Demystifying Legalese in Contracts, Part I

Posted by: Nick Leiber on August 17, 2009

This is a post by guest blogger Jonathan I. Ezor.

jonathan_ezor.jpgOne of the complaints frequently leveled against attorneys is that they speak, and write, a language foreign to all other people: legalese. This tongue, filled with words and phrases like “heretofore,” “hereinafter,” “notwithstanding the foregoing,” “including but not limited to” and “except as otherwise provided herein,” is most commonly seen in contracts, and seems to be best expressed in

very tiny letters.

The phenomenon causes most businesspeople, and even many other lawyers, to give up before ever trying to understand what the contract says.

This is extremely unfortunate and wrong, since a "contract" is also an "agreement," which means that the parties who are actually bound by it are supposed to agree to its terms, which really requires understanding them. The best contracts lawyers are actually good writers, able to turn a variety of business points into a single, comprehensible and consistent document. While there are some words that have specific legal meaning and need to be included in a contract ("warranty," for example, rather than simply "promise"), the rest of the language should be understandable to everyone involved. If the client can't read a contract and figure out what it means, it's a bad contract. Worse still, vague language will more likely lead to a lawsuit than do clear provisions, since misunderstanding is a frequent driver of disputes.

While all attorneys should strive to be better, clearer writers, there are other things that also can help make legalese more understandable to businesspeople. The next few articles in this blog series will be dedicated to demystifying typical contract provisions, using a Web development agreement (a frequent source of misunderstanding and conflict) as a model.

From warranties and representations to indemnification to the specifications to termination and beyond, the goal is to help turn the contracts readers get (and give) in business from gobbledegook into guideposts.

For starters, consider a provision often buried in the "Miscellaneous" (which many translate as "skim or even ignore this") section of a contract: the choice of law and forum clause. It usually looks like this:

This contract and any disputes hereunder shall be governed by the laws of the State of New York, excluding any principles of conflicts of laws. The exclusive forum for any disputes hereunder shall be the state and federal courts in the City of New York, State of New York.

There are two important pieces here. The first tells you which laws will be used to explain and interpret the contract, in this case New York's. The "excluding any principles of conflicts of laws" part avoids the logic puzzle caused by looking at New York law about what law applies to a contract: "New York law is supposed to apply, but New York law says that this contract should be governed by Texas law because the two parties are in Texas, but the contract says that New York law is supposed to apply, but..." Most states' laws are fairly similar, but you should still ask your lawyer if one or another has some unforeseen landmines (often regarding consumer or employee protection) that makes the choice troublesome.

The second piece, though, is almost purely strategic: where do disputes get heard? The short answer is often, "in the city where the more powerful party is located." Why? So that, if the parties are in different locations, the one with the power will find it much easier to bring a lawsuit than will the other. Consider if Fredco is in New York and Murrayco is in Los Angeles, and they sign a contract with the New York forum language. If Fredco cheats Murrayco, Murrayco will have to find a New York lawyer, travel to and stay in New York, and lose the services of any Murrayco employees in New York if it wants to sue Fredco. By contrast, Fredco's general counsel can hop on the nearest subway down to the courthouse and sue Fredco, forcing it to come East to defend itself. A New York forum is clearly better for Fredco than Murrayco.

What can Murrayco (or your company) do when faced with a far-away forum demanded by the other side to a deal? One productive approach is to propose the following alternative:

The exclusive forum for any disputes hereunder shall be the state and federal courts nearest the party against whom the dispute is brought.

In other words, if Fredco wants to sue Murrayco, it has to go to Los Angeles.

For Murrayco to sue Fredco, it must come to New York. Equal disincentives to sue, equal encouragement to settle, and it's very difficult for Fredco's lawyer to reasonably object to the suggestion.

The next blog will demystify one of the most important, and least clear, portions of most business contracts: the warranty provision. If you have suggestions for provisions you would like demystified, please feel free to e-mail your ideas.

Jonathan I. Ezor is the director of the Touro Law Center Institute for Business, Law and Technology, and an assistant professor of law and technology. He also serves as special counsel to The Lustigman Firm, a marketing and advertising law firm based in Manhattan. A technology attorney for more than 15 years, Ezor has represented advertising agencies, software developers, banks, retailers, and Internet service providers, and has been in-house counsel to an online retailer, an Internet-based document printing firm, and a multinational Web and software development company.

Reader Comments

Ellen Victor

August 18, 2009 12:31 PM

Clear, concise explanation of a provision all small business owners should understand before signing a contract. I look forward to future explanations and suggestions for alternate approaches.

Clint Costa

August 18, 2009 11:39 PM

The problem here is two-fold: (1) contracts are legal documents and must hold up in court if challenged...sometimes the agreement between the parties is complicated thus requiring complicated language; and (2) business people do business and lawyers practice law, this specialization is bound, at least sometimes, to lead to contracts that cannot be easily understood by business people...a good lawyer can make the interpretation simpler.

http://www.chicagolawblogger.com

James Davis

August 21, 2009 07:22 AM

I am a businessman, and have found a major problem to be that lawyers often cannot seem to understand the business arrangement trying to be represented by the agreement. This then leads to representations with convoluted words that simply cover up this lack of understanding more than trying to write accurate language related to the business arrangement being described.

James Davis

August 21, 2009 07:22 AM

I am a businessman, and have found a major problem to be that lawyers often cannot seem to understand the business arrangement trying to be represented by the agreement. This then leads to representations with convoluted words that simply cover up this lack of understanding more than trying to write accurate language related to the business arrangement being described.

Jon James

August 21, 2009 08:44 AM

Mr Costa's argument cuts both ways. Sometimes lawyers don't understand the business aspects of a complicated agreement between the parties.

Kingsley Hill

August 21, 2009 09:33 AM

Cynically one could say that complex language creates job security for lawyers who will have to be employed to read the agreement anytime a reading is necessary. While sometimes this is probably the case, the fact that a contract must be binding and sometimes it is difficult to write simple binding language regarding complex issues.

BUT, for a clear example of overly complex legalese, try reading just about any legislation written by the US Congress. Complex legislation requires that related legal documents be complex, and sets a bad example for the legal community.

Rogier van Vlissingen

August 21, 2009 11:30 PM

It is also time to take note of radically different approaches that are emerging such as www.stateofgracedocument.com - which is a fascinating approach to keep business relationships on track on the basis of agreement and conflict resolution methods, as opposed to the adversarialism typical of traditional contracts. It's an approach that could drastically reduce legalese, but which requires some careful attention and investment in details up front.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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