What makes contracts difficult to read or comprehend?

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Business Finance

Question Description

What makes contracts difficult to read or comprehend? Identify and then explain two most important elements of a contract that every manager should know about. Provide examples for each.

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Explanation & Answer

There’s sometimes no good excuse.  In my experience, it’s uncommon for lawyers to set out to create a confusing document, but a combination of ingrained habits, the jargon that builds up between members of any profession, and laziness leads to unreadable contracts in circumstances where they should be readable.

Lawyers rarely draft contracts from scratch.  If the lawyer has already done a similar contract (or someone else has), it’s just inefficient to start with a blank page.  It takes less billable time to modify an old contract that’s close to what you want.

In addition, it’s easier and feels safer to use a sprawling, wordy provision that covers everything conceivable than to think carefully about a sparsely worded one.  Are you really covered if you say “liability”?  How could it hurt to add “any direct or indirect indebtedness, liability, or other obligation, whether fixed, unfixed, secured or unsecured, accrued, absolute, contingent or otherwise”?

Once someone has drafted a sprawling provision that covers everything, it tends to be copied from document to document and changed only to add a more words . . . just to be safe.

So even in a situation where a very simple document would be appropriate, you often find lawyers producing long and wordy ones.  Sometimes that’s because the lawyer lacks the skill and imagination to produce a short effective document.  Usually, it’s because the lawyer doesn’t think the client wants to pay for one.

So short and readable contracts are possible in some circumstances, but they might cost you more than long and convoluted ones.  To give an example, There was a client that was “rolling up” a lot of small businesses into a larger chain.  On the first few deals, the lawyer used my standard, 50-page, everything-but-the-kitchen-sink asset purchase agreement.  That seemed efficient because I already had it.  Each deal required only a few modifications.  The client and I quickly realized that was false economy.  The sellers complained.  What’s worse, they didn’t understand the contract, even if they agreed to sign it (if they had lawyers at all, they usually couldn’t afford good ones).  That was bad for my client, since one of the main purposes of an asset purchase agreement is to encourage the seller to disclose facts the buyer needs to understand and price the deal.  So the client paid me to develop a short form.  A lot of thought went into simplifying.  The lawyer had to think through every provision, looking for things that could be safely eliminated or reworded.  In the end, I got the document below 20 pages.  Most sellers could understand it without difficulty.  The sellers were happier and the client got better disclosure.  It cost money, but it seems to me (and seemed to the client) that it was worth the price.

So if you think you really need a simple contract, ask for one.  If you’ve got a frustratingly complicated form contract that you use all the time, ask your lawyer if it can be simplified.  But be prepared to pay for simplicity.  Remember, lawyers charge by the hour, not the word.

Contracts Are Closer to Computer Programs than Novels

You see words on paper or a screen.  They seem to be English words.  You know how to read English.  But you can’t make head or tails of it.  You naturally conclude that it’s the product of either bad writing or deliberate obfuscation.

This is the thinking behind a lot of complaints about legal documents.  As discussed above, it’s sometimes justified.  Often, however, it misses an important point:  Contracts aren’t novels.  They’re much more like computer programs.

A contract is equivalent to a computer program, designed to be read and executed by human beings.  The idea is to combine a series of promises to determine the future actions of the parties under contingent circumstances.  If the contract works right, a given set of inputs will produce a predictable set of outputs.  If it doesn’t work right or if the inputs were not anticipated, you may end up with The Blue Screen of Death (otherwise known as endless litigation).

This function of contracts goes a long way toward explaining why they are hard to read if you aren’t used to reading them.  You would not expect the source code for a complicated program to be something that you can sit down and ready quickly and easily.  You should have similar expectations for contracts.  If the deal is complex and involves a lot of contingencies, you should expect a dense, complex contract.

There’s one crucial difference between a computer program and a contract:  A contract has to be designed to withstand the parties’ deliberate attempts to make it crash.  As Homer Simpson put it, “Weaseling out of things is important to learn.  It’s what separates us from the animals . . . except the weasel.”  As economists put it, people are opportunistic.  If a contract sets a rule and the rule starts to work against one of the parties, they often don’t just follow it.  They try to reinterpret it.  They look for loopholes in the language to turn the rule on its head.  They suddenly remember what the contract was “really supposed to mean” when it was negotiated (always, miraculously, exactly what they want it to say now).  They reinterpret the facts or try to obfuscate them.

Businesspeople negotiating contracts often aren’t concentrating on the possibility of future weaseling.  They’re focused on the business terms of the deal.  But lawyers are paid to worry, and weaseling is one of their biggest concerns.  As they try to protect against it, they aim for maximum precision.  Simplicity and readability properly take a back seat.  A contract has to be functional before anything else.

Simple, common terms, for instance, tend to have somewhat ambiguous meanings.  That’s not a problem in normal conversation.  Everyone is trying to understand the speaker and will usually focus on the intended meaning and ignore the other possibilities.  A good lawyer can’t assume a helpful reader when drafting a contract.  To the contrary, the lawyer has to assume a hostile reader who is trying hard to misunderstand.  So lawyers define common terms in wordy ways, hoping to prevent people from exploiting the ambiguities (see the definition of “liability” above).

There are ways of mitigating necessary complexity.  One of the most common is to put long-winded defined terms somewhere in the back of the document, where they don’t get in the way.  So long as human nature remains unchanged, however, there’s only so much you can do without taking real risks.

Nfuyrl_E (1174)
University of Virginia

Really great stuff, couldn't ask for more.