Rethinking Your Templates Instead of Just Redrafting Them

In this post I critique Shaw Burton’s article in the Harvard Business Review in terms of the guidance it offers on making your contracts clearer. But it also offers a useful reminder of the benefits of overhauling your templates top to bottom.

Usually when I work on a template for a consulting client, I start by redrafting their version of the template. But that can result in two problems. First, it’s rare that a template’s problems are limited to how it says what it says. Instead, it’s usual for templates to include both dysfunctional language and dysfunctional content. Redrafting dysfunctional content can be a waste.

And second, when I give a consulting client my version of their template, I’m asking them to accept a lot of change. That’s something I discuss in this post.

A different approach would be along the lines of that adopted by Shawn and his team at GE Aviation: You revisit the basics of the transactions in question, perhaps using the existing template as a starting point but nothing more. You consult all relevant constituencies. You build a bullet-point framework, then you gradually flesh it out. That way, you’re not simply perpetuating whatever’s in the current template. And because change is accomplished step by step, it’s not as alarming as change that’s dumped on you all at once.

But a complete overhaul takes time, and it takes your personnel away from other projects. Shawn describes his initiative as “a three-plus-year effort.” That might not be exceptional: a seminar client recently told me that they spent 18 months redoing one of their templates. I suspect that such projects take a long time because those involved aren’t contract-drafting specialists (see this post for what I mean by that) and because they’re juggling other responsibilities.

Put me in charge of such a project and I’d get it done in perhaps a quarter of the time.

Optimal Contract Language Requires More Than Enthusiasm: My Critique of Shawn Burton’s Article in the Harvard Business Review

Just in time for Christmas, the January–February 2018 issue of the Harvard Business Review offers us a lump of coal in the form of an article entitled The Case for Plain-Language Contracts (here). It’s by Shawn Burton, general counsel of GE Aviation’s Business & General Aviation and Integrated Systems businesses. It describes “a three-plus-year effort to promote plain-language contracts at GE Aviation’s digital-services business.” That effort started in 2014.

Flawed Approach

The premise is unobjectionable: “For the most part, the contracts used in business are long, poorly structured, and full of unnecessary and incomprehensible language.” Sure, using clearer language in contracts allows you to save time and money, be more competitive, and avoid assuming unnecessary risk. And no doubt overhauling the contracts used by GE Aviation’s digital-services business yielded many benefits. But as a guide to how to make business contracts clearer, this article ill-informed.

First, the article is unrealistic in the standard it sets: “If a high schooler can’t understand the entire contract, it ain’t good enough.” Contracts are necessarily as complex as the transactions they express, and plenty of transactions are complicated. Perhaps the transactions that GE Aviation’s digital-services business enters into could indeed be understood by a high-school student, but it’s misleading to suggest that that standard could be applied broadly. I discuss that in this recent blog post. Furthermore, it appears that the resulting template clearly flunked the high-school-student test in at least one respect, as I discuss below.

Second, the article lumps risk assessment and relevance in with clarity. The starting point for Shawn’s initiative was seven templates. The average length was 25 pages; the longest was 54 pages. Boiling them down to one five-page contract must have involved cutting provisions wholesale. That goes beyond saying stuff clearly.

And third, Shawn’s approach is that of someone who hasn’t been immersed in commercial contracts. (Until he became GC in 2013, he worked in labor and employment.) The article mentions by way of background plain-language initiatives that have nothing to do with contracts. And it appears from this GE report that for guidance, Shawn consulted authorities on general legal writing, presumably works such as Richard Wydick’s Plain English for Lawyers:

Burton [then general counsel of Digital Solutions] harked back to his law school days when he studied Plain Language, a way to condense the written word to the clear basics. He dusted off his textbooks and, with the help of his GE language commandos, used it to write a new contract.

That’s not promising. Contract language is limited and stylized, and often a lot is at stake, so contract language is subject to considerations very different from those that apply to, say, litigation writing and memo writing. Furthermore, I can think of a handful of directly relevant works Shawn could have consulted. (Let’s not be coy—what I really mean is that he could have consulted A Manual of Style for Contract Drafting.)

Flawed Execution

Shawn’s naiveté is on display in the examples of the reworked contract included in the article. Here’s one sentence, described in the article as “containing 13 very understandable words”:

During the contract term, we will comply with all of our legal obligations.

Leaving aside use of the first person and, it follows, use of will to express obligations, I suggest that “During the contract term” is expendable: unless it’s specified otherwise, a contract provision necessarily applies only during the term of the contract. (For more on that, see MSCD 13.254 or this 2007 blog post.) And “all of our legal obligations” appears to be an awkward way of saying you’ll comply with the law. For one thing, the word obligations is so associated with contracts that some readers might assume that this sentence refers to contract obligations.

Here’s another “after” extract:

Your and our total compensation obligation under this contract cannot exceed twenty-five percent of the amount FES has billed you in the last twelve months for the applicable service, and neither of us have any compensation, contribution or other obligation for consequential, punitive, incidental, indirect or exemplary losses (including, but not limited to, profit or revenue loss, capital costs, replacement costs and increased operating costs).

It raises a number of questions:

  • “Your and our total compensation obligation”? What a wretched buried-verb combo! See MSCD 17.7. Say instead something like “Neither of us is required to pay”.
  • Does “Your and our” mean that the limit applies to the aggregate of the, uh, compensation obligation of both parties? Or does it apply to each party’s compensation obligation considered separately?
  • Why “cannot exceed”? The word cannot expresses physical or mental inability; that’s out of place here. See MSCD 3.293. As always, the question is, What category of contract language should this be? See MSCD chapter 3.
  • Why use words to state these numbers? See MSCD 14.1.
  • So the GE Aviation entity is referred to using both “FES” and the second person (“our”)? A basic rule in contracts is that you shouldn’t say the same thing two different ways, as that invites confusion and gives the reader more work to do.
  • Using “including, but not limited to,” is a bad idea. See MSCD 13.353 or my recent article with Vice Chancellor Laster of the Delaware Court of Chancery, When Contracts Seek to Preempt Judicial Discretion (here).
  • Regarding “consequential, punitive,” and so on, any high-school-student exposed to that would be rendered a gibbering wreck. Such limitation-of-liability incantations are a strong candidate for most-misunderstood contract provision, commercial-contracts category. I recommend doing something different. See MSCD 13.161 or this 2010 blog post. Shawn’s article says that the law firm Weil vetted the new template; it so happens that Glenn West, a Weil partner, is author of the article on the pitfalls of the standard “consequential damages” litany (here).
  • Black’s Law Dictionary says “exemplary damages” means the same thing as “punitive damages”: why include synonyms in the litany?

Here’s the third “after” extract:

If an arbitrator finds that this contract was breached and losses were suffered because of that breach, the breaching party will compensate the non-breaching party for such losses or provide the remedies specified in Section 8 if Section 8 is breached.

It raises the following issues:

  • The “after” version is described as “clearer and much more concise.” That’s not so—instead, it’s entirely different! The provision it replaces is a clunky indemnification provision that in effect says that the customer will be liable if various matters arise, regardless of whether the customer was somehow at fault. The “after” version just says that the breaching party will be liable for breaches.
  • Why bother saying that that the breaching party will be liable for breaches? That’s the way contract law works, whether or not you say so in a contract.
  • Use of the term “non-breaching party” can have unintended consequences. See MSCD 2.123.
  • Using such instead of those is a hallmark of dysfunctional traditional drafting. See MSCD 13.179.
  • Using a capital S in the word section in cross-references is inconsistent with the recommended practice in general English usage. See MSCD 17.34 and The Chicago Manual of Style.

Significance

The moral of this story is that optimal contract language requires more than enthusiasm. “Better” is easy; “best” requires serious application. If that weren’t the case, I’d feel a bit of a chump for having devoted much of the past 20 years to researching the building blocks of contract language.

This isn’t the first time I’ve encountered a company that has ingenuously patted itself on the back for having overhauled a contract. See this 2014 blog post for my critique of IBM’s cloud-services contract, which had been rolled out with some fanfare. On rereading that post, this caught my eye: when it comes to contract language, “If you’re not a specialist, you’re a dilettante.”

So I find myself in the unusual position of taking issue both with traditionalists (most recently in this post and this post) and with people who think they’re at the forefront of the push for clearer contracts. In both contexts, my message is the same: contract language is tricky, and a lot is at stake, so for optimal contract language you need standards.

That I’m the author of the only comprehensive set of guidelines out there—A Manual of Style for Contract Drafting—doesn’t mean I’m writing this in a fit of pique. Promoting one’s ideas requires pointing out the shortcomings in other ideas, particularly when they’re broadcast from atop a soapbox as prominent as the Harvard Business Review.

(This isn’t the first time I’ve written about GE Aviation’s effort; see this blog post from earlier this year.)

Who You Gonna Trust?

I used to use King Arthur organic all-purpose flour for all my baking. Now I use King Arthur only for bread and pizza; for cakes and pastries, I’ve switched to Gold Medal all-purpose flour. Why? Because Stella Parks (@BraveTart) recommends Gold Medal. When it comes to baking sweet things, what @BraveTart recommends, I do, with a salute and a smile on my face.

That’s because Stella is a baking expert, and I’m not. I wouldn’t dream of attempting to replicate the years of research and experimentation that have made her an expert. Instead, I happily rely on Stella’s expertise, although I don’t expect her to be infallible. What convinced me to rely on Stella? Her impressive book, BraveTart: Iconic American Desserts. Her posts at Serious Eats. The success I’ve had in following her recipes. And her fun Twitter feed.

We might not always be aware of it, and it might be out of fashion in some circles, but we rely on experts all the time. We have finite amounts of time, energy, and talent to expend in our lives. We’d rapidly run dry if we aren’t willing to rely on experts.

That of course applies to contract drafting. The whole copy-and-paste engine reflects that building contracts from scratch for each transaction doesn’t make sense and wouldn’t be possible. But with each act of copying, you’re relying on someone.

When you copy something you’ve found online, you’re relying on … well, who knows who you’re relying on. At best, you’re relying on an institution’s reputation. This is an Acme contract! Acme wouldn’t have crappy contracts, would they? Well, actually, they would: I’ve shown time and again that BigLaw contracts and global-company contracts are reliably dysfunctional.

Even if you use a contract prepared by your law firm or law department, it might not be clear who you’re relying on, given that precedent contracts morph over time. The starting point might have been a contract from outside your organization, with further adjustments being made from transaction to transaction.

What if you’re using a contract template offered by a commercial service? You’re likely relying on an unnamed refugee from BigLaw, doing their BigLaw thing. That’s not particularly promising.

When it comes to individual usages, who are you relying on? When during my seminars I ask participants about the implications of a particular usage, usually those who offer their views are hazy as to the source. Someone once told me … I’ve heard that … To rely on conventional wisdom is to rely on no one.

My livelihood is based on my having decided twenty years ago that as regards the building blocks of contract language, no one was authoritative enough for me to be willing to rely on them. Since then, I’ve worked to make myself someone you would be willing to rely on.

What factors might be relevant? Your experience with MSCD? The general reputation of MSCD? My blogging? My marketplace-of-ideas smackdowns? What others say about me? The fact that I do seminars around the world? The shortcomings of other commentators? All that’s for you to decide.

In any event, I hope you’re willing to rely on me as an authority on contract usages just as I’m willing to rely on @BraveTart for purposes of baking cakes and pastries.

The post Who You Gonna Trust? appeared first on Adams on Contract Drafting.

“Compensation” Versus “Remuneration”

Today I tweeted the following:

It prompted the following tweet from the redoubtable @IPDraughts:

Because tackling this requires more than 280 characters, I permit myself to respond on this blog.

As regards compensation, Mark is playing a game I don’t want to be caught playing, namely “My meaning is better than your meaning!” In fact, Black’s Law Dictionary offers as definitions of compensation both meanings that Mark alludes to:

compensation (kom-pən-say-shən) n. (14c) 1. Remuneration and other benefits received in return for services rendered; esp., salary or wages.

2. Payment of damages, or any other act that a court orders to be done by a person who has caused injury to another.

I gather that compensation is mostly used in England to express only the second meaning. But given the promiscuous exchange between American and England, I suggest it would be rash to expect the English understanding to prevail in a given context. Mark pointed me to the following exchange in this 2010 article in The Lawyer about the meeting of American and English cultures at Hogan Lovells, and I think it makes my point for me:

Still, the Americans have won the first lexical battle. Asked about remuneration generally, Harris checks himself. “Oh, we don’t say ’remuneration’ now,” he says, as Gorrell nods in agreement. “We say ’compensation’.” Quite why ’remuneration’ has become a non-word within Hogan Lovells is difficult to work out, but the following day The Lawyer gets some ­clarification. Apparently it boils down to ­accepting the American term, which is “more widely understood as a term around the world, not just in the US”.

You might think I’d be in favor of promoting use of remuneration to express the first meaning and compensation to express only the second meaning, so as to avoid confusion, but in fact I’m not so inclined. The alternative meanings of compensation don’t worry me: unless you’re particularly clumsy, the context in which you use the word compensation would make it clear which meaning you intend the word to have: you should always refer to compensation for something or other.

This ties into my aversion to unnecessary terms of art. Here’s what MSCD 1.11–.12 says:

Lawyers are prone to using doctrinal terms of art in contracts even though simpler terminology is available, rendering those terms of art unnecessary.

For example, in a security agreement, why use hypothecate regarding a security interest? Why not simply use grant? Hypothecate means to pledge without delivery of title and possession. That meaning goes beyond the function required of the verb in language granting a security interest. And that meaning isn’t otherwise necessary, as the security agreement itself will specify what the terms of the security interest are. Hypothecate might have value as shorthand for court opinions or scholarly texts, but that’s very different from what’s required for a contract. Using grant in granting language in a security agreement wouldn’t prevent that grant from being a hypothecation, if the remainder of the granting language is consistent with that meaning. If it isn’t, using hypothecate instead wouldn’t fix that.

In other words, say what you mean to say without relying on the reader to read into your choice of words distinctions of varying levels of obscurity.

It’s just as well that I’m OK with using compensation to express both meanings: I wouldn’t hold out much hope for rehabilitating remuneration, which sounds fuddy-duddy to Americans. I don’t recall encountering it outside of a formal legal document. And it’s not that common in U.S. contracts: only 341 contracts filed on EDGAR in the past 30 days contain the word renumeration.

An Efficient Way to Link Statements of Fact to Termination Provisions

In recent consulting projects I’ve found myself revising client contracts that address issues as both statements of fact and grounds for termination, as in this made-up example:

Widgetco states that the Widgets are in good working condition.

Acme may terminate this agreement if the Widgets are not in good working condition.

My book The Structure of M&A Contracts (here) discusses how to make statements of fact and obligations in an M&A contract flow efficiently through the rest of the contract. Inspired by that, I’ve found myself experimenting with the following sort of provision as an alternative to saying the same things twice in commercial contracts:

If one or more of the following occurs, Alpha may by notice to Baker terminate this agreement , with termination occurring ten days after Baker receives that notice:

a statement of fact made by Baker in this agreement could not be made again on any date after the date of this agreement without being materially inaccurate[, except that if Baker is capable of remedying the circumstances causing a statement of fact to be materially inaccurate, then Alpha shall not terminate this agreement in accordance with this clause X unless Alpha notifies Baker of those circumstances and Baker fails to remedy those circumstances no later than 10 days after Apha so notifies Baker]; …

What do you think?

When Litigating Confusing Contract Language, It’s Best to Have a Frame of Reference (Featuring “Stepped Rates” and “Shifting Flat Rates”)

During my blogging-in-my-bathrobe years, I entertained myself by trawling on Westlaw for court opinions dealing with confusing contract language. Good times.

In a fit of nostalgia, this evening I went back to Westlaw and entered a search, saying to myself, Yes, I can still do this! But I’d obviously lost my touch, because I forgot to limit my search to recent cases, so the first case I looked at was Tennessee Excavating Co. v. Morrison-Knudsen Co., No. 01-A–019201CH00010, 1992 WL 113426 (Tenn. Ct. App. May 29, 1992) (PDF here). It was a serendipitous mistake, because it offered the first-ever example I’ve encountered of a dispute over whether a fee schedule involved stepped rates or shifting flat rates.

“Whether a fee schedule involved what?” I hear you say. If you’re not familiar with those terms, it’s because I invented them, having never seen any discussion of the related ambiguity. (To name something is to bring it into existence.) I haven’t done a blog post about the distinction between stepped rates and shifting flat rates. It’s discussed in the fourth edition of MSCD, at 14.64–.70. Paragraph 14.66 will give you a taste:

But this schedule is ambiguous. If the annual gross revenue is $3.4 million, it’s not clear from this schedule whether the 8% rate is applied to all gross revenue (this manual refers to such a rate as a “shifting flat rate”) or only revenue over $3 million, with the lower rates being applied to the increments of revenue under $3 million (this manual refers to such a combined rate as a “stepped rate”).

It’s good to be able to point to an instance of every kind of ambiguity I write about, so I’m pleased that I encountered this opinion. But that’s not why I’m writing about it.

Instead, I noticed that, unsurprisingly, the Tennessee Court of Appeals didn’t mention stepped rates and shifting flat rates in holding that the contract was unambiguous. Instead, it blundered through an analysis that didn’t make sense to me.

One thing MSCD stands for is that if you try to make sense out of contract language that is, or might be, ambiguous and you have no experience with the subject, don’t be surprised if you fall flat on your face. By contrast, anyone familiar with MSCD who is presented with the dispute underlying Tennessee Excavating Co. would understand what’s involved by flipping to the relevant part of chapter 16. And MSCD would provide a frame of reference for explicating the dispute to others, whether in an opinion or a brief.

That’s why judges and litigators who handle contract disputes would benefit from becoming acquainted with MSCD. The foreword to the fourth edition by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery (here) might help spread the word. And so might appellate guy Jason Steed’s recent review of the fourth edition (here).

And obviously, contract drafters too would benefit from being able to distinguish between stepped rates and shifting flat rates.