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Contract Language: What Is Good Practice?

July 1, 2010

During one of IACCM‘s ‘Ask The Expert’ calls, a listener asked the following question.

“My experience shows that it is very important to have “standard contracts” without overly turgid, legalistic language, otherwise the contract will be ignored after signature by everyone except the contract manager. Do you agree?”

In my opinion, there is a growing understanding that good contracts are clear and easily understood contracts – they can be used as operational guides. Of course, many lawyers argue against this because they are afraid of confusion in the event of litigation – they see it as ‘risky’ to present the courts with documents that are not full of conventional legal terminology. Of course, this argument assumes some likelihood of a dispute that will end up in litigation (itself in fact quite unlikely). But this view also fails to appreciate that obscure language increases the risk of failure. If no one understands what they are meant to be doing, a dispute is more likely. If someone writes a plain language interpretation of the contract, that in turn becomes risky, since it may differ from the contract … and if it doesn’t differ, why wasn’t it written that way in the first place?

A compromise position followed by many organizations is that the ‘boilerplate’ is often the preserve of the lawyers and they turn a blind eye to ‘supplements’, ‘attachments’, ‘service level agreements’ etc. But this just adds to the confusion:

  1. Many business people then think that ‘the contract’ doesn’t include these attachments etc. So they see no need to be disciplined in their creation and management.
  2. Because they are drafted separately, these important documents may in fact (intentionally or unintentionally) override or conflict with key aspects or terms in the boilerplate.
  3. When it comes to ensuring clarity over the goals, responsibilities, performance criteria and change management, the attachments, supplements and SLAs are the important documents; these typically merit far more attention than the boilerplate.

As many have observed over the years, ‘craft unions’ develop secret codes and language which may initially have been about creating efficiency in their communications, but over time represent a restrictive practice. For many, the feeling is that the legal and contracts profession has hijacked what should be a business document and turned it into slef-serving mumbo-jumbo.

What are your thoughts and experiences? What is ‘good practice’ when it comes to the wording of a contract?

5 Comments
  1. “…. obscure language increases the risk of failure. If no one understands what they are meant to be doing, a dispute is more likely.”

    This statement captures my experience.

    Although I agree that it is rare agreements end up in litigation, few lawyers will risk being the ONE! 😉 Hence they throw it all in to be safe. Nonetheless, simplifying agreements is an inevitable evolution in response to unbearable complexity. If lawyers do not have the collectively desire, time or ability to simplify, lawyer pioneers and non-lawyer entrepreneurs will build businesses simplifying law, contracts and legal process. Another missed opportunity?

    Now if we could only get judges involved. 😉

    Jorge
    Founder of The Online Bar
    http://follr.me/Jorge

  2. Jorge, you are of course completely right – it is this fear of being caught by the exception. This demands that we start to view legal risks in a similar way to the approach in areas like insuarance – thinking about portfolios of risk and related probability. That means we must start to understand the economic value of risk-taking and we can then relate this to the relative cost of a periodic ‘claim’ or failure. But that demands a very different approach by the legal profession; it means pooling experiences rather than operating on the basis of individual, case by case judgment.

    As you say, an area of real opportunity.

    And as for the judges, I guess many of them today take the view that commercial disputes should not even reach the courts; they should be settled through arbitration or mediation – another argument for greater clarity ….

  3. Agree entirely with the importance of contracts using simple language that can be easily understood by people actually preparing & administering it. This is a key characteristic of NEC contracts – have a look at http://www.neccontract.com. The ojectives in their drafting were that NEC contracts should be clear, simple, flexible and act as a stimulus to good management. Can you imagine contracts steeped in sensible project management procedures, aimed at dispute avoidance not dispute resolution?! They are already in place and have been successfully used for a while now.

    Rob
    NEC Users’ Group Secretary

    • Robert, thanks very much for this comment. I am of course aware of the NEC contracts, though I suspect many of our memebrs are not. We should talk about interviewing you on this topic and the use of the NEC model.
      Tim

  4. Great article. I’m a trainer on international purchasing topics and I spend a few minutes in my seminars on keeping contracts simple. I have a post on the topic over on Sourcing Innovation that you will probably find useful. It’s at

    http://blog.sourcinginnovation.com/2009/08/27/its-good-to-have-an-entire-state-on-my-side.aspx

    There’s a dead link in the article. The new link to the SEC’s Plain English Handbook is

    http://sec.gov/pdf/handbook.pdf

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