Guest Post from Michael Blasie on Why Contracts Should be Understandable

Who Cares if No One Understands Contracts?
Professor Michael. A. Blasie

I do. And I hope I am not the only one.

Why should contracts be understandable? Typically, we link understandability to the fairness of contract terms through arguments about mechanisms like disclosures, informed minorities, and reputational consequences. In short, if people understand contracts then a chain of events leads to more fair contract terms. Thus, understandability is a means to an end.

Mission failed. The verdict is in. Improving understanding will not make terms more fair. Channel the most high-tech features from Star Trek, Star Wars, and all of science fiction to make every contract understandable to all humans of any age, language, reading level, or background and the terms still will not become more fair. Why? Because consumers do not read contracts and cannot negotiate them. Competitors often all use the same unfair terms. And businesses use consumer data, social experiments, and artificial intelligence to make their contracts irresistible.  So if making the contract more understandable will not make it more fair, why care about understandability?

Because the legitimacy of calling an agreement a contract depends on parties having the opportunity to understand that agreement.

Doctrinally, contract formation requires assent, but assent is meaningless without an opportunity to understand. Whatever metric you use to measure understanding, the result is that neither the consumer nor the seller understand consumer contracts. But because the seller (more specifically the seller’s lawyer) created the contract and had time to select the text, the seller had an opportunity to understand it. That said, there may be scenarios where lawyers draft contract language even they do not understand. But for the consumer, there is no opportunity. There is no meaningful difference between giving consumers a modern contract and giving them a contract written in hieroglyphics. The duty to read makes is essential to contract formation, yet makes little sense when we know that if a consumer read the contract they could not understand it. Sure, most consumers choose to not read the contract. But the bigger point is that they never had the opportunity to understand the contract. Without that opportunity, consumers are only assenting to enter a contract, not to enter the contract.

Functionally, understandability offers many benefits unrelated to fairness. A big one is all parties can use an understandable contract to make decisions. From the consumer’s perspective, there is implicit fairness in having the opportunity to understand a contract they cannot negotiate and in having the same opportunity as other consumers. More, that opportunity allows consumers to understand their obligations and whether they or the seller breached the contract. Plus, if understanding is doctrinally relevant, then it can be litigated, which in turn means discovery. And such discovery might be a way to expose unsavory contract design and dark patterns. Keep in mind, here “consumers” means buyers. Don’t forget that businesses, nonprofits, and even governments are all consumers who enter nonnegotiable form contracts. You might not be able to negotiate your contract with the car dealership, but that dealership cannot negotiate its contract with the tire supply company, who in turn cannot negotiate its contract with the internet provider. Bottom line: businesses enter lots of contracts, sometimes as a seller and sometimes as a consumer. Understandable contracts benefit all consumers.

Sellers benefit from understandable contracts for the same reasons that consumers benefit. Sellers also need to know their obligations and need to tell whether they or the consumer breached. Often we overlook this point. Although sellers might use lawyers to draft their contracts, they cannot afford to consult the lawyer every time any action could implicate a contract.  Almost all U.S. businesses are small businesses without in-house counsel and outside counsel is expensive. Even in gigantic companies, in-house counsel does not have the bandwidth to opine on every action cover by a contract. Businesses are not made up of lawyers who specialize in contracts and must selectively consult lawyers. As a result, most contracts are just as perplexing to the consumer as they are to the seller’s employees. Can the employees in procurement or the loading dock tell if the shipment complies with the contract? How many landlords understand the lease they give tenants? Sellers get big benefits if their employees can understand most of the contracts without consulting a lawyer.

There are other benefits for consumers and sellers, but at this point pragmatism sets in. You might begin to wonder if contracts could ever be understandable to every consumer, what would happen to the predictability of terms vetted by precedent, and how much it would cost to jettison all contract templates and start over.  All fair concerns and all manageable. In fact, underlying some of these are widespread misconceptions (some might say myths). As it turns out, contract drafting is much more copying and pasting than intentional wordsmithing and a cohesive strategy to maximize business profits and minimize costs and risks. Let’s make contract drafting intentional and achieve a goal that is good for sellers, buyers and lawyers: understandable contracts. If you are at least tempted to consider understandability as a crucial foundation to contract law, this post has done its job. For a full-throated explanation of the importance and pragmatism of understandable contracts, see The Duty to Make Contracts Understandable, which argues incomprehensible contracts should be unenforceable.

Understandability is a must have, not a nice to have.