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Contract Simplification

September 5, 2010

There is a vigorous debate underway on one of the IACCM LinkedIn sites. It is on the topic of the word ‘effort’ as used in contracts and the effects of terms such as ‘reasonable’ or ‘best’.

With over thirty comments now made, it is clearly a debate that will progress for quite some time. Those commenting are rightly highlighting how the interpretation or significance of such terms varies under different legal systems …..

It is debates of this type that raise questions in many minds about the entire contracting process. To the independent observer, such discussions seem archaic and irrelevant, just another way to waste time in the deal-making process. But more than that, it seems to represent some level of underlying dishonesty in the way that contracts are formed and managed. And in a sense that is true. As highlighted in a recent blog (and exchanges with Jon Hansen on Procurement Insights), the contract is often an exercise in pinning down the truth. For the buyer, they want to maximize the extent of the commitment because they fear the supplier will start wriggling the moment the contract is signed. For the supplier, the aim is to avoid too firm a commitment in case they find it too hard or too costly to perform.

I understand and respect the great history of the law and how individual national approaches have evolved over many centuries. I understand that they are rooted in cherished cultural traditions and that each practitioner genuinely believes that their system of law is best. But a key purpose of ‘law’ is to create clarity in human interactions; it is to assist in the definition and understanding of outcomes that can be seen to be fair and equitable. The law is fundamental to trust. Therefore, obscurity and stealth should not be core to this process.

In today’s global business environment, there are so many areas for potential misunderstanding and few potential mechanisms for their avoidance. That is the role that ‘the contract’ and contracting experts should be attempting to fill. To do so, they must step outside their traditional national methods and instruments and be open to the use of alternatives – or indeed develop and promote  those alternatives.

That is why we must become far more open to the use of clear and precise language (not words that depend upon a lawyer from within a specific system debating endlessly with a lawyer from another system). We must think about better defining the methods for governance and accountability. We must look more at arbitration and mediation as the source for claim and dispute resolution.

The contracts and commercial community has a very real, professional interest in the success of world trade. We should be keenly pursuing new ways to ensure its health, rather than getting lost in debates about the specific meaning of individual words within the various legal systems of the world. That does not make us important; eventually, it will simply make us irrelevant.

  1. I totally agree and that was really well put. The hard part is convincing other lawyers, especially at large law firms, that this is a good idea.

    • Thanks Jeremy. I guess as with all change the secret is to find ways to demonstrate the new opportunity, rather than making this sound too threatening!

  2. Lovely statement and you pinned the issue down when you said “the contract is often an exercise in pinning down the truth.” Unfortunately, the vast majority of lawyers simply don’t think like that. One post-grad lecturer hammered home to us – ‘don’t ever go to court looking for the truth’. The root of the issue is that law (anglo-saxon tradition) is adversarial whereas business IS about the truth. A lawyer drafts a contract intent on ‘covering the field’ but a business person will ‘architect’ a contract based on their operating model.

    To me, though, legal interpretations are only necessary when the parties take different positions on the understanding of a single statement. Leaving aside discovery, there is a very real issue when 2 experts, steeped in the deal, have developed an understanding and body of knowledge around a single deal which is peculiar and exceptional. It is my understanding that legal precendents are used as fall-back positions where nobody can understand the underlying meaning of aspects in a deal. I think the onus, therefore, is for the “deal archtects” to be explicit and precise in their meanings so that the mortals who tread thereafter don’t spoil their art.

    • Rory, thanks – great observation and ties well to the issues frequently identified around lack of clarity in requirements and governance. If these were clearer, perhaps disputes would be less regular.

      However, is this lack of clarity because the contract developers are pulled in too late, or becaue they focus ont he wrong things, or is it because the deal ‘visionaries’ prefer to leave things a bit murky so that they can’t be blamed when things go wrong?

  3. Scott permalink

    I agree that simplification is a worthy goal but anyone trained in law knows that once a dispute gets to court the meaning of individual words is critical. This is especially true if a word has a technical legal meaning as well as an ‘ordinary’ meaning. These meanings can vary across jurisidictions and of course countries.

    Not relating to contracts but the first one that springs to my mind is unrepeatable in this forum! In the USA the word means “really angry” but in the UK and Australia the same word means “heavily intoxicated with alcohol”. My simple point is that you fail to consider the alternate meanings of words at your own peril. The attempt to simplify the contract may lead to the depths of ambiguity!

    This is the natural tension between simplifying legal relations and the technical aspects of the national legal system. This is where the interface between the legal professional and the Contracts Manager should become tighter. The Contracts Manager should be the expert “where the rubber meets the road” while the legal professional should be looking out for potholes!

    • Scott, thanks for your comment. I think your observations – and your example = perfectly illustrate the point. This is why contract design needs to be increasingly based on an assumption that we need to stay out of the court system because it simply struggles to adjust to internatinal needs. My whole point is that the negative consequences of having to spend hours debating individual words and their possible consequence is what discredits our entire profession, lawyers and contract managers. If we do not come up with a better way, then others will. It is time to be inventive, not fatalistic!

  4. Florante C. Abaya permalink

    I totally agree with your observation and I think, there are various obvious reasons as to why these ambiguous provisions are mandated.

    First, it is either the drafter is not fully confident or an authority on the subject matter and devising such ambiguity provided him a false leverage, in case of dispute. On the other hand, some contract drafters (most especially lawyers) are intentionally doing it in order to create problems, which may turn out later as an opportunity for them to show off their legal skills or job sustainability by resolving the ambiguity.

    Such practice can only be eliminated by self-regulation among practitioners to keep things as simple as they can and uphold the basic ethical values that they are destined to provide.

  5. Durga permalink

    Probably simplification of contract is essential. These days not only lawyer but also a lot of semi-legal or people from other disciplines heavily need to play with contract. Now many companies focusing on making their employees contractually aware. If we want contractually aware community, its simplification is first step.

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  1. International Contracting: An End To Common Law? « Commitment Matters

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