Comments on: Simplifying Contracts

By: Eric Goldman

Eric Goldman — Wed, 14 Feb 2007 21:26:06 +0000

I agree with Mike F., but I also think this issue is linked to your recent post on termination for convenience clauses. As a vendor, give me a few key paragraphs (termination for convenience, liability limits) and I can dispense with lots of other provisions without any loss of clarity or certainty. Viewed from this perspective, many contracts are horribly, unnecessarily bloated, resulting in unnecessary transaction costs (and lost deals). Eric.

By: Michael Fleming

Michael Fleming — Tue, 13 Feb 2007 16:30:50 +0000

I think Mike’s comment has much merit. That said, my thinking is that we’ve still not done enough to prove that the cost of obtaining certainty does not outweigh the costs imposed on the client’s overall business goals. Even if one contract out of a hundred goes really bad, does the litigation from that one kill all of the benefits obtained from the other 99? If we’d sought certainty in all of our contracts, would we have ended up with only 50 deals instead of 100? If we’d gotten 50 incremental more deals by using small contracts, are the profits from the extra deals going to outweigh the litigation costs from the one bad deal? In all, why is retaining risk necessarily a bad thing for every one of our clients?

(Clients are just as guilty as the lawyers in many aspects of the above — I’m not blind. I toss the questions out for debate though…)

By: mike

mike — Tue, 13 Feb 2007 13:47:21 +0000

It’d be interesting to see the contracts. Whenever I see “contract simplification” arguments made, I can’t help but think, “what they’ve done is not made it simpler, but rather difficult to know anything with any certainty.” While they’re certainly right that “certainty” in some things is “illusory,” how often is that really the case? But, really, people don’t draft contracts because they like to draft contracts. People draft contracts to avoid 1) mutual assured destruction of the relationship (contra the foundational principle of the simplified approach) and 2) really, really expensive time spent arguing the details in litigation.

In any event, this contract simplification scheme seems to essentially be a “master” + “statement of work” arrangement. The master agreement, rather than being negotiated, is derived from 1) common law 2) standard contract rules (UCC, various treaties, etc) 3) course of dealing 4) good faith. To me, that’s a litigator’s dream (or is it nightmare) come true.

One last point. It’s been my experience that where there is already a good working relationship, contracts don’t matter much at all anyway. The problem is getting to that point in the first place (and contracts are usually necessary at that point). Those previous contracts then become the foundation for the course of dealing and essentially foster the scheme they describe. If that’s there point then nothing new.