Securities lawyers and sticky contracts: innovation and elite law

I am sure you, like me, have been on the lookout for an elegant, readable, sophisticated and fairly short book about sovereign debt agreements. And one that happens to end as a critique of elite legal practice. And here it is, The Three and a Half Minute Transaction: boilerplate and the limits of contract design by Professors Gulati and Scott.* It blends economic and behavioural theory, history and law, qualitative and quantitative data with solid and measured arguments.

The book in outline is about this problem:if sovereign debt agreements have a clause which does not appear to make much sense and a court interprets that clause in a way which makes even less sense, what would you do? And by you, I mean a highly paid, highly intelligent, sophisticated practitioner in a leading law firm specialising in such blue riband work? Don’t rush, there are only many millions resting on it. Might you redraft future agreements to avoid the problem or might you leave the troublesome clause (the only one with a Latin name, wouldn’t you know it) as it is? Would your choice be influenced by the fact that there is a less risky version of the clause? And would your professional judgment on such matters be based on a full understanding of the purpose of the clause (it’s the pari passu clause) and the legal implications of leaving or changing it?

The rather perplexing answers to these questions are:

  • No, you’d leave the clause alone;
  • No, you’d leave the clause alone; and,
  • No, you don’t seem to understand the reasons for the clause, which is not surprising as pretty much no one else understands the clause either.

The reasons for this inertia are potentially complex. A good part of the reason is that the judicial decision in question was an ex parte Belgian decision which looked rather odd until, more recently, other courts started to take not dissimilar views. The emergence of later litigation calls into question the wisdom of letting sleeping pari passus lie. The book comprehensively reviews the other potential reasons for not changing or deleting the clause. It may be that clients prefer the status quo over change. It may be that actually clients like having a clause which no one understands but speaks, somewhat mystically to a species of fairness. It may be that no one can agree to change a clause that no one understands and so it stays in to be litigated by vulture funds when the opportunity presents itself.

The book suggests it is to do with the way modern law firms are organised and run. Two quotes from practitioners interviewed for the book captures the basic line of argument:

“You have to understand the system. No one pays that much attention to the minute details like this. One cannot afford to, if one wants to stay competitive. The firm has a computer program. You know… one that a junior associate can go to and plug the relevant parameters into – you know, type of issuance, type of issuer, which side we are representing, etc. – and the computer generates a standard contract. The firm spent [a large amount] on putting together this system. Associates can now produce a contract for one of these deals in three and a half minutes. This is the future of contracting in these markets.

These systems are quick, efficient and produce contracts (or bits of contracts to be fair) which those producing them do not understand. The second quote is a little chilling and on this point. It comes from a mid-level associate:

“Most of what we mark up and send round, we don’t understand at all.”

The book is partly a critique of big law business models which prevent associates from learning their trade, and partners from getting the research done on contract problems which would sort them out. The lawyers seek to blame their own business model and clients for driving them to be efficient rather than right. One partner is heard to bemoan the fact that they pay associates too much; that they therefore have to ensure they are billed out as much as possible; and that this prevents them spending the time necessary to mentor and train their future partners. It is a somewhat self-serving argument. The worldy wise claim that it’s my business model’s fault rapidly degenerates into the argument that it is after all the client’s fault. The too busy/rich/important to train argument is doubly threatened by the knowledge that had the partners interviewed in this research (elite sovereign debt lawyers) trained this lawyers on the meaning of this particular clause it would have been a quiet class. They didn’t understand it either.

There are also a suite of less critical insights into why the clauses may not have changed. Clients like predictability and new clauses increase unpredictability. On the whole the book skewers these. They also suggest that junior lawyers are subtly disciplined for suggesting change and are also reluctant to claim the success of innovations that are implemented and ‘work’. A simplification of the argument would be: very few people round here are paid to think about the law (and perhaps tellingly those that are appear to be a dying breed).

Interestingly, however, the book also serves as a warning for innovators: when developing systems for efficient delivery of legal product a whole variety of complexities and inertia’s make change difficult both within organisations, in markets and with clients. Systems which law engages with have a natural inelasticity. A second lesson is more basic: if you are going to design a system make sure someone understands that system. And keeps an eye on it. And fixes it when it goes wrong.


*Many thanks to James Davey, a former colleague at Cardiff, and expert in insurance law who tipped me off about the book and is working on contractual design in insurance contracts.

3 thoughts on “Securities lawyers and sticky contracts: innovation and elite law

  1. An interesting article on a subject which is rarely discussed.

    When I was in practice I used to do the ‘money test’: every clause boils down to money at some point (mostly how it can be lost and what can be done about it). This didn’t always work so I’d try the ‘3x times’ in desparation (eg I would try to read something three times and if I didn’t succeed then it probably made no sense).

    The key was to have the confidence to say that a clause makes no sense. No lawyer ever wants to look a fool so it takes a wee bit of courage sometimes to say, ‘this clause is a dog’s dinner. It makes no sense!’

    More research in this area would definitely be of interest. I may look into it myself and write a blog post about it:

  2. Reading this makes me wonder about the role and impact of Professional Support Lawyers/Knowledge Management Lawyers and the differences between US and UK firms. My own experience was that US firms were much less likely to have knowledge management systems in place or to employ PSLs/KMLs.

    Also be interesting to look at the history of standard form/precedents and how these are created and used. Wonder how many firms/lawyers still do the “Does anyone have an X contract?” round robin email and then work from Deal Y’s documents and/or how many firms/lawyers use standard forms which have had input from PSLs/KMLs/others.

  3. Cliona Kelly and I sought to use the lessons from this book (and accompanying literature) to explain the (apparent) sudden change from no-reservation of title clauses to them being everywhere in the mid-1970s. Our working paper, presented to the SLS conference, is at

    Stage 2 is to check our hypothesis against empirical data from the time. Our interest is primarily in developing a theory of ‘natural selection’ in contract boilerplate. That may just be because I have spent too much time reading Darwin / Alfred Russel Wallace blogs recently…

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