers but Mr. CEO, who do you really think is looking out for the best interests of the business — the sales guy on his 5th job in 7 years or your lawyer…?

  24. Alan says:

    Sophisticated clients use their lawyers to spot issues and identify risks that the business people failed to identify. They choose the appropriate level of legal review and make the critical business and legal decisions after being informed about the risk / reward consequences by their lawyers. Sometimes that means virtually no legal review; at other times it means heavily involvement from legal. But always the sophisticated business person is in control of the process.

    In ordinary course of business situations, there is often little if any need for legal review because good forms and strong processes reduce most of the risks and sophisticated business people cover the rest.

    Unsophisticated clients come in two flavors:
    1. those who let their lawyers dominate the process and let legal issues overwhelm the business issues (this is sometimes the case in runaway divorce cases); and
    2. those who see no value in the legal process and only have legal involved for a bad reason – as a scribe, as a potential scapegoat, or because policy requires it.

  25. Alan says:

    To answer Matt's questions:

    "Why companies' legal departments or outside counsel aren't directed to be as efficient in doing their work as their other departments."
    Of course they are. In this economy nobody gets a free-pass except government. However, you clearly see no value in their output, so no matter how efficient they are, you see them as inefficient. Could legal departments and outside counsel be more efficient? Of course, and they are constantly under pressure to do so.

    "Why companies insist on using their standard form of agreement if they're going to staff a legal department to review contracts anyway (this clearly wouldn't work if everyone in the world behaved this way)."
    To be efficient and force transaction costs onto the other side. (See your question #1).

    "Why lawyers insist on answering questions with "because that's how all our contracts are" instead of applying their brains and logic to situations."
    Any lawyer who answers a question that way should be fired, and any business person who fails to fire that lawyer should be fired.

  26. Alan says:

    "Why business people seem to have no leverage with their legal departments, especially in larger companies, therefore surrendering the negotiation of business terms and the timing of relationship launches, technology usage, etc. to lawyers."
    This is completely unacceptable conduct by lawyers and by the business people who should be supervising them. If legal is impeding business, escalate. Sophisticated clients do not tolerate this.

    "Why in-house lawyers make the same dumb changes to wording and formatting that lawyers who bill by the hour make."
    Again, control your lawyers. Ask what risk is being addressed by the wording changes. If none, then you have a legitimate gripe. But more often than not, I'd bet there is a risk, but not one that you care to be protected against. Instead of whining, take control of the situation, tell your lawyer that you see no value in addressing that risk, and move on. If you don't have authority to do that, escalate until you find someone who does.

  27. Nick says:

    As a lawyer I would say
    1. a lot of time is wasted because managers are not clear about what they want out of an agreement and so we spend a lo of time trying to find that out (and it changes);
    2. at the begining, noone wants to talk about how to terminate and what happens if things go wrong;
    3. you'll blame us if things are not sown up as tight as possible.

  28. Those are good points, Nick – especially the first one.

  29. Ah, good – a counter-rant! I will freely admit that there are poor business people out there, including those who don't know how to manage lawyers well. And there clearly is a role for lawyers and contracts. But this post clearly struck a nerve based on the pickup and comments, and the ratio of the number of times I hear smart and talented business executives who understand the law a bit and appreciate the need for protection INFURIATED by an asinine lawyer on the other side and pissed off about wasting money to the number of times that same class of business person sings the praises of a lawyer for a job well done is way out of whack.

  30. Certainly agree with your last point, Alan.

    Maybe I'm only ranting against the other side's lawyers! 😉

  31. Doug says:

    So your counter is "The tribe has spoken"? If I post my reply on the American Bar Assocaition website I'd get more support — and that wouldn't prove anything either :-)….

    Start-up executives need to keep in mind that just because you think the contract in question is the most important document in the history of the world, the other side may not. And the fact that you have some junior, form-wed, in-house lawyer in charge on the other side (yes, I concede that happens at times) may be indicative of the "value" the other side places on the deal.

  32. Thanks for the concession, at any rate

  33. I will say one thing – which is that there's absolutely no excuse for a poorly managed or undermanaged lawyer. If there's a weak one on "the other side," it's because the business people either aren't managing legal effectively — or can't for structural or political reasons

  34. Doug says:

    Institutions typically have A, B (and maybe C, people). There is a difference between the law firm partner you hired and the junior associate. You don't want to pay for the senior partner for certain matters and you don't want the junior associate running your M&A deal. With your own lawyer it is important to manage expectations in both directions. Who is your point person? When do I get star partner and when do I get an associate? What associate(s) do I get? Can I talk to other start-up executives associate works with?

    You don't get to make that decision with opposing counsel — be it in-house or law firm.

    In-house legal departments at BIG Co. are in-house law firms; they have stronger people and weaker people. In most instances a deal with a start-up is a small deal for BIG Co. and gets staffed with a lower level in-house lawyer who has less authority to divert from the form.

    I advise start-ups to carefully pick and choose their battles when dealing with BIG Co.

  35. That’s a shame, since startups often have technologies that can be transformative for BIG Cos and can provide disproportionate value relative to cost

  36. Doug says:

    Blame there falls on the business side. Legal sets "priorities" based on directions received from business….

  37. JDLawyer says:

    I question your premise —the first question that people should be asking is do we need a contract at all? The law on quantum meruit and the implied promises of seller are very fair and well developed. If your lawyer cannot explain to you what you need a written contract, look for another lawyer. And, you don't need a written contract because it has promise to pay attorneys fees, if you win a lawsuit, or lots of other boiler plate of similar ilk. If you think that is likely to happen, maybe you should look for business elsewhere

    Second, do no confuse contract with creditworthy or knowning your customer

    Last, most disputes not over "terms;" they are over the assumptions of the parties. For example, a firm is hired to dig a foundation for a new home. Everyone assumes that there is no rock or other obstruction to the work. A good contract will say, the price is X, assuming we don't hit rock or another obstruction or have bad weather. A bad contract will say the price is X and say nothing about the assumptions.

  38. Robin Roberts says:

    "Why business people seem to have no leverage with their legal departments, especially in larger companies, therefore surrendering the negotiation of business terms and the timing of relationship launches, technology usage, etc. to lawyers"

    This one is easy. Because often the legal department is specifically charged by corporate managment with enforcing corporate policies that the business people ignore with excuses.