Triantis

COLLABORATIVE CONTRACT INNOVATION
George G. Triantis1
This draft: April 30, 2010
1
Eli Goldston Professor, Harvard Law School. I thank Isaac Belfer, John Coates, Jay
Mitchell, Ashish Nanda, Milton Regan, Robert Scott and David Wilkins for valuable discussions
and comments on earlier drafts. I also benefitted from helpful comments at workshops at the law
schools of Columbia, Harvard, Pennsylvania, and Stanford.
Page -2- Collaborative Contract Innovation
COLLABORATIVE CONTRACT INNOVATION
I. Introduction
The standardization and commoditization of contract documents is transforming the

delivery of transactional legal services. As a result, transactions can be planned and executed at
lower cost, yielding significant economic benefit. The current recession and competitive
pressure across a range of industries has accelerated this cost-cutting trend, which is well-
recognized by practitioners and scholars of the legal profession. Much less attention, if any, is
given to the process by which the quality of contracts is improved – innovation in contract
design. Standardization exploits network gains, but tends also to chill innovation, because
adopters of novel contract terms bear the risk of surprising judicial interpretations or market
reactions. Moreover, while innovators and early adopters bear these risks, they cannot capture
the future gains that will be enjoyed by others if their novel terms become popular. Accordingly,
commentators observe that contract innovation is sluggish, other than in the production of
financial products and services. The financial pressures in the current economic environment
further discourage investments in contract quality. Thus, a fundamental challenge in the market
for transactional legal services is to establish the organizational structure and incentives for
desirable innovation in contract design.
Peer production has realized significant successes in knowledge-based industries,

particularly in the open-source development of computer software. Contracts bear close
resemblance to software. In particular, they are both complex, modular, information-based
products. They are public goods that yield significant network benefits from widespread use. In
both cases, innovation is impeded by features of hierarchical or market organizations. Yet, the
legal profession and the community of software developers each have long-standing, but
underexploited traditions of sharing work product.
In light of these similarities, this essay explores the potential for collaborative contract
innovation, supported by social software such as wiki, that might replicate some of the success
of open source software development. The reader may wish to refer to a prototype that Douglas
Barnard and I developed: the Contracts Wiki.2 The structure of this site is described later in this
essay. Although wikis are used in various areas of legal education and legal practice,3 the
Contracts Wiki is a novel and valuable application of the software for contract design.
The essay is organized as follows. Part II describes the drivers and obstacles to
innovation in contract terms under the current organizational structures for the delivery of
transactional legal services. Part III proposes an agenda for peer production of novel contract
terms, explores the advantages and challenges to such a process, and the desirable architecture
for it. Although today’s practitioner and scholarly commentators focus on cost-cutting and
competitiveness in transactional law, the impediments to investment in innovation and contract
quality are a neglected issue. In fact, while the challenges to contract design have become more
complex, there is considerable excess capacity among lawyers and related professionals today.
The time is ripe to address and clear the organizational obstacles to valuable contract innovation.
II. Contract Production and Innovation
A. Contract as product
A contract is typically an exchange of promises for future actions, but it is
distinguishable for a set of simple promises because it provides for judicial enforcement. By
2
http://hub.law.harvard.edu//contracts_wiki. The site is based on open-source wiki
sofware available at http://www.drupal.com. We are grateful for technical support from the
Berkman Center for the Internet and Society. Douglas C. Barnard, formerly a partner at
Kirkland & Ellis, is currently the vice president, general counsel, and secretary of CF Industries.
3
[list examples].
doing so, a contract may create value in one or more of several ways: promoting intertemporal
exchanges of value, transfers of risks (which may be thought of as exchanges of value across
contingencies), protection of investments specific to relationships, and the mitigation of
information asymmetries that impede exchanges (of both the hidden action and hidden
information kinds).4 A contract is a product that can be supplied at a cost by a third party: often
lawyers, because they have expert knowledge of judicial interpretation and enforcement.
The practice of transaction lawyering centers on the production of contracts for clients,
which can be divided into the tasks of standardizing, tailoring and innovating. For some time,
lawyers have standardized contract forms and language. Standard documents are customarily
preserved by lawyers in their files and reused in future deals. Not only are contracts
nonrivalrous but, as discussed later, their use yields network benefits. Therefore, standardizing
and commoditizing contracts both reduce the cost of production and increase their value.
Standard contracts are also often tailored to fit specific circumstances of clients. This tailoring
service focuses both on maximizing the value from a good fit and minimizing the cost of doing
so. Finally, lawyers can innovate to either increase the benefit from or reduce the cost of
contracting. This essay uses the term innovation to describe improvements to contracts that are
more significant in degree than tailoring and that can be redeployed in other transactions, and
even standardized. There is a tension between the strategies of exploiting the benefits of
standardization and maintaining the incentive to improve these standards. This tension is an
important obstacle to innovation and is discussed at greater length later in this essay.5
B. Environmental Drivers of Contract Innovation
4
See, generally, Alexander Triantis and George Triantis, Timing Problems in Contract
Breach Decisions, 41 J. Law & Econ. 163 (1998); Robert Scott and George Triantis, Incomplete
Contracts and the Theory of Contract Design, 56 Case W.L. Rev. 187 (2005)
5
Infra text at notes –. This tension is reflected in the seminal work of James G. March,
Exploration and Exploitation in Organizational Learning, 2(1) Organizational Science 71 (1991)
and Clayton M. Christensen, The Innovators Dilemma: When New Technologies Cause Great
Firms to Fail (1997).
Contract innovation has been most active in the sphere of financial products. The
literature analyzing financial innovation identifies drivers of innovation that fall into three
categories: (1) learning, (2) regulatory changes and (3) changes in market conditions. First,
advances in technology or other forms of knowledge can raise the gains from or lower the costs
of innovation. The discovery of the Black-Scholes option pricing formula in the early 1970s, for
example, spurred the rise of many new forms of option contracts to transfer a variety of risks,
because their values could be priced more accurately. Developments in accounting standards
permitted contracts to condition promises and termination rights on more revealing financial
ratios.6 Improvements in the processes of dispute resolution might similarly encourage novel
provisions governing forum selection and other adjudication procedures.
Second, changes in regulation provide opportunities for innovation. Nobel Laureate

Merton Miller noted some time ago that “the major impulses to financial innovations over the
past twenty years have come, I am saddened to have to say, from regulation and taxes.”7 Parties
are motivated to enter into new transactions, or to restructure existing transactions, to avoid
regulatory costs.8 In a similar manner, litigation outcomes might trigger innovation. Judicial
opinions that interpret or strike down an existing contractual provision, may call for an
innovative approach to clarify or restate the parties’ contractual intent.
Third, changes in market conditions spur financial innovation. Increases in volatility, for
6
See Peter Tufano, Financial Innovation, in Handbook of the Economics of Finance 307,
321-2 (George M. Constantinides, Milton Harris, and Rene M. Stulz, eds., 2003). Tufano gives
securitization of debt obligations, such as mortgages, as another example, because this
innovation was facilitated by the expanded use of computers to track cash flows and defaults, to
calculate prepayment risks and run pricing programs. Id.
7
Merton H. Miller, Financial Innovation: The Last Twenty Years and the Next, 21 J. Fin.
& Quant. Analysis 459, 460 (1986).
8
For example, Michael Powell suggests that the enactment in 1987 of a 50% tax on gains
from greenmail (I.R.C. §5881) made that arrangement prohibitively expensive, and thereby
provided the impetus for the creation of the poison pill. Michael J. Power, Professional
Innovation: Corporate Lawyers and Private Lawmaking, 18 Law & Soc. Inqu. 423 (1993).
instance, create new demand for contracts that transfer risk. This demand might not be satisfied
in incomplete markets. New financial instruments are valuable if they transfer risks that are
substantial in the current environment and have no close substitutes.9 New securities in
exchange-rate futures emerged, for example, when the US dollar was permitted to float after the
collapse of Bretton Woods.10 Volatile economic conditions also increase the variance of payoffs
from transactions and thereby raise the potential gains from novel solutions to problems of
information asymmetry and moral hazard.
The recent turmoil in financial markets invoked all three categories of innovation drivers.
Market volatility rose significantly and triggered a surge in litigation over broken deals and the
allocation of losses. Significant regulatory initiatives may be coming in its wake, as well as
fundamental transformations in the institutions of market finance. Despite the recession and
decline in economic activity, these conditions are likely to create significant gains from contract
innovation. Accordingly, designing appropriate incentives and mechanisms to encourage
efficient investment in innovation is an important objective. It is difficult to prove empirically
that too little (or too much) innovation occurs. However, the following section suggests that
there are significant organizational and institutional impediments to innovation. Moreover, the
challenge of coordination may create pockets of excessive or duplicative innovation even where
it exists. For example, a high-profile opinion of an appeals courts may stimulate redundant effort
among law firms that each revise their internal transactional documents and “best practices” to
adapt to the new jurisprudence. The purpose of this essay is to address these structural
inefficiencies by encouraging collaborative innovation.
9
The innovations may transfer risks either in discrete securities or embedded in
commercial contracts. See, e.g., Darrell Duffie and Rohit Rahi, Financial Market Innovation
and Security Design: An Introduction, 65 J. Econ. Th. 1 (1995); Robert E. Scott and George G.
Triantis, Embedded Options and the Case Against Compensation in Contract Law, Colum. L.
Rev. (2004).
10
Miller, supra note–, at 466. The innovation of cash settlement, instead of physical
settlement, and the use of clearinghouses to enforce collateral, were important steps in the
expansion of futures contracts. Id., at 467.
C. Impediments to Contract Innovation

What induces a contracting party to invest in the development of innovative contract
provisions? Perhaps the best place to start looking is an industry whose essential product is its
contract: insurance. The insurer has the incentive to develop contract terms that create net value
to the insured customer over the cost to the insurer. Of course, the insurer may not invest in this
innovation if it can be copied by competitors at low or zero cost. It is more likely to invest if it
enjoys some market power, or if the innovation itself creates market power. This is the
conventional argument for property rights in inventions. However, contract innovations are
unlikely to be protected under the governing intellectual property regime; courts interpret
narrowly the copyright in contract language and are unlikely to uphold patents in contract
design.11 Improvements in contract language are also difficult to preserve as a trade secret
because at least one other party – the contracting partner – has access to the language and
because some material contracts need to be publicly disclosed as a matter of law.12
Consequently, the gains from innovating must come other than from a monopoly conferred by a
proprietary right.
Even without intellectual property rights, some evidence suggests that larger institutions
lead in the production of new financial products, perhaps because they can insulate their returns
from competitive pressures.13 Other studies, however, indicate that smaller firms in competitive
11
See, generally, Josh Lerner, Where Does State Street Lead? A First Look at Finance
Patents 1971-2000, 57 J. Fin. 2 (2002). In October, 2008, the U.S. Court of Appeals for the
Federal Circuit tightened the requirements for awarding patent to business methods, by
reaffirming the “machine-or-transformation” test from Gottschalk v. Benson, 409 U.S. 63, 67
(1972) and rejecting the “useful, concrete and tangible result” text of State Street Bank v.
Signature Financial Group. In re Bilski (Fed Cir 2008 - en banc)(whether a hedging strategy is
patentable). Under the Bilski test, pure business methods cannot be patented unless they are
either tied to a particular machine or apparatus or transform a particular article into a different
state or thing. The case is on appeal at the Supreme Court.
12
E.g. Securities Exchange Act (1934)...
13
See W. Scott Frame and Lawrence J. White, Empirical Studies of Financial Innovation:
Lots of Talk, Little Action? 42 J. Econ. Lit. 116, 125(2004).
markets are more likely to innovate in order to survive; the innovator may even be the player
whose survival is most threatened.14 In the case of financial innovations, Peter Tufano has
suggested that there may be first-mover advantages even in the absence of property rights in
contract innovation.15 The innovator may reap sufficient returns from a temporary increase in
market share. Alternatively, the first-mover may establish critical relationships or brand loyalty
that deter competitors. Over time, it may build a reputation for creativity, which is attractive
both to future customers and to employees seeking a stimulating workplace.16 In cases in which
these benefits are not present, the advantage may revert to the quick second-mover, who learns
and freerides by observing the mistakes of the first.17 To the extent the latter effect dominates,
innovation is correspondingly discouraged.
The contracts contemplated in the foregoing discussion of financial innovation tend to be

products that the innovator markets to a large number of buyers (investors, depositors, insurance
customers, and so on). One can appreciate in this light why futures exchanges have been so
active in producing new contracts. Exchanges retain financial and legal expertise to develop
14
Josh Lerner, The New New Financial Thing: The Origins of Financial Innovations, 79
J. Fin. Econ. 223-55 (2006).
15
Peter Tufano, Financial Innovation and First Mover Advantages, 25 J. Fin. Econ. 213
(1989); Tufano, supra note –, at 325-6. Tufano contrasts the classic debate represented by
Schumpeter, who argued that market power and scale economies were necessary to overcome
the free rider problem, and Scherer, who argued that competitive pressures stimulate innovation.
Id. at –.
16
Kenneth A. Carrow, Evidence of Early-Mover Advantages in Underwriting Spreads, 15
J. Fin. Serv. Res. 37; Kenneth A. Carrow, Underwriting Spreads and Reputational Capital: An
Analysis of New Corporate Securities, 22 J. Fin. Res. 15; Frame and White, supra note –, at 130.
Indeed, particularly in the realm of financial innovation, one could ask whether the payoffs from
innovation are so large as to encourage redundant investment by multiple actors, even in the
absence of patent protection. See Tufano, supra note –, at –.
17
Indeed, there may be valuable lessons conveyed to third parties by the use of novel
terms, even if those parties do not adopt them. Tufano writes: “Individual innovations often fail,
but even in their failure, they give subsequent innovators new information that can be used to
develop the next generation of products.” Tufano, supra note –, at 324.
new contracts to meet market demands for the shifting of risks.18 Their members enjoy a return
on the investment in the innovation in the form of brokerage fees on trades and the ability to
hedge risks in their own accounts.
The incentive to innovate is muted when the innovation is not the contract itself, but a
term in the contract between two parties, such as a sale of assets or a joint venture. The
economics of investment in such contract production is different from either the competitive or
monopolistic industries contemplated in the preceding paragraph. If one party were to invest in
the design of a contract provision that increased the value of the exchange, the incremental
benefit would be shared in the bilateral bargaining between the parties. The non-drafter would
participate in the benefit. Therefore, each party has the incentive to invest too little in such
contract production, so that parties transact under terms that may be inefficient.19 Indeed, each
party is more likely to focus on changes in contract language altering the distribution of gains
from trade, rather than increasing them.
The underproduction of contract terms and underinvestment in innovation may result

from the network aspects of contracts. Like other forms of information and knowledge, novel
contract terms are public goods that are undersupplied in the market. A contracting party
creating an improved provision does not internalize the benefit of such term to third parties, who
may use it in their own transactions. Moreover, if a novel term spreads to a significant number
of contracts and becomes standardized, it yields further gains that are not fully internalized by
18
See, e.g., Richard L. Sandor, Innovation by an Exchange: A Case Study of the
Development of the Plywood Futures Contract, 16 J. Law & Econ. 119 (1973).
19
This suggests an advantage in the much-maligned adhesion contracts. By offering
provisions on a take-it-or-leave-it basis, the drafter can capture the gains from efficient drafting.
the innovator.20 These network benefits are well described in the literature.21 A future party
using the term will be less likely to face a suspicious contract partner unfamiliar with the term;
the partner’s expected reading costs will be lower when the term is standard. The more parties
invoke the term (and the greater the amounts at stake), the more likely that courts will have
interpreted and enforced the term. Third parties, such as investors or their analysts, are more
likely to be familiar with these terms too. Where contracts can be assigned or traded,
standardization is a critical factor in ensuring liquid markets.22
A party to a single novel contract will not internalize these benefits, which is the well
known public goods problem. Indeed, this innovator also bears the more immediate and
significant cost of departing from an existing standard: the lost opportunity of realizing the
network benefits from conventional provisions.23 Contracting partners are suspicious and
expend resources to understand the novel term. The prospect of litigation and judicial error
raises uncertainty and the cost of prospective enforcement. And, if the contract is to be
marketed, the innovator must invest in communicating the advantages of the new term.
20
Notably, the cost of standardized contracts has been reduced recently by outsourcing
and offshoring the task of drafting documents. Some corporate legal departments staff offices
abroad (e.g. India) with foreign lawyers or outsource to third party service providers in those
jurisdictions. See infra note – and accompanying text.
21
Charles J. Goetz and Robert E. Scott, The Limits of Expanded Choice: An Analysis of
the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985);
Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 Va. L. Rev.
757 (1995); Marcel Kahan and Michael Klausner, Standardization and Innovation in Corporate
Contracting (or “The Economics of Boilerplate”), 83 Va. L. Rev. 713 (1997). But see Mark A.
Lemley and David McGowan, Legal Implications of network Economic Effects, 86 Calif. L. Rev.
479 (1998) 562-90 (network effects are unlikely to raise sufficient costs to cause significant
lock-in of suboptimal terms).
22
A particularly important feature of financial innovation is whether the contract can be
standardized and traded in a liquid market. See, e.g, Mark Oliver Bettzuge and Thorsten Hens,
An Evolutionary Approach to Financial Innovation, 68 Rev. Econ. Stud. 493 (2001). Kahan and
Klausner give examples of covenants in bond indentures or provisions in corporate charters and
by-laws. Klausner, supra note –, at ; Kahan and Klausner, supra note –, at
23
Supra, note –.
Stephen Choi and Mitu Gulati offer evidence that boilerplate language responds slowly to
shocks of judicial interpretation or market change. In particular, they observe a lag of three
years in the reaction of drafters of sovereign debt contracts to the wayward interpretation of the
pari passu clause in Elliott Associates v. Peru.24 They blame this lag on the difficulty in
effecting a coordinated change to the networked term, even where the design of sovereign
contracts is dominated by a small number of large law firms and investment banks. A single
party proposing a contract change risks signaling an elevated expectation of litigation and, in any
event, imposes added reading costs on its investors.25 Choi and Gulati observe in the pari passu
case that the affected parties were more likely to coordinate a litigation strategy to rectify the
erroneous interpretation, than an adjustment in contract language. They speculate that this may
be driven by the fear of an adverse effect on existing contracts from adopting a new term
prospectively.26
D. Law Firm Structure and Strategies

By serving a large number of clients, a law firm may realize economies from using the
same or similar contract provisions across different transactions. The same type of advantages
can be realized by other professionals who sell transaction services, notably investment banks.27
Indeed, as will be discussed below, the modularity of some contract provisions allows
professionals to redeploy provisions between other parties and within different contracts. This
24
Stephen J. Choi and G. Mitu Gulati, Contracts as Statute, 104 Mich. L. Rev. 1129,
1133, 1137-9 (2006); Stephen J. Choi and G. Mitu Gulati, Innovation in Boilerplate Contracts:
An Empirical Examination of Sovereign Bonds, 53 Emory L.J. 929 (2004).
25
Id. at 1133, 1137-8.
26
“[M]arket participants may fear courts will misconstrue an uncoordinated response
immediately after a court interpretive shock as supporting the view that the interpretive shock
correctly characterized the market’s prior understanding of a term.... [and when the coordinated
response eventually takes place,] by this time, even a coordinated change in the contract terms is
unlikely to persuade a court that there existed a different market understanding from a now-prior
court interpretation.” Id. at 1169.
27
Klausner, supra note –; Kahan and Klausner, supra note –.
multiplies the network of applications. These features motivate some innovation in law firms,
particularly in sectors such as tax products. To realize these economies, firms keep repositories
of contracts and update periodically their record of best practices. The combination of lawyers
and clients within a single firm permits the sharing of contract provisions and of revenues, and
this collaboration mitigates some of the problem of underinvestment in contract innovation.
Law firms face several significant impediments to contract innovation.28 First, even a
large firm cannot capture all external benefits from innovating, particularly when novel
provisions may be used across different types of transactions. Second, the rate of innovation is
likely to be retarded by organizational biases within the firm. Although large corporate law
firms assemble lawyers with diverse legal skills, there is a natural tendency in hiring practices to
replicate the profiles of existing members (their alma maters, etc). Moreover, the hierarchy and
the collegiality in a firm discourage individual lawyers from making significant changes to
precedent forms, at least partly to avoid offending the partner who authored the provision in
question.29 Third, the competitive structure of the industry can drive firms to focus on cutting
costs in providing standardized or tailored transactional products rather than innovating.30 These
features of industrial organization are discussed in the remainder of this section.
28
Kahan and Klausner note a herding bias among lawyers, due partly to risk aversion and
partly to the way that reputation is drawn from outcomes (whether a term gives rise to litigation
and unfavorable interpretation). They quote John Maynard Keynes’ observation that “it is better
for reputation to fail conventionally than to succeed unconventionally”, and draw on empirical
studies of investment managers. Kahan and Klausner, Path Dependence in Corporate
Contracting: Increasing Returns, Herd Behavior and Cognitive Biases, 74 Wash. U. L. Q. 347,
355-8 (1996). They find empirically that investment bankers were more likely to initiate and
spread significant changes in contract provisions. Kahan and Klausner, Standardization and
Innovation, supra note –.
29
Organizations, particularly hierarchical ones, tend to discourage dissent and
independent thought. [cites]
30
The distinction between standardized, tailored and innovative products is discussed
supra at note –. We defined innovation as the creation of a new product that can be adopted by
other parties and in other transactions.
In his classic study of professional service firms, David Maister describes a spectrum of
three categories of business strategies.31 At the end on the right, he places the professional
practice that sells expertise, which Maister referred to as “brains” or “rocket science”. To the
left of it, he positions the firm that markets experience, the “grey hairs” who specialize in the
application of tacit knowledge and judgment gained from prior cases and clients. Downmarket
from the grey-hair practice is the firm that encodes experience into standardized procedures and
methodologies that can be applied at relatively low cost by junior associates (“cookie cutters”),
or might be commoditized and run by the clients themselves.
The expertise (rocket science) practice devotes significant resources developing and
applying the theoretical and empirical tools, to tackle the complex and high-stake problems of its
clients. The firm sells products rather than time. It charges a significant premium to recover its
research investments, and sets rates based on the value conferred to the client. In the consulting
world, BCG is sometimes described as a firm that aspired to this model and, as noted below,
Wachtell Lipton might be the example in corporate law. McKinsey is the commonly cited
example of the grey hair firm. Both the rocket-science and grey-hair practices cannot use much
leverage (e.g., associates-to-partner ratio) because the relevant expertise is by definition difficult
to share. In contrast, the procedure-based practice impounds the knowledge in systemized
methodologies that can be followed by trained associates in the firm. Accenture is the business
consulting example of this category. The commoditized practice takes this process a step further
and exploits high leverage to provide large quantities of relatively undifferentiated services. The
market for such commodities is highly competitive, with low barriers to entry and small profit
margins.
The best known innovation by a corporate law firm in the past half-century is probably
the poison pill. The idiosyncratic strategy behind its development sheds light on the general
31
David H. Maister, Managing the Professional Service Firm (1993). It is developed in
later work, including Thomas J. Delong, John J. Gabarro and Robert J. Lees, When Professionals
Have to Lead: A New Model for High Performance (2007) and Ashish Nanda, Strategy and
Positioning in Professional Service Firms, Harv. Bus. School Case Study 9-904-060 (2004).
failure of law firms to become transaction innovators in the scale of financial companies or
exchanges. From their experience working with targets of corporate takeovers, the lawyers at
Wachtell Lipton developed the poison pill (the right of shareholders of a target to purchase
newly issued stock at a low price, triggered by the acquisition of substantial share by a bidder).
The firm identified a potentially broad and unsatisfied demand among “besieged” target
companies. The other Wall Street firms were far more keen to act for acquirers, who were better
off financially and more likely to have the cash to pay their legal fees. At the time, Wachtell
Lipton knew that their potential clients might hesitate to pay for the pill because of the
uncertainty about the new product, and particularly the risk that it might not be enforceable and
therefore ineffective when needed in the face of a hostile takeover bid. So, an important part of
the Wachtell strategy was to absorb much of the litigation risk: it essentially guaranteed that the
firm would take all steps to ensure that the pill would not be struck down by the courts.32 The
firm used a broad public relations strategy to explain why the pill was in the public interest and
they defended against the early legal challenges to the pill.33
The poison pill was not simply a device engineered to meet the particular needs of one or
two clients. Instead, Wachtell proactively seized a market opportunity to design and market a
new product. It undertook an aggressive campaign to sell the poison pill to a broad market of
corporate managers, many of whom were not previously its clients.34 Wachtell is unlike other
Wall Street firms in that its structure is well-aligned to an innovative practice (in terms
32
Wachtell “prided itself in its willingness to risk litigation in order to sustain the
innovations that it believed would accomplish its clients’ objectives.” Marketing” at Wachtell,
Lipton, Rosen & Katz, HBS Case Study 9-496-037 (Nov. 29, 1995).
33
Michael J. Powell, Professional Innovation: Corporate Lawyers and Private
Lawmaking, 18 Law & Soc. Inqu. 423 (1993).
34
Once Wachtell had successfully defended the pill in the Delaware courts, other firms
jumped on the bandwagon. Although they typically claimed to be offering new and improved
versions, their variations were in fact modest compared to the initial innovation. It’s fair to say,
therefore, that the product has become quite standard.
mentioned earlier in the paper, somewhere between rocket science and grey hair).35 Its fees are
based on the value to the client rather than hourly billings, its compensation scheme is lock-step
according to seniority, and it has a low leverage ratio of associates to partners. These features
are consistent with the overall strategy of selling a high-value product.
Experts have observed that there is a natural drift downmarket (to the left, on Maister’s
spectrum) over time, as professional services become standard products.36 Once a firm has
created value for one client through expertise, it has an incentive to use that experience to help
future clients -- not only to avoid reinventing the wheel, but also to attract new business. After
sharing and building on that experience with a number of clients, the firm might find ways of
codifying it into procedures with which a pool of associates can serve more clients and at lower
cost.37 At this point, technology can be valuable in digitizing the information and automating
access to it by others in the firm. The drift downmarket continues when the procedures become
simple enough to be used by individuals with relatively little training, and the procedures
themselves can be sold as commodities.38
35
See HBS Case Study, supra note –. Key features of the Wachtell strategy include: value
billing, lock-step compensation, low associate-partner leverage, small size, single location and
the willingness to turn down business that does not involve large-stakes and complexity.
36
E.g. Delong, Gabarro and Lees, supra note –, at 99 (“Since Maister first described his
three archetypes of practices, we have seen an almost relentless commoditization pattern in every
major professional service business... The commoditization pattern is found across all of the
major professional services without exception.”) Later, they say “the core practice of every
professional service industry has been commoditized”. Id. at 101.
37
Delong, Gabarro and Lees note that the movement of professionals between firms
threaten a firm with the loss of its experiential advantage, thereby intensifying the pressure to
standardize and commoditize, at the lowest cost. Id. at 100-1.
38
Although a firm might try to span some or most of these points in the spectrum,
experience shows that such attempts often fail. Features such as compensation, promotion, and
governance, must be aligned with the chosen overall business strategy (e.g. rocket science, or
procedure-based, or commodity), and the optimal configuration varies across the spectrum.
Supra note –, at –.
Corporate law firms, and particularly their transactional practices, can be plotted along
this practice spectrum. The forces driving the drift described above are as prominent in legal
practice as in other professional sectors, such as management consulting. Information
technology has played a large role in facilitating the move downmarket in law practices, from
experience to standard procedures (based on standard contract documents) and then to
commodities. Law firms have long stored and retrieved documents from past deals, and have
procedures for standardizing their best practices in different transactions. These law firms, are
paid for their time rather than their product, and they compete to make execution more efficient
rather than by innovating. While financial organizations such as banks and exchanges invest in
R&D to create new contractual products, most corporate law firms downplay research in favor of
client service and maximizing hourly billing.
Over the past decade, document generation software has been developed to tailor
agreements to the particular circumstances of different deals. As these have become more
sophisticated and more prevalent, some firms (beginning with the large Magic Circle UK firms)
have made them available directly to clients.39 In the U.S., Wilson Sonsini, for example, offers a
publicly available tool that allows entrepreneurs and their investors to generate the initial draft of
a term sheet for preferred stock financing. The generator invites users to respond to a series of
questions and then it produces a customized draft. The term sheet generator is available to
clients and nonclients alike, and at no cost. The firm’s website notes that its attorneys use a
more extensive version of the tool to generate initial drafts of a wide range of other agreements.40
Other firms – such as WallStreetdocs -- sell automated document generation for a modest fee to
39
E.g., DealBuilder and WallStreetdocs, supra note –. The systematization and
commoditization of legal services through information technology is described with examples in
Susskind, supra note –.
40
The firm’s generator can be found at
http://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/termsheet.htm. The user is
required to agree to a set of terms and conditions that are designed to insulate the firm from
liability arising from this service.
both law firms and directly to business clients, without personal legal advice.41 These
developments downmarket are making transactional services available to a wider range of
clients, but they also cannibalize the practices of corporate firms that lie upstream, such as the
grey-hair and even rocket science service. While there have been impressive advances in the use
of technology to improve the distribution of transactional legal services, from document storage
and retrieval to document assembly software, the process of innovation remains somewhat
anachronistic compared with advances in other knowledge-based industries.
The very significant reduction in demand for the services of corporate law practices and
the accompanying cost-cutting pressures from clients over the past several years, have made it
difficult for law practices to resist this drift. Cost-cutting pressures lead clients to question the
value of upmarket services. In fact, clients may be justified in their intuition that their deals are
overlawyered.42 Even in a complex, large-stake deal, how much more is rocket science worth
than grey-hair experience, grey-hair over procedures?43 Moreover, business managers realize
41
http://wallstreetdocs.com. An older competitor, Business Integrity, offers a similar
questionnaire-based service (called “Deal Builder”) to assemble business contracts.
www.business-integrity.com.
42
In his work on innovation, Clay Christensen distinguishes between overserved and
underserved customers. Firms can address the latter group by improving the quality of service
through “substaining” innovations. The former group call for “disruptive” innovations that offer
lower cost (and lower quality) alternatives. Christensen also discusses the importance of the
non-customers, the ones that currently find it infeasible to purchase the service. The disruptive,
lower-cost innovation may also bring them into the market. Clayton Christensen and Michael
Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth (2003).
43
A fundamental problem in this respect is the absence of a valuation methodology for
transactional legal services and of data to quantify the pertinent legal risks. Contracts align legal
obligations with contingencies (“do A when contingency Y occurs”). The value of treating
contingencies separately (what economists call completing the contract) depends on the
magnitude of the associated risk and consequences. Moreover, the value of a contractual
provision depends also on the efficiency with which parties would be prompted otherwise by
extra-legal forces to accommodate contingencies cooperatively. Neither law firms nor clients
have the information to make these calculations and therefore cannot reasonably assess whether
the clients are getting their money’s worth. See, generally, George Triantis, An Introduction to
Valuing Legal Services (working paper 2009).
that pieces of transactional work can be done more effectively and at lower cost by non-lawyers.
Increasingly, they disaggregate their transactional work, seeking the most feasible provider for
each component and demanding that the various providers collaborate. Many of these tasks are
in-sourced to non-lawyer employees of the clients, out-sourced to non-lawyer professionals and
other service providers, and off-shored to producers in India, Romania and other economies with
low labor costs.
As a consequence of these trends, corporate law firms currently have substantial

overcapacity and underutilized human capital, which drains partner profits and demoralizes staff.
Law firms have laid off associates and imposed furloughs, but there are reputational limits to
their ability to do so. Under these circumstances, the temptation to look to downmarket revenues
in this environment, by focusing on routinizing procedures and rationalizing execution, is hard to
resist. The firms might add tailoring services. However, if a firm also tries to combine a
tailoring practice with rocket-science innovation, it blurs its business strategy and upsets the
aforementioned alignment of practice features such as governance, compensation and promotion.
In addition, once clients are accustomed to paying for commodities or procedures, it is difficult
to transition back to providing rocket science or grey-hair services once business picks up again.
The discussion in Part III suggests that today’s excess capacity in the legal profession may be
deployed to collaboratively innovate contract terms, for the benefit of individual lawyers, their
firms, and the economy as a whole.
E. Collaborative Tradition in the Legal Profession

The legal profession is a close-knit community with a deep tradition encouraging the
sharing of knowledge among members and across firm boundaries.44 Lawyers and law firms
44
In addition, there are regulatory requirements that mandate the disclosure of contract
forms for other reasons. Publicly traded companies are required to file material contracts as an
exhibit to their periodic filings under the Securities Exchange Act. A variety of internet
databases provide indexed repositories for these contracts. For example,
http://www.onecle.com/; http://cori.missouri.edu/; http://contracts.corporate.findlaw.com/;
http:///www.techagreements.com/default.aspx;.
share their work product in a variety of ways, such as programs in continuing legal education
and other practitioner conferences, as well as in publications.45 Lawyers donate their time and
documentary precedents partly out of a sense of collegiality and, of course, partly in order to
market their expertise in particular fields. Clients themselves may also share through their own
associations, including industry groups and organizations of corporate counsel.46 Moreover,
sharing has been a by-product of the increase in mobility of both associates and partners between
firms over the past generation. The resulting diffusion of information promotes network benefits
that can reinforce the lock-in effect described earlier. However, the practice of sharing contract
provisions can also stimulate innovation by creating channels for diffusion of new terms and
thereby shortening the lag between the creation of a novel term and its broad adoption within a
standard.47
Beyond sharing, lawyers collaborate explicitly across firms in the production of

contracts, through organizations such as the American Bar Foundation and the American Bar
Association.48 Industry associations bring together industry representatives and their lawyers to
develop contract documents. These initatives generally improve the level and quality of
innovation, compared to the atomistic efforts of individual parties and their legal counsel.49 At
45
[examples]
46
E.g., Association of Corporate Counsel, at http://www.acc.com.
47
There are other less formal avenues in social and corporate networks, such as
interlocking board of directors or individuals interacting in geographic proximity Gerald F.
Davis and Heinrich R. Greve, Corporate Elite Networks and Governance Changes in the 1980s,
103 Am. J. Soc. 1, 2 (1997) (the poison pill diffused quicker and in a classic S-curve through the
network of interlocking directorships, than did the golden parachute through regional elite
networks).
48
E.g., Revised Model Simplified Indenture and Commentary, 55 Bus. Law 1115 (2000);
Model Negotiated Covenants and Related Definitions, 61 Bus. Law (2006).
49
Choi and Gulati propose interesting solutions. First, they suggest that organizations,
such as law firms or industry associations (e.g. ISDA), could offer dynamic interpretation of
boilerplate terms, and that parties could expressly delegate this role in their agreements. The
authors argue that courts should support this delegation by showing deference to these “standard
least among contract law scholars, one of the best known collection of contract documents has
been produced by the American Institute of Architects.50 The AIA documents are offered on a
Microsoft Word platform and the AIA Contract Documents software permits the use to create,
share and manage the documents. Although many of these organizations are not-for-profit, they
tend to treat their contract products as proprietary: they allow only members to view and
download contracts or they charge a per-contract fee.51 The internet permits these associations to
share their contract products with a larger group of prospective parties. Internet technology has
encouraged the recent formation of more broadly constituted groups dedicated to setting
contracting standards.52
As noted earlier, for-profit organizations such as law firms underinvest in innovation

even where it is valuable, because they do not internalize all the benefits from a valuable new
term. The industry associations described in the previous paragraph are established as non-
profits but they are not charities, and they are funded by their for-profit members. Therefore,
while they derive no direct economic return from innovative effort, these associations need to
serve the interest of their members – but no broader social interest – in order to continue
receiving funding.53 For reasons described earlier, the groups may not overcome the resistence
setters”. Choi and Gulati, supra note –, at 1144, 1162-6 (“This allows for quick adjustments to
the meaning of a term that applies consistently across an industry”).
50
http://www.aia.org/docs_default.
51
The AIA site does this, as do http://www.aipn.org/modelagreements/ [and others].
52
E.g. the International Association for Contract and Commercial Management (IACCM)
declares that it “works with corporations, public and academic bodies to provide thought-
leadership and understanding of ‘best practice’ contracting and relationship standards... Its
membership is drawn from more than 1600 corporations and public sector organizations in over
90 countries and represents a community of contract and commercial managers, attorneys and
supply management executives and professionals.”
53
Cf. Kevin E. Davis, The Role of Nonprofits in the Production of Boilerplate, 104 Mich.
L. Rev. 1075, 1077 (2006) (“nonprofits sometimes take into account benefits and costs that are
not recognized by for-profit organizations” and “credibly assur[e] prospective users of their
[contracts’] value”).
among the members to significant change in their existing contracting practices. The
homogeneity of the drafting contributors in industry group further reduces the likelihood of
significant innovation. Moreover, once terms are adopted in the industry’s standard forms, there
is limited incentive for the non-profit drafting organization to update or improve them.54
The state – courts and legislatures – is also a producer of contract terms, in the form of
default or off-the-rack rules, and it serves a broader social interest than industry or bar
associations.55 The public good character of contract terms is invoked to justify the need for the
state to invest in their production. The development of default provisions frequently involves
collaboration among legal academics and practitioners, along with non-law experts from the
relevant industries. Default rules often have more breadth than the contract provisions drafted
by industry associations, and this may have advantages. When default terms can be used in
multiple industries and contexts, it becomes more likely that interests will be present on
competing sides of issues, so that bias may be less likely than in intra-industry contract
production.56
The public production of default terms, however, has come under considerable criticism
from academics. Governmental institutions lack the resources to design efficient default
provisions, other than in circumstances where a simple rule is available to address a wide range
54
As Kahan and Klausner put it, “a standard setting institution should consist of
individuals with experience with a wide range of firms and transactions that a standard term
could potentially implicate... [it] should continually review its standards in light of changes in
business practices and changes in business environment, and where appropriate should update its
standards.” Kahan and Klausner, Path Dependence, supra note --, at 764 (1996). See also Davis,
supra note –, at 1082 (ABA model contracts are not updated).
55
Michael Klausner noted this problem in the design of corporate law and proposed that
state legislatures offer menus of default rules that would provide multiple focal points for
coordination. Klausner, supra note –, at –.
56
See Paul G. Mahoney and Chris Sanchirico, General and Specific Legal Rules, 161 J.
Inst’l & Theor. Econ. 329 (2005).
of contexts.57 In addition, the incentives of their members may be no better than those of
nonprofit trade associations. Regulators and legislators may be captured by dominant interest
groups or by a self-aggrandizing drive of individual reformers to leave a mark on the law with a
vague and ineffectual provision.58 Even where state legislatures are thought to compete with
each other, as in the case of corporate law, their legislators may not internalize fully the benefits
of an efficient novel default rule and may therefore invest to little in the process.59
In sum, there are many types of organizational structures for collaboration, including
categories of for-profit firms, government bodies and a variety of non-profits. These
organizations help coordinate efforts to improve contracts and to encourage broad adoption of
new terms. I have briefly summarized in this section some of their respective strengths and
weaknesses. For the most part, these structures are hierarchical, closed, homogeneous and
sluggish. The past decade has witnessed significant experimentation with peer production in
other sectors, and this is transforming innovation in some knowledge-based industries,
particularly software production. It may be well suited to the production of contracts, for
reasons discussed below. It represents a natural next stage in the evolution of the processes of
contract innovation. The significant challenge is how to design it.
57
See Alan Schwartz and Robert E. Scott, Contract Theory and the Limits of Contract
Law, 113 Yale L.J.541, 598-601 (2003). These public drafting bodies “cannot hire neutral
economic or industry experts to help in rule creation, and generally rely on the part-time labor of
law professors and private attorneys”. Id., at 598.
58
Alan Schwartz and Robert E. Scott, The Political Economy of Private Legislatures, 143
U. Pa. L. Rev. 595 (1995).
59
See Gillian Hadfield and Eric Talley, On Public versus Private Provision of Corporate
Law, 22 J. Law, Econ. & Organ. 414 (2006). Hadfield and Talley suggest that this will be true
even when states rely on advice from private lawyers and academics in bar associations or law
reform commissions. Cf. Henry Hansmann, Corporation and Contract, 8 Am. L. & Econ. Rev.
1, 2 (2006)(“by adopting default rules of law rather than using explicit contracting, parties allow
for the constant readjustment of their relationship over the long period of time that it may last”).
III. Innovation and Peer-Production of Contract Design
A. Contract and Software Production

The production of computer software and legal contracts have much in common.60 Both
can be characterized as sets of instructions: directed to a computer in the case of software and to
a court in the case of a legal contract. Both are complex information products, and use
information as inputs and outputs. Software packages and contract designs are often tailored to
the specific needs of individual users. Moreover, production is dynamic in the sense that the
code or contract design is improved over time: by finding and fixing “bugs” in the software or
contract and by adapting to changes in the environment. The two products are nonrivalrous and
public goods – the use of software or contract technology by one person does not diminish its
value to another. In fact, as mentioned earlier, diffused use creates network benefits.
Information sharing and collaborative effort is socially desirable and important in both contexts.
Software developers and lawyers take measures to protect the returns from their investment in
contract language, despite weak legal protections. Software producers have the advantage of
keeping their language – software code – secret. Yet, this competitive drive is tempered by the
tradition of collegiality among both software developers and lawyers, which was described
earlier.
Open-source software production facilitates collaboration across a wide community of

otherwise unaffiliated developers, by revealing to all the code behind the product. Individual
programmers and software firms have contributed to very significant new open-source products:
Linux, Apache, Sendmail are three of the best known. In light of the similarities between
software and contract-design development described above, as well as the tradition of
collaboration within the legal profession, the process of contract innovation may be improved by
technology-assisted, peer production, beyond the level attained in the existing market-based and
hierarchical systems described earlier. The advantages include broader and more extensive
participation among contributors, coordination of decentralized effort, and enhanced adoption
60
See, generally, Bryan Niblett, ed., Computer Science and the Law (1980).
and diffusion of innovations. These benefits, as well as the prospects for success, are discussed
in the remainder of ths essay. The design attributes, or architecture, are critical to its prospects
and are central to this analysis. The discussion is divided into five topics: (A) modularity, (B)
governance (hierarchical vs decentralized), (C) participation screens (closed vs open networks),
(D) adoption and diffusion, and (E) participation incentives.
Readers may wish also to examine the Contracts Wiki prototype referred to in Part I to
see the application of the analysis that follows.61 The Contracts Wiki exploits modularity by
focusing on contract terms instead of entire contracts. It organizes material based on the type of
clause (indemnification, confidentiality, severability clauses), rather than contract type (loan
agreement, license, joint venture, etc). Although it would be possible to upload a very large and
diverse inventory of contract provisions, collaborative activity in the ContractsWiki is triggered
by the identification of “shocks” that are identified by participants as calling for revisions of, or
novel, contract terms: judicial opinions, legislative or regulatory enactments, and significant
changes in markets. Thus, the agenda for innovation is decentralized. Each participant selects
and focuses her attention on the shock or innovation that draws on her particular skill and
interest.
The Contracts Wiki combines a blog and an associated wiki. A blog entry identifies a
particular shock and invites a discussion of its implications through a thread of comments. The
initiator or any later contributor can propose contract language to address the shock. This
language may be in the form of one or more provisions forming a module that can be injected in
contracts at relatively low cost. The drafter of the contract provision(s) can choose either to
leave the language open to future editing (in the spirit of a true wiki) or to close it to future
editing. Future contributors can either edit open language or can introduce alternative
provisions. Any participant can comment on the shock or proposed language, whether she
contributes to the Wiki or not. In addition, participants can indicate their preference among
alternative contract terms by voting in a poll and by further elaborating their reasons in the space
61
Supra note –.
provided for comments. They may, for example, indicate whether they have or intend to use the
contract provision in a contract. Finally, by being a collection of innovative modules, the
Contracts Wiki leaves the integration of provisions into contracts to the ultimate user (and its
legal counsel). In this sense, it is different from Wikipedia, for example, which presents a single,
integrated text at any particular time (although a user can view the history of previous versions).
The following discussion outlines the advantages of this structure.
B. Modularity
Open source software development succeeds because it coordinates decentralized,
parallel and asynchronous work on different portions of complex code by parties who are
heterogeneous and geographically dispersed.62 Although internet connections allow these parties
to communicate with each other, the modularity of the code is what permits their individual work
product to be integrated into a given software project.63 Modules fit together through standard
interfaces. So, one party can make changes to any module with very little knowledge about the
other modules, and the improved version of the module can be integrated without requiring
adjustment to any of the others. Modularity also facilitates customization of complex code to the
particular needs of a given user: one module can be adapted to those needs without requiring
adjustment in any other.
Contracts are modular to the degree that their parts can be drafted and read, without
adjustment or reference to other parts of the contract.64 Contract provisions such as non-
62
See Benkler, supra note –, at 109-115 (peer production avoids the search and
transaction costs present in other labor markets).
63
See Carliss Y. Baldwin and Kim B. Clark, The Architecture of Participation: Does
Code Architecture Mitigate Free Riding in the Open Source Development Model?, 52, 29 Mgmt.
Sci. (2006)( modularity enhances the incentives for innovation and coordinates innovation by
avoiding duplicative efforts or freeriding).
64
Henry E. Smith, Modularity in Contracts: Boilerplate and Information Flow, 104 Mich.
L. Rev. 1175, 1180 (2006)(“adjustments can happen within modules without causing major
ripple effects”). “A boilerplate provision about governing law can be developed by those versed
in choice of law without their having to know in detail about where the boilerplate provision will
disclosure, indemnification, venue choice or noncompete clauses are good examples of modules.
Modularity lowers the cost of generating standardized contract documents and of adapting the
contracts to the conditions of individual transactions. Modularity is exploited in the automated
document production software packages that tailor by asking the client a series of questions
about the subject transaction.65 Modularity and technology might similarly be harnessed to
enhance innovation. In modular software production, it is important to set clear architecture and
interfaces governing how modules will connect and interact.66 Similarly, the benefits can be
enhanced in collaborative contract design if different types of contracts share the same
architecture, with similar interfaces, to allow modules to be combined across contracts. In
addition, modularity in contracts reduces the costs of reading and understanding them, which
thereby facilitates the adoption of a novel provision because it can be incorporated in documents
without disturbing the other provisions.
The Contracts Wiki invites parallel, autonomous, simultaneous, and continuous effort on
different modules, that can be subsequently integrated at low cost. The enterprise decentralizes
the agenda for innovation. Each participant chooses which modules she wishes to improve, and
may do so at any time and without regard to the work done by others. Contributions to
individual modules can be made at a very granular level;67 even small, occasional edits can be
aggregated to produce valuable innovation. Granularity invitest the participation of individuals
wind up.” Id. at 1188.

65
See supra text at note –.
66
Carliss Y. Baldwin and Kim B. Clark, Managing in an Age of Modularity, Harv. Bus.
Rev. 84 (1997).
67
Granularity means the size of the modules. “The granularity of the modules therefore
sets the smallest possible individual investment necessary to participate in the project.” Yochai
Benkler, The Wealth of Networks, How Social Production Transforms Markets and Freedom 101
(2006). Benkler then describes a project as being especially well suited to peer production if it is
“highly modular and diversely granular”. Id. at 103. This is the case with contract drafting
under the Contracts Wiki: each participant can choose to contribute a small word change or a
comment, or entire blog entries and contract provisions.
with relatively limited time or effort to spare. Often, but not always, individual lawyers have a
better idea of their expertise and comparative advantage than their clients or partners. Their
interaction with other Wiki participants gives them quick feedback as well. Moreover, in
choosing among shocks and contract terms, they collectively identify the opportunities for
innovation that are most likely to create value. In the current market for contract services,
clients dictate the allocation of resources and lawyers react. The Wachtell model under which
the poison pill was developed, described in Part II, is not common: transaction lawyers are more
often reactive than proactive in anticipating market demand. Individual clients often lack the
information to know where the gains from innovation lie and their instructions to their lawyers is
much less coordinated than the interaction in the peer production forum of the Wiki. For the
reasons stated in Part II, industry associations or bar initiatives may suffer from biases that can
be avoided in a broader network of peer innovation, because it engages broad participation and is
directed by the aggregate impact (or “wisdom”) of a large number of individual and
heterogeneous contributions.68
C. Governance: Hierarchical vs. Decentralized

The previous section described the benefits from contract modularity and decentralized
agenda that can be exploited in a peer production process. Diverse participants self-select to
various contract design tasks, in the manner and the degree they see fit. When different
participants work on different pieces of a modular contract, the pieces can be coordinated and fit
together through relatively simple interfaces.69 However, when parties are working on the same
module, coordination of their efforts is more complicated. In some open-source processes,
governance is hierarchical: a person or board has the authority to choose among alternative
patches. As noted earlier, however, hierarchy can undermine the benefits of heterogeneous
68
The recognition of this benefit has made significant inroads into popular press. See,
e.g., James Surowiecki, The Wisdom of Crowds ch 8,9 (2005).
69
Baldwin and Clark, supra note –, at 86. Baldwin and Clark call the architecture: what
modules will be part of the system, the nature of their interface (how they fit together and
interact), and the standards that will be used for testing and choosing among alternative versions
of a given module
participants. Alternative processes are more democratic and, for example, invite frequent and
substantial contributors to vote whether to incorporate a given module.
Though necessary to coordination under any form of governance, the decision to reject
the work product of a contributor may be costly. The creator of the rejected module or patch
may defect and launch an alternative project based on her own version and perhaps under her
leadership.70 In open-source software development, this is known as forking the code base.
Forking plays an important role in open source software production.71 It can create parallel
products that each serve better the needs of different groups of customers, or it can discipline and
correct for mistakes. Excessive forking, however, duplicates effort and dilutes the benefits of
integrating the expertise of numerous and diverse participants.
The Contracts Wiki preserves the benefit and avoids the cost of forking by deferring the
choice among competing versions of a module and delegating the decision to the adopters or
ultimate users. Participants have the collective wisdom to identify the modules in which
innovation yields the highest returns, and users are in best position test and choose among
alternative versions. The design of the Contracts Wiki and its associated blog provides
documentation from participants to inform the users. It also has a polling feature to aggregate
and reveal the relative popularity of alternative versions, and thereby replicates the benefit of
collaborative filtering of programs used by on-line retailers such as Netflix. Moreover, if the
users are also contributors, they are more likely to participate if they know they will be able to
choose which modules to adopt.72
70
The defector, of course, must draw participants to the new community and bears the
risk, in turn, of forking by these members.
71
“To explain the open source process is, in large part, to explain why that [forking] does
not happen very often and why it does when it does, as well as what that means for cooperation.”
Steven Weber, The Success of Open Source (2004) at 93. Weber discusses the benefits and costs
of forking, id. at 159-60, 170.
72
See infra, note –.
Those who fork, by choosing to propose an alternative provision rather than editing an
existing one, need not defect from the overall project (as they would do in open-source software
or Wikipedia); they can do so within the Contracts Wiki. The Contracts Wiki also gives
contributors who propose a contract provision the option of choosing to close their language to
future editing, thus “forcing” others to fork. This structure allows for simultaneous work to
proceed in parallel on alternative versions of any given module, thereby realizing some of the
advantages of forking.
I should mention in passing a related social benefit. The Contracts Wiki is not a
substitute for legal counsel; indeed, the fact that it produces the modules rather than entire
contracts will deter unsophisticated parties from simply downloading contract forms.73 Unlike
contract forms that are available for simple consumer transactions (such as residential leases,
etc.), the Contracts Wiki would not help individuals who cannot afford legal advice. However, it
can reduce the cost of transactional services to financially constrained small-business clients. If
we postulate that there is a difference between high- and low-priced transactional advice, and
that part of the difference is the provision of innovative and tailored contract design, then the
Contracts Wiki can make innovation available to the mid- and lower ends of the market. The
proliferation of forms and document assembly services described earlier has made standardized
terms available to smaller firms for the benefit of smaller clients. The Contracts Wiki provides a
more dynamic sharing vehicle that would allow this market to respond at low cost to shocks that
affect those standard documents.
D. Participation Screens: Open vs. Closed Network

Contract design calls for a range of skills and experience, including a variety of legal,
73
As such, it is different from the online lay document providers and therefore unlikely to
run afoul of restrictions against the unauthorized practice of law. See, e.g., Catherine J. Lanctot,
Scriveners in Cyberspace: Online Document Preparation and the Unauthorized Practice of Law,
30 Hofstra L. Rev. 811 (2002); Christina L. Underwood, Balancing Consumer Interests in a
Digital Age: A New Approach to Regulating the Unauthorized Practice of Law, 79 Wash. L.
Rev. 437 (2004).
social and economic expertise. These advantages are distributed among different types of
lawyers and professionals and, as noted in Part II, this fact has prompted clients to increasingly
disaggregate their transactional work. Peer production also draws on a wide range of
heterogeneous expertise, but it relies on self-selection rather than the instructions of each client’s
corporate counsel or manager. Participation in peer production may be either open or limited to
a defined network of contributors. An open process might attract the large and heterogeneous
crowd, particularly if it invites contributions at a granular level, across time and geographic
separation. Innovations may come from lawyers or nonlawyers. Among lawyers, an open
network may encourage greater collaboration in contract design between transaction and
litigation lawyers, bridging a curious lingering divide in the profession. It might also prompt
exchanges of approaches and ideas between common-law and civil-law professionals.
Moreover, modular solutions developed in one context may be valuable in others. To succeed as
an open source, however, a project needs a critical mass of heterogeneous and independent
participants – a challenge discussed in the next section.
Even with a large group of participants, open source faces the challenge of quality
control. Recently, Wikipedia has encountered this problem partly because of the activities of
vandals and partly because of misinformed lay participants. Their participation undermined the
quality of the text and over time, expert contributors became weary of editing erroneous
statements and debating content. Wikipedia’s administrative response was to engage in more
intrusive editing and to proliferate a body of regulations to deal with conflicts between
contributors. These developments were at least partly responsible for the accelerating decline in
contribution levels since the peak in 2007. In the first three months of 2009, Wikipedia is
reported to have lost 49,000 editors, compared to one-tenth of that number in the same period of
2008.74
As described in the previous section, the ContractsWiki users mitigate this problem by
74
Julia Angwin and Geoffrey A. Fowler, Volunteers Log Off as Wikipedia Ages, Wall St.
Journal Online, Technology, November 27, 2009.
choosing among alternative modules, with the benefit of the documented reaction of other
participants and the aggregated opinion of the polling feature. However, if the quality variance
is high and an effective screen is not in place, the low quality contributions may dilute the high
quality contributions and deter the participation of the more knowledgeable. Quality concerns
might prompt a decision to close the network in some way – e.g., to members of a bar
association or of an industry. If expertise is narrowly held and identifiable because, for example,
the problems in a given set of contracts are relatively idiosyncratic, then closed participation may
be preferable.75 Of course, multiple networks can coexist, some closed and some open, before
they duplicate efforts and compete for the same pool of expertise.
One might ask whether a firm or industry group may be better off running an internal
wiki and even to structure more tangible rewards for those who make valuable contributions.
Although an open wiki is unlikely to provide such financial rewards, the countervailing benefit is
that contract language will be reviewed by a larger number and, equally importantly, by a more
heterogeneous group of reviewers. Moreover, the incentive to correct and innovate may be
greater in the open design model: partners and, especially associates, may be reluctant to point
out significant errors to their colleagues in an internal wiki, particularly in a way that is visible to
other members in the firm. The value of dissent in peer production has been emphasized in other
contexts.76
E. Adoption and Diffusion

We described earlier a fundamental tension between standardization and innovation.
Standardization reduces production costs and increases network benefits to users, but it dampens
incentives to develop and adopt novel terms. We observed in Part II that some relief is offered
by collaborative organizations such as industry associations, regulators or legislatures. A well-
designed, more open collaborative process, supported by technology, can improve significantly
75
Gary P. Pisano and Roberto Verganti, Which Kind of Collaboration is Right for You?
Harv. Bus. Rev. 2 (2008)
76
E.g. Surowiecki, supra note –, at –.
on these efforts, by encouraging ongoing innovation while not undermining the benefits from an
existing standard. Two features of open source software development are instructive in this
regard. First, users understand that experimentation is ongoing.77 Second, while debugging
work proceeds on parts of experimental releases of code, the project periodically releases
“stable” versions of the software for users.78
The Contracts Wiki is a superior mechanism for producing standards dynamically and
promoting the efficient structure of networks. As emphasized earlier, the Contracts Wiki
delegates the choice among modules to the ultimate user who performs the integration into a
contract. Yet, individual modules might be standardized in the process. The Contracts Wiki is
sufficiently dynamic, however, so as to mimic the flavor of continuous experimentation of open
source software development. It invites alternative formulations in a laboratory environment.
Through the Wiki, a participant might post and test a novel term that is unlikely to be used in an
actual contract because of the cost of departing from a standard provision. There are several
ways in which the merits of each alternative can be assessed by the audience: by the ability to
comment, edit or offer alternatives, as well as by use of the polling feature. If, in the course of
such editing and comment, it is accepted by the community, adoption of the provision in
question will be less risky for the counterparty and third parties.
Through this process, peer production might encourage diffusion, and thereby
innovation, by accelerating the realization of network benefits. The Contracts Wiki will display
background information related to a successful innovation: the reasons for the change, the stages
in the development of the new term, any objections or concerns, the preferences of participants
77
“The expectations are different: In a real sense open source software is always in beta
[release]... a collective perception of the open source software process as ongoing research.”
Weber, supra note –, at 78.
78
Steven Webber uses Linux as an example, calling it “a clever organizational innovation
– parallel release structures for the code base. The stable code is tested, ‘proven’, and optimized
for users, while the experimental code tree tries new ideas and experiments.” Webber, supra
note –, at 236.
against alternatives, and also the individuals who were responsible for or endorsed it. This will
help to familiarize future parties with the term, as well as give it legitimacy, both in the eyes of
contract partners and the courts. Indeed, the content of comments and reactions are likely to
provide guides to judicial interpretation, consistent with Choi and Gulati’s proposal that judges
interpret contracts as statutes, and look at evidence of the intent of the first adopters (or standard
setters) of a boilerplate provision.79
In one respect, innovation in contract design raises a more serious challenge than
experimentation in software development. Revisions in software are easier to adopt by existing
users than improvements in contract design. Users can simply adopt the patch, or replace the old
release with the new version. Contracting parties cannot amend their existing contract as easily.
They must negotiate a modification and this may be difficult if their positions have changed
since the initial agreement. Therefore, lawyers may be conflicted in deciding whether to revise a
contract term they have used before, for fear of influencing adversely a court’s interpretation of
outstanding contracts that included the prior language. A lawyer, for example, may be loath to
suggest an improved provision when it might reveal a mistake or bias in one or more of her
earlier contracts. Once the Contracts Wiki becomes an established process, however, the lawyer
may not have the option to conceal a problem, because another participant might post an entry
on point. In these circumstances, the best strategy for that lawyer is to raise the issue, propose a
solution, but enter discussion that preserves the intended meaning of the prior term.
F. Participation Incentives
Economists have been intrigued by the success of the open source software movement in
attracting contributors, particularly the reasons why individuals contribute their time without any
direct financial compensation.80 Human motivation is complex, however, and commentators
79
Supra note –, at 1167-
80
E.g., Eric von Hippel and Georg von Krogh, Open Source Software and the “Private-
Collective” Innovation Model: Issues for Organization Science, 14 Org. Sci. 209 (2003); Josh
Lerner and Jean Tirole, Some Simple Economics of Open Source, 50 J. Ind. Econ. 197 (2002);
point to four categories of benefits from participation in peer production: (a) the inherent
pleasure of contributing and interacting with other contributors, (b) enhancement of professional
reputation or stature,81 (c) learning about the product through participation and (d) ensuring that
the product meets the contributor’s own needs as user.82
The transparency of contributions to the Contracts Wiki allows a participant to take credit
for her postings, edits or comments.83 The author of a blog entry, contract language, edit to a
contract provision, or a comment, can identify herself with the contribution. In addition,
participants self-register and the profile of each individual contains a link to the list and dates of
contributions. Indeed, an individual can hyperlink her professional web page to this list. This
may lead to future referrals, client contacts or employment. In contrast, when a contract is
drafted for a particular transaction in the current regime, the contribution of the counsel for each
party is sometimes not clear. And, if a party is represented by a firm, the contribution of a
particular associate or partner is not discretely apparent, at least not to observers outside the
firm.84 For some time, lawyers have been marketing their individual expertise by donating their
Josh Lerner and Jean Tirole, The Economics of Technology Sharing: Open Source and Beyond,
19 J. Econ. Persp. 99 (2005).
81
Eric S. Raymond, The Cathedral and The Bazaar (1999)
82
Eric von Hippel and Georg von Krogh, Open Source Software and the ‘Private
Collective’ Innovation Model: Issues for Organization Science, 14 Org. Sci. 209 (2003)
83
There is a collateral benefit to scholars who study the process of contract production. In
the software context, von Hippel and von Krogh write: “open source projects offer opportunities
for an unprecendented clear look into their detailed inner workings. By the very nature of the
way these projects operate, detailed and time-stamped logs of most interactions among
community members and of project outputs are automatically generated. These logs are publicly
available and open to the inspection of any researcher...” Eric von Hippel and Georg von Krogh,
Open Source Software and the “Private-Collective” Innovation Model: Issues for Organization
Science, 14 Org. Sci. 209, 212 (2003).
84
In the case of Apache open source software, see Il-Horn Hann, Jeff Roberts and Sandra
Slaughter, Understanding the Motivations, Participation, and Performance of Open Source
Software Developers: A Longitudinal Study of the Apache Projects, 52 J. Management Sci. 984
(2006).
time to conferences, legal education and law reform projects. This is consistent with the
professional culture of sharing and collaboration described earlier, and may well support the
open contract design initiative. In our exploratory discussions with potential contributors to a
Contracts Wiki, however, I was struck by the fact that several individuals expressed an interest
in posting content anonymously, which might reflect an altruistic or educational interest in the
project, or an aversion to the risk of being identified with a contribution that turns out to appear
weak. To encourage participation, therefore, we might permit the individual to reveal her
identity only after the community reacts favorably to her contribution.
As has been observed with open source software projects, working collaboratively on the
design of contract provisions provides a learning opportunity for individual participants. An
individual might be tempted to observe and free ride on the contributions of others. However, it
is often the case that one learns more by doing than watching, and by participating in the
discussion of the contribution of others. As noted below, software companies who now
encourage their employees to participate in open source projects ascribe to this approach.
Even if individual lawyers are inclined to participate, one might ask whether their
employers will allow them to. The Contracts Wiki will take some of their lawyers’ time and
may divert valuable knowledge and boilerplate from the firm’s files, perhaps even leading to loss
of business. For this reason, as well as others mentioned above, a closed network within a firm
might be more appealing. Yet, in this respect again, the lessons from open source software are
instructive. It is often reported that IBM, for example, realizes several types of benefits from the
participation of its employees in Linux, Apache, and other open source projects. First, the
software IBM uses and builds applications on, is subject to the scrutiny of many eyes during the
peer production, and errors are more likely to be caught earlier. Linux provided IBM a better
operating system for its server business. This is equally the case with contract development. If a
lawyer in a firm posts the provision, others can comment and correct errors on the Wiki. In this
sense, the Contracts Wiki is a broad laboratory in which novel terms can be tested before being
used in real transactions.
Clients are well served in many ways by an expansion of the collaborative efforts in
contract design. Some of these benefits have been mentioned earlier: the availability of novel
contract provisions, the lower error rate, the acceleration of network benefits. Perhaps the most
obvious advantage is that collaboration reduces the cost of contract production by avoiding the
duplication of effort, and thereby reduces transaction costs. Therefore, clients may encourage
their lawyers to contribute to open contract design and prefer to engage those law firms who are
more active contributors. The most enthusiastic endorsement of our efforts in the ContractsWiki
has come from the corporate counsel we consulted.
Software producers have notably restructured their business strategies to accommodate

the presence of open source production. IBM famously adapted to the Linux and Apache open
source projects, which it joined, by shifting its business to the provision of related services.85
Whereas open source has developed general platforms such as web servers and operating
systems, software companies have focused their efforts on the marketing of complementary
services. They tailor software to the particular needs of their clients by providing add-ons.
Transactional departments of law firms may undergo a similar adjustment. They already face
broader and increasingly intense competition in their marketing of standardized contracts,
particularly from offshore providers and nonlaw professionals. To the extent that the innovative
process moves to an open enterprise such as the Contracts Wiki, law firms may accelerate the
inevitable shift of their business strategy toward tailoring contracts and auxiliary services, in
parallel with the shift that has already taken place in the software industry.
The Contracts Wiki is more dynamic than the alternative collaborative mechanisms,
because it keys contract innovation by the shock to which it responds and allows for forking
within the enterprise. Open source software projects sometimes run out of steam. Part of the
motivation for participating in peer production is the opportunity to learn and to contribute to a
useful project. A lull in activity can therefore trigger a broader loss of interest and of
85
Benkler reports that revenues from these services grew to over $2 billion by 2003.
Benkler, supra note –, at 46.
momentum. If some participants lose interest and drop out, this can cascade into large scale
defection. As noted earlier, forking also can threaten a cascading exit, but it can be
accommodated within the Contracts Wiki. Indeed, the benefit in correcting mistakes or a
misguided path of collaboration can be exploited without endangering the enterprise as a whole.
Moreover, the Contracts Wiki stays fresh because it is constantly fed and motivated by the new
shocks identified by its participants. The Wiki shifts attention to where “the action” is, rather
than to any particular type of contract. If the current financial crisis has brought to the fore the
operation of material adverse change clauses, for example, this affects a range of contracts (such
as acquisitions or loan commitments). In other words, it is the module-type rather than contract
type that provides the organizational focus.
Finally, the Contracts Wiki might be administered by a non-profit and prominent

educational institution, with a large network of alumni and affiliates. User support for the open
source initiative is important to its success, whether it is provided officially by a promoter or
spontaneously by the field of users.86 Open source software projects have been more likely to
succeed when they are led by nonprofit instead of proprietary organizations. Lerner and Tirole
suggest that for-profit leaders cannot commit credibly to refrain from appropriating
developments in the open source project. The risk of similar appropriation of contract language
from the Contracts Wiki is quite small. Yet, one can imagine that a lawyer might be reluctant to
contribute to a wiki created by a competitor firm, because of a worry that credit might not be
fairly distributed. Moreover, one might be worried about that firm’s incentives to support the
wiki community over the longer term. A law school can commit more credibly to arbitrate any
disputes fairly, and without favoring one law firm or one industry over another. Law schools
devote considerable attention to maintaining strong reputation in the legal community in order to
attract excellent students and preserve goodwill among their alumni.
86
Karim R. Lakhani and Eric von Hippel, How Open Source Software Works: ‘Free’
User-to-User Assistance, 32 Research Policy 923 (2003).
IV. Conclusion
Open source software development, and peer production in general, have transformed
production processes in their respective, knowledge-based industries. That it might well become
a significant next step in the production and innovation of contracts is hardly a surprising
prediction. A more difficult question is how it should be structured, and this essay analyzes
some of the factors and desirable features. There are other important institutional questions.
Law firms are undergoing fundamental transformations in strategy and organization, particularly
in the area of transactional practice. Will lawyers and law firms buy into this mode of knowledge
production the way IBM joined Linux, or will they resist? What is the appropriate role of
academic institutions, government and courts in this type of initiative? These are questions
worthy of further investigation and ones that are likely to be addressed soon as the evolution of
transactional legal practice unfolds. An open collaborative project such as the Contracts Wiki
would also be of significant interest to scholars in contracts and contract law. It would yield
considerable data for research and scholarship on the relatively obscure process of contract
design, as well as the contract law governing the interpretation of various contract terms.87 This
interest is likely to persist as the focus shifts from shock to shock, thereby reinforcing the
assurance of continued vitality in the enterprise.
87
In the software context, von Hippel and von Krogh write: “open source projects offer
opportunities for an unprecendented clear look into their detailed inner workings. By the very
nature of the way these projects operate, detailed and time-stamped logs of most interactions
among community members and of project outputs are automatically generated. These logs are
publicly available and open to the inspection of any researcher...” Eric von Hippel and Georg
von Krogh, Open Source Software and the “Private-Collective” Innovation Model: Issues for
Organization Science, 14 Org. Sci. 209, 212 (2003).

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COLLABORATIVE CONTRACT INNOVATION

This draft: April 30, 2010

COLLABORATIVE CONTRACT INNOVATION

The standardization and commoditization of contract documents is transforming the

Peer production has realized significant successes in knowledge-based industries,

underexploited traditions of sharing work product.

II. Contract Production and Innovation

B. Environmental Drivers of Contract Innovation

Second, changes in regulation provide opportunities for innovation. Nobel Laureate

C. Impediments to Contract Innovation

The contracts contemplated in the foregoing discussion of financial innovation tend to be

The underproduction of contract terms and underinvestment in innovation may result

D. Law Firm Structure and Strategies

As a consequence of these trends, corporate law firms currently have substantial

E. Collaborative Tradition in the Legal Profession

Beyond sharing, lawyers collaborate explicitly across firms in the production of

As noted earlier, for-profit organizations such as law firms underinvest in innovation

III. Innovation and Peer-Production of Contract Design

A. Contract and Software Production

Open-source software production facilitates collaboration across a wide community of

wind up.” Id. at 1188.

C. Governance: Hierarchical vs. Decentralized

D. Participation Screens: Open vs. Closed Network

E. Adoption and Diffusion

Software producers have notably restructured their business strategies to accommodate

Finally, the Contracts Wiki might be administered by a non-profit and prominent

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