Sometimes You Want a B+ on Your Legal Documents

I have written here before that the key to managing legal costs is determining what you need, then making sure you align that with what you get. Do that right, and the rest is easy. Just a matter of clear communication about what it costs.

I was reminded of this recently over lunch with a young entrepreneur. He had commissioned a lawyer to prepare appropriate documents to bring some other people into his business with a minority ownership interest. The entrepreneur ended up with documents he knew were capably prepared, but cost more than he thought they should. The cost was more than what the entrepreneur thought the value was to the business for the legal work. He needed a $10,000 car for his kid to drive to school and work, and he got a $35,000 car that would look respectable when the valet brought it back to him at the club. (I don’t know the actual numbers here, that’s just an illustration.)

There are two lessons for both the entrepreneur and the lawyer from this conversation – a conversation I have had on multiple occasions, by the way. First, it sounds like the entrepreneur and the lawyer may not have fully communicated about cost. The entrepreneur’s point of entry into the law firm that did the work was a friend. It is great to do business with our friends, but the personal relationship may cause us to hesitate to ask pointed questions we would immediately ask a relative stranger.

Also, lawyers, in general, are not always very good about proactively raising these questions. So while it is a very natural question in most transactions to ask, “Hey, what’s it cost?,” these friends may have avoided the topic. Then the lawyer friend handed the project off to a colleague who did not have as direct a connection with the entrepreneur, which adds another layer of imperfect communication.

The point is not to assign blame to anybody. There was just an unintended lack of communication. The lawyer should initiate communication about costs. That is part of effectively serving the client. And businesspeople should not be afraid to ask.

The less obvious point is that sometimes you need B+ legal documents. I don’t mean that you want mistakes. Obviously you don’t, nor would any lawyer tell you mistakes are acceptable. But for your business purposes at that time, there are things you do not need or want. For a very simple transaction, you may not want or need the world’s finest arbitration clause setting forth a brilliant and innovative procedure for resolution of disputes relating to the transaction, or a multi-faceted indemnification clause allocating liabilities that are unlikely to arise or be worth much. You don’t want the A+ laboratory version. You want a B+.

A very simple example in my own practice is that ongoing clients will receive agreements from vendors and other business associates and want a review of the documents before signing them. That prior review is a good practice for avoiding more significant legal issues later. But many are small transactions. Often the agreements are not exactly models of legal drafting.

However, what is at stake for the client does not warrant my rewriting them to be what we consider to be good legal work. So, we identify the one or two red flags that really need to be fixed to protect the client, point out areas that could be better but are unlikely to raise larger problems, and briefly discuss a transaction-appropriate strategy for the client to follow up with the business associate to address the key areas of concern. B+. (Note that an important part of that discussion is that the client knows it is getting the B+ and why.)

A useful tool to address communication issues, as well as getting what you need, is to ask the question: “So what is this deal worth to the businessperson anyway?” Because that will help set an appropriate cost of the legal services. You do not want to pay $2,000 in legal fees to buy that $10,000 car. But if the transaction is worth millions, investing a much larger amount in legal fees may be just a small percentage of the value of the deal and be an appropriate cost to protect the client from legal issues that would kill the deal altogether.

This conversation is a good way to facilitate the legal fees discussion and make sure everybody is in sync up front. Sometimes the businessperson may not fully realize what is involved in the legal work, so this dialogue will identify that fact and get it resolved, one way or the other. Perhaps the lawyer will explain how the transaction raises some research issues that need to be addressed to protect the businessperson, and the businessperson will reassess her view of what the costs should be. Perhaps the businessperson will decide she will take the risk of not having that research done, or that she should get another estimate to see if another lawyer or law firm can do the work.

In either case, we have created a common understanding up front and avoided the businessperson several months from now telling a third party at lunch that he paid too much. That’s bad for everybody.