Ours is an age in which legal forms proliferate and many entrepreneurs are tempted to use them without thinking much about customizing them for the details of their deal.
This is a mistake.
The thoughtless use of legal templates assumes that the law is a mechanical process, as capable of simplifying as is the process of selling widgets. The thought goes something like this: you find a widget on the web. You buy it for a cheap price. You use it. So there is no need for those middle-of-the-road attorneys who charge a lot to pull the identical widget out of their drawer and deliver it to you with your invoice.
Here are some partial truths. Some contractual situations are completely routine. And lawyers have at times abused entrepreneurs by keeping them in the dark while increasing turnover in simple situations. However, it does not follow that the contracts are simply interchangeable and widget-like units that can be used by anyone in a plug-and-play manner.
Actually, the law is a slippery beast, one that seems to defy simplification. David Dudley Field made a famous effort to simplify the laws of California in the 1870s. The most educated men of that time consciously set out to take all of California’s laws and make them so simple that even the least educated person could understand them. The result: a world-class belly drop. The justices took the new simplified layer of laws incorporated into the field codes, woven them into a complex system of legal interpretation, and voila! – California emerged with the most complex set of laws in the nation.
Why did this happened? Why does the law so stubbornly defy being reduced to a thoughtless enforcement system that is easy to understand and administer?
Because, like it or not, the law is designed to regulate human affairs that are complex in themselves. And you can’t do this effectively unless you adapt to the situations at hand. That is why the judges decide matters on a case-by-case basis. That is why the law has so many localized variations. That is why a canned contract, even beautifully worded, will be of no use to parties who adopt it without thinking about its implications.
Again, like it or not, business and corporate law is complicated. So is intellectual property law. And tax law. And securities law. And licensing law. And distribution law. And property rights. And all other forms of contractual and commercial law. Have you ever tried to deal with an unsecured obligation? Or a revisionist interest? Or with any other of the thousands of strange-sounding legal concepts that seem to float in and out of the law that surrounds businesses and corporations? Yes, you may be familiar from practical experience with what FOB means as a commercial shipping term. Or by what an “implied warranty of merchantability” means. But take those terms, multiply them by the thousands, put them in an unfamiliar context, and what do you get? You get a network of legal terms from the art, each of which has a specific meaning only when understood within a complex legal context.
This is much more than the case of a lawyer trying to spread so-called “fear, uncertainty and doubt” in an illegitimate way. This is the reality of law that tries to understand and regulate complex matters that do not lend themselves to simplification as a whole.
Therefore, contract and commercial law is very complicated and does not lend itself to thoughtless application. If it was just a matter of filling in names, for example in a partnership agreement, then anyone starting a business could go to a stationery store (the old way) or go to a form download site (the new one), buy a canned partnership agreement, fill in the names and finish with it. Typically this is a reckless way to start a business. Such repetitive form may have nothing to do with the nature of the business being established by the parties. It may have language that has nothing to do with your deal and will only confuse them and everyone else as to what your deal was intended for. Worse still, you will not expressly state the nature of your deal to clarify what you intend in your contract. Such a contract is an open invitation to litigation in case something goes wrong in the deal between those parties. Perhaps tens or even hundreds of thousands of dollars will be spent hashing and redoing ad nauseam what they intended when they “accepted” a repetitive poorly worded text. If you have ever been unfortunate enough to suffer this fate, you will never again turn to those corner clippings to document the affairs of your new business or small business.
All but the simplest contracts must be carefully reviewed by someone with a keen eye and must also be understood in their full legal context. A contract review, of course, can be done by a smart layman using self-help resources. And some people are inclined to invest time and effort for that purpose in a way that helps them manage their legal budgets more carefully because they bear much of the burden themselves. But it is a burden and has an associated cost; there is always a cost-benefit component to any effort of this kind. What’s worse, many people don’t do a good job of thinking about problems and end up taking shortcuts. A contract in your hands can be like a loaded gun in the hands of a six-year-old – wildly unpredictable and sometimes dangerous results can follow.
Also, context is critical. What appears placid on the surface may hide legal turmoil underneath. Sell shares to investors with a simple purchase agreement. Penalty fee. I sell. You buy. Then later you find out that you did not abide by securities laws. Or that its buyer obtains a large taxable profit for having contributed intangible assets for his shares. Or that your deal violated the rights of someone else at the company that restricted those sales. Yes, attorneys can, and sometimes do, solve these problems unnecessarily. But these problems can and do exist in many cases. When you use a standard form, you need to look beyond its seemingly simple limits to understand how it works legally in its broader context. Otherwise, you could get into trouble without having the slightest idea that you are doing it.
So can you, as an entrepreneur, use boilerplate forms with impunity without fully understanding them and without understanding their context? In some cases, yes. You need a simple promissory note, and the generic one suits your needs without too much risk of going legally blind in a simple transaction. You need a canned nda for your employees and you have a form that you had used at a previous company, the type of form that has remained fairly consistent over many years of use. This may work for you, and even when there are potential technical problems with the documents you are using, the problems may never arise in your particular situation.
However, for all the cases in which entrepreneurs can get away with it or can get away with it, there are too many situations in which their attempts to do so are ill-advised. Flying blind has its limits, after all.
Bad business attorneys are attorneys who simply adopt shapes and change names without thinking about the nature of the deal before them. As bad as this may be, at least these attorneys have a modicum of legal education and experience to be able to spot some of the legal problems and some of the potential pitfalls.
The same cannot be said for an entrepreneur trying to do the same but without the benefit of legal education or legal training. This is then the worst of all cases. Don’t put yourself in this situation.
The question becomes confused when the employer will have had significant exposure to certain types of legal documentation, as for example in the case of someone who handled the contracts of a large company in an executive capacity while working under the guidance of qualified attorneys. In such cases, someone who has had a lot of practical experience with a particular class of contracts is often much more aware of its ins and outs than unskilled attorneys who have not dealt much with such contracts.
This is also true for the seasoned entrepreneur who has developed such a solid working knowledge of trade deals that he is able to bypass any green business lawyer trying to work on such deals.
While all of this is true, it simply means that the law has a practical and a theoretical side, and any smart person who has worked on complex legal settlements often enough will come out of that experience with some excellent skills applicable to such settlements. Serial entrepreneurs, contract managers, and others with similar experience fit this mold.
However, this only confirms why it is not advisable for an entrepreneur to try to do business using legal ways without thinking. The experienced entrepreneur, the qualified contract manager, etc. They may not be corporate attorneys, but they have the vast experience to be able to think carefully about a complex contract. Even then, such individuals will attest that they ultimately need their agreements reviewed by a qualified business attorney. Although they may be able to strike a deal more efficiently due to their experience, they themselves know that this is not a substitute for the services of an attorney who is an expert in their field.
The operative word is “think.” A good business attorney will think carefully about any deal and tailor any contract to the business situation at hand. An experienced entrepreneur will do the same within the limits of a layman’s knowledge of a technical field. An entrepreneur who uses good legal self-help resources will similarly think through problems carefully within the limits such resources allow.
It’s the thoughtless use of repetitive shapes that doesn’t cut it. Using standard forms without the necessary training, experience and education does not give the entrepreneur any basis to think of a deal to spot problems and potential trouble spots. Don’t use repetitive forms without thinking. In the end, it may cost you dearly.