The Value of Transactional Lawyering

Posted by Jeff Lipshaw

I suppose one reaches a point in one's academic career when one no longer jumps around the house shouting "yes, yes, yes, yes, yes" when one places a law review article, or, as we say, "kvells" quietly upon being cited by anybody, much less a fine scholar in a really interesting and insightful article, and even when you're not sure the citation is for precisely the point you thought you were making.  But I'm still a neophyte, that explains my happy reaction, apart from the real value of the article, to Explaining the Value of Transactional Lawyering, posted by Steven Schwarcz (Duke Law School) in the ExpressO pre-print series. 

The really interesting approach Professor Schwarcz has taken is to collect data from lawyers and clients on their perceptions of the value lawyers create in transactions, and uses it to challenge the "transaction cost engineering" approach proposed over twenty years ago by Ronald Gilson.  With all the appropriate disclaimers for the flaws in the data, Professor Schwarcz hypothesizes that the primary value transactional lawyers bring to the party is not transaction cost engineering (in the sense of reducing the likelihood of future litigation), or acting as reputational intermediaries, but in reducing "client regulatory" and "transaction regulatory" costs.

More below the fold.

I think there's gold in some of this data, and it helps direct the next aspect of empirical research.  (Not the smallest bit of gold from my standpoint is support for my merely casually empirical assertion at the outset of The Bewitchment of Intelligence (78 Temp. L. Rev. 99) that there is little relationship between what lawyers focus on in the negotiation and what is actually litigated - something that Judge Posner had asserted was actually tied together in a way expressable by a mathematical function.  According to the survey data, 66% of the clients surveyed reported their experience being that fewer than twenty percent of contract litigations were over issues anticipated during the negotiation.)

Professor Schwarcz cites my Contingency & Contracts:  A Philosophy of Complex Business Transactions (54 DePaul L. Rev. 1077) generally for the point that lawyers prepare contracts to minimize future contingencies.  I think the citation belongs in the article, but as support for his broader conclusion: that good or effective transactional lawyering is not reducible to economic formulae, something I suspect is intuitive to both of us as long time transactional practitioners as well as, at least in his case, academic thinkers.  I've read and wrestled with the Gilson thesis, feeling intuitively that it is over-reductive.  What I wish Professor Schwarcz's data had done, and propose for additional research and thinking on the subject, is to provide a basis for a regression on what clients and lawyers believe to be the value. 

My hypothesis (consistent with the themes of Contingency and Bewitchment that the contingencies of the world are too complex ever to be captured fully by the language of contracts) is that the value of lawyering reflects many, many concerns, some of which can be reflected in cost reduction, and some of which cannot.  For example, one transaction cost is the risk of not making a deal at all.  Lawyers who have a skill in crafting meaningful (or, in my case, often slick but meaningless) compromise language ARE transaction cost engineers in a sense, but I'm not sure (and certainly not without going back and re-reading Gilson) in the sense the economic approach has considered.  Those factors and concerns ought to be the subject of a regression analysis, and good survey data of the kind Professor Schwarcz has begun might address that issue.  My intuition is that we will see a number of "value perceptions" but none that we could really call "primary."

The other data I find interesting (along the lines of something I've noodled about) is that close to half the lawyers and clients surveyed say that clients should "seriously consider hiring a highly reputed law firm in all transactions where opposing parties hire highly reputed law firms."  Think about this for a second.  It's a Prisoner's Dilemma.   There are two sides to the deal.  Neither knows whether the other side will hire a lawyer (we could put probability into the matrix).  Recall that in a single play, the prisoners will always confess and get a middling sentence, because the payoffs of holding out are worse whether or not the other prisoner holds out.  The best payoff only occurs if there is cooperation to hold out, something that most likely occurs only with trust and repeated plays of the game.  If, as client, I think that the other side will hire a lawyer, I have to hire one as well.  I could go to the other client and say "there are no regulatory or other costs here; let's both save on costs and do this on a sheet of paper."  My hypothesis (I didn't come up with this today; I've been thinking about it for a while) is that there are a certain segment of transactions in which the lawyers provide NO value, but are present in the deal because their clients are facing a Prisoner's Dilemma.

Well, that was stimulating for a Saturday afternoon....