From Risk Mitigation to Value Creation: Preventive and Proactive Law - Differences and Similarities
preventive & proactive law Feb 28, 2024
In a setting where clients seek to avoid bearing long litigation expenses, Preventive and Proactive law emerge as key approaches for the transformation of traditional adversarial lawyering. Both offer practical strategies that help lawyers and legal professionals at large better meet clients' needs and maximize business outcomes without diminishing risk management.
While their objective of preventive and proactive law revolves around minimizing legal issues and maximizing business results, the paths they tread differ significantly in focus, strategy, and outcomes. Both approaches have been instrumental in changing the perception that contracts and other legal documents are meant to be used reactively only after problems occur. These methodologies can play a crucial role in addressing "the paradox of reactive legal service” that was coined by Professor Richard Susskind in his influential book "The Future of Law," initially published in 1996.
In this article, I will delve into the differences and complementaries of Preventive law and Proactive law, explaining how these approaches not only help shape a new modern legal practice but also serve as catalysts for business success in a modern, complex and fast-paced economy.
1. Preventive Law: Mitigating Risks and De-Escalating Disputes
Preventive law, as the name suggests, revolves around anticipating and mitigating potential legal issues before they escalate. Preventive law traditionally focuses on risk management, compliance, and the avoidance of legal issues, aiming to create contracts and legal structures that minimize the likelihood of disputes. Preventive law is more widely known and practiced in North America, particularly in the highly litigious American context. The emphasis is on preventing legal issues before they arise or at least de-escalate disputes when they occur to avoid costly litigations. This has the advantage of minimizing costs for parties but also help give more agency to parties in the way they want to resolve their disputes.
In this context, Dr. Julie Macfarlane, a distinguished university professor (Emerita) at the University of Windsor in Canada calls for a reevaluation of the role of lawyers. In the first edition of her famous Book "The New Lawyer: How Settlement Is Transforming the Practice of Law", she pointed that the traditional "client warrior" image of lawyers is becoming outdated and added that the new lawyer's skills extend beyond court battles to include negotiation, mediation, and restorative justice initiatives.
According to scholars like Helena Happio in Finland, Petra Hietanen-Kunwald in Sweden, and Gerlinde Berger-Walliser in the USA, there are key elements that define preventive law:
- Managing conflicts, avoiding litigation and de-escalating disputes: Preventive law places a strong emphasis on managing conflicts and addressing problems before they become legal disputes. Lawyers adopting this approach work proactively to identify potential sources of conflict and implement measures to mitigate them. The goal is to maintain harmony and prevent disputes from arising in the first place. Lawyers employing preventive strategies aim to create legal structures and agreements that minimize the likelihood of disputes and legal proceedings. This approach seeks to primarily resolve issues outside the courtroom to save time, costs, and maintain relationships.
- Handling problems and managing risks: Preventive law involves a systematic analysis of potential risks associated with legal matters. Lawyers work to identify, assess, and manage risks, implementing preventive measures to ensure compliance and reduce the likelihood of legal challenges. The focus is on avoiding pitfalls and complications down the road.
- Professional legal care: In preventive law, legal professionals act as caretakers, ensuring that their clients' legal matters are handled with precision and care. This involves providing guidance on compliance, risk mitigation, and navigating potential legal challenges. The focus is on offering comprehensive legal care to prevent issues from arising.
Maintaining the relationship and cost-effectiveness are key considerations in preventive law. By addressing potential issues in their early stages, lawyers can save clients from costly legal battles. This approach aims to minimize financial losses and maintain the relationship by proactively addressing legal risks. In contrast, proactive law shifts the paradigm by emphasizing anticipation, collaboration, and the active pursuit of success. That's exactly what I will be covering in the next section.
2. Proactive Law: Balancing Risk and Reward to Foster Business Success
Proactive law takes a more dynamic and forward-thinking approach, shifting the focus from mere risk avoidance to actively fostering success and achieving stakeholders' goals. As outlined by professor Professor Haapio, proactive law and contract design pioneer based in Finland, this approach aims to eliminate the causes of problems, create sustainable relationships, and add value to all parties involved.
Proactive law is a pioneering approach to the practice of the law that originates from Europe that truly envisions legal instruments, particularly contracts, as dynamic tools for accomplishing business goals. It goes beyond the traditional legal approach by not just "de-mining"contracts from all possible risks but also fostering a shared understanding and a strong alignment on business outcomes.
Professor Helena Haapio has been championing this proactive law approach for decades, advocating for the adoption of this inherently business-oriented approach to practicing the law. According to Professor Haapio, there are key distinctive features of proactive law:
- Balancing risk and reward in achieving desired outcomes: Unlike a purely risk-averse approach, proactive law seeks to strike a balance between risk and reward. Lawyers employing proactive strategies work towards achieving desired outcomes and success for their clients. The focus is on actively contributing to the success of the business deal rather than merely avoiding legal issues. Proactive law is inherently value-driven. This often involves collaboration between lawyers and clients to align legal strategies with broader business objectives.
- Eliminating causes of problems: Proactive law seeks to go beyond surface-level solutions by identifying and eliminating the root causes of potential legal issues. This involves creating a foundation where conflicts are less likely to arise and maximizing clarity to foster sustainable relationships.
- Team approach with a view to foster legal self-care: Proactive law involves a collaborative and team-oriented approach. Lawyers work alongside clients, supporting them in understanding legal implications and facilitating legal self-care. This shared care model empowers clients to take an active role in legal decision-making, fostering a cooperative and informed relationship.
Proactive law, as defined here, originated within corporate settings, where business managers have the lead. This approach evolved in response to the needs of large enterprises aiming to improve their cross-border contracting processes by applying quality and risk management principles. The focus was primarily on business considerations and quality enhancement, rather than being solely centered on legal matters. To illustrate this concept in action, let's explore a practical example in the next section, and discuss the application of proactive law in contracts!
3. Proactive Law for Contracts: From Clause Mining to Contract Designing
To illustrate the impact of proactive law, there is no better field than contracts. The reason why contract is a good example for the illustration of proactive law is that research already suggest a misalignment in the focus of negotiators, particularly lawyers, during contract negotiations.
Here's what the research say about the way contracts are currently negotiated: While common causes of claims or disputes relate to business terms such as scope and goals, specifications and prices, delivery, and service levels, negotiators tend to prioritize legal terms like limitation of liability, indemnification, and termination. (World Commerce and Contracting, Most Negotiated Terms , 2018 and 2022). This discrepancy indicates a potential oversight in addressing the root causes of problems. Rather than concentrating on terms that directly impact the execution of contracts and often lead to disputes, negotiators seem to be more concerned with minimizing legal consequences when issues arise, highlighting a need for a more strategic and holistic negotiation approach.
In contrast to traditional contracts practices, which often focus on reactive measures and legal safeguard clauses, proactive contracts emphasize the need to design the agreement in a way that fosters the achievement of desired outcomes, eliminate root cause problems and ensure self legal care. To achieve that, the contract is designed as a roadmap to drive performance and serves as dynamic management tool for all stakeholders involved - not just legal. This proactive approach helps foster good relationships by creating alignment on desired outcomes.
That's where the concept of contracts and legal design kicks in.
As outlined by Professor Helena Haapio, the role of a proactive lawyer takes on the multifaceted role of a "Designer" – by being both a solution-creator and a problem-solver. This involves acting as a business partner, a legal architect, a trusted counselor, a mentor, and a coach; instead of a contract drafter and litigious lawyers when problem arises. The proactive lawyer collaborates with clients to help them achieve their objectives and ensure success. Rather than waiting for legal issues to arise, the lawyer proactively aids managers in running their businesses more efficiently by offering clear advice, introducing innovative solutions, and implementing systems and tools to maximize opportunities while minimizing costs and risks. The proactive lawyer also plays a crucial role in imparting legal knowledge to clients, facilitating legal self-care, and acting as a mentor to support their understanding and management of legal challenges.
Let's consider an example: A traditional contract usually includes extensive legal jargon and clauses centered around litigation in case of disputes, or indemnification for liability. In a proactive legal design approach, the contract would focus on capturing the essence of the business deal, facilitating a shared understanding, and building a framework that guides successful collaboration. Clear language and visual elements like timelines or flowcharts objectives become integral to the contract's design, minimizing the risk of misunderstandings and potential disputes, while maximizing the business desired outcomes.
In essence, the proactive lawyer becomes a legal designer whose role goes way beyond traditional legal roles by proactively ensure positive outcomes. By implementing tools and frameworks, using visuals and clear language and actively contributing to the overall success of the client's business, not just prevention of conflicts or de-escalation of disputes. This is the paradigm shift, which I'm going to discuss more in depth in the following section!
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