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People Make Mistakes in Contract Review. Here's How.

by: Noah Waisberg | April 28, 2014
4 min read

 

Optimal contract review conditions?

Two of the main drivers behind building the DiligenceEngine contract review system were that (1) contract review really needs to be done accurately and (2) the junior lawyers who typically do due diligence contract review sometimes make mistakes in this work. We thought that, since people often review contracts for the same provisions project after project (e.g., on a M&A deal, change of control, assignment, governing law, maybe term, maybe restrictive covenants, maybe liabilities (e.g., indemnification), maybe more), we could build software to help users find this information. And, after a bunch more work than we expected, our system works and has caught lots of human misses. Since it's not necessarily intuitive that lawyers at good firms would make mistakes at reviewing contracts, here's some more information on how they do.

The most serious errors are missed provisions. I frequently hear stories from top-firm midlevel and senior associates about mistakes they caught. Lawyer misses break down into two categories, random and systematic:

  • Random Error. Due diligence contract review is often high volume work. Lawyers can keep at it late into the night for days or weeks. Reviewers get tired and distracted. Mistakes happen. Random error can happen to anyone reviewing contracts, and there's no reason to think junior lawyers are more susceptible, only they do more contract review work than more senior lawyers so have more opportunities to make mistakes in this work.
  • Systematic Error. Many Biglaw juniors are smart, well educated and thorough. Their new firms put a lot of effort into training them. But they don't teach due diligence in law school, at least as far as I've heard (and this is not necessarily a bad thing). Even if they did, it's hard to teach contract provision identification. Sure, most people can pick out the term or governing law of an agreement. Critical provisions like change of control and exclusivity can be much harder. It's not obvious that "any assignment, whether direct or indirect" raises change of control issues. Or that an obligation to purchase all requirements is an exclusive relationship. Intuitive or not, these provisions count just as much as provisions with a "change of control" or "exclusivity" header and direct text under. Less experienced contract reviewers are especially susceptible to systematic misses, but we've even seen experienced lawyers miss relevant provisions they didn't realize mattered.

Misses happen at the best firms around. Ideally mistakes get caught as part of the spot-check review process, but it is just a spot check, not a full re-do, and it would be unsurprising if misses got through. It's not like potentially relevant provisions are highlighted for reviewers in the text of agreements ... unless you use a system like ours, which shows an original agreement highlighted with what our experienced-lawyer-trained system thinks matters. Don't trust software to do contract review? Our system is designed for people who don't trust it; you don't need to. You can use it to read agreements the traditional way, page-by-page. The system will show you highlighted provisions which it thinks are relevant, and you can use its built-in tools to delete false positives and capture new text, with less effort than it takes to cut and paste. An experienced lawyer using our contract review system has been shown to be more accurate (as well as 20–45% faster when reviewing agreements page-by-page) than one not. It's worth checking out if you care about accurate work product, let alone speed.

 

The DiligenceEngine document and summary viewer on a smaller window. Original document, highlighted with relevant text, is on the right, overlaid over the system's automatically created (and fully-editable) summary chart on the left. The DiligenceEngine document and summary viewer on a smaller window. Original document, highlighted with relevant text, is on the right, overlaid on the system's automatically created (and fully-editable) summary chart on the left.

NYC at night photo: diasUndKompott via Wikimedia Commons

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