Avoiding unnecessary complexity
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There are 19'972 words in the iTunes terms and conditions. Shakespeare’s Macbeth has 18'100 words. When you click "I agree", you’re saying to iTunes that you have read something longer than Macbeth. We are not all lawyers, and none of us have unlimited reading time. Why aren't contracts written so that ordinary people can read them?
Colette R. Brunschwig, Senior Research Associate at the University of Zurich, Department of Law, Centre for Legal History, Legal Visualization Unit suggested that the best approach to contract simplification would be one involving all stakeholders – an inclusive approach. According to her, legal and non-legal people are important actors. Scholars and practitioners of private law are natural candidates for involvement, but so are many other types of lawyers and theorists (including multi-sensory lawyers) as well as economists, business information scientists, media and communication managers, information designers, and visual communicators. If so many different stakeholders could contribute to change the current situation, why don't they?
This kind of inclusivity was a key element of the International Conference on Contract Simplification. Legal scholars and experts from other disciplines addressed the various challenges brought by contract complexity, particularly the cost of complexity on all levels of our society. They looked at various solutions that have been tried and tested in various countries and industries, and what the benefits have been. Participants also were introduced to software-based solutions and other technological developments, such as Text Mining, blockchain and smart contracts, which could and will significantly reduce complexity in future.
Pitfalls of current contracting and commercial practice
The International Association for Contract & Commercial Management (IACCM) has identified its top 10 pitfalls of current contracting and commercial practice (see Figure below). These are areas that the IACCM sees as leading to substantial value erosion in the average contract. The 9.2% erosion represents 9.2% of annual revenue. Not every business suffers the same. In general, some of the bigger corporations, particularly, in the complex services world, have become much more efficient than many others, but value erosion remains at a level that makes it commercially relevant.
Contracts exist because of trade. The fairness of trade is of major significance to human progress and peace. Contracts do not live in isolation. They are a manifestation of a will subject to change. Today, the internet is an element of everyday life, trade is done through virtual enterprises, and communication occurs within interdependent supply networks. Cummins reminded us that we have moved to an era that requires flexible contracts, and contracting that will recognise reality and build in the methodology through which change can be integrated.
According to Cummins, contracts should be considered as economic assets, and their simplification as asset management. Simple contracts are a reflexion of a successful simplification of internal processes, where the future lies in the synergy across law and technology.
A vision for moving away from complex contracts
According to Helena Haapio, Assistant Professor of Business Law at the University of Vaasa and International Contract Counsel at Lexpert Ltd, contracts used to be legal tools only needed in a dispute in the minds of many people. That led to people working in silos. What we can do when we develop a new mindset towards simplification is that we help people collaborate and work together towards clarity and an improved understanding. This leads to better decisions faster, better results and ease of doing business. She suggests that we see contracts through the user's eyes, and simplify both the content and how it is presented. We should explore visualisation, share solutions, and consider contributing to the Contract Design Pattern Library for contracts.
Contract simplification in practice
IBM's cloud services agreement was revolutionary because it was a departure and a change, a shift from how they traditionally wrote contracts. Carol Savage, Corporate Legal Director, Global Client Contract Development at IBM noted, "To be successful in our society, flexibility is key. You need to move quickly, be agile, and do not hesitate." She further described, "We moved from the traditional approach of writing with legalese, of ensuring that aspects of the contract were covered in maybe multiple parts to actually a very simplified approach only including those terms that were required - not those nice to haves or the luxuries. We began breaking everything down into very plain English that would be easy for our clients to understand."
Some of the challenges were centred around securing buy-in from IBM's internal stakeholders. Savage said, "I think having sponsorship from our senior leaders was helpful in that regard. The second challenge was actually coming up with a single simplified agreement that would accommodate a very robust and wide portfolio of cloud offerings."
Visual knowledge communication
What are the typical pitfalls when you try to capture complex ideas in writing? How can images be used to codify complex ideas, agreements, or intentions? Professor Dr Martin Eppler from the Institute for Media and Communications Management at the University of St. Gallen revealed that the answers to these two questions can be found in an emerging discipline called visual knowledge communication. According to him, knowledge visualisation enables better collaboration and greater clarity. To apply the technique, one should look beyond the contract itself and visualise knowledge regarding: 1) the contract process, 2) the contract context, 3) the contract contents, and 4) the contract experience.
Professor Eppler also demonstrated how real-time Dynagrams can be used to adapt visualisations to evolving contractual agreements, opening the perspective for a new way of approaching contracts. This starts with the negotiation process, and aims to enable not only an enhancement of their accessibility, but also their tailoring according to the needs and requirements of the potential parties to the contract. Professor Eppler showed us how easily consensus can be supported and fostered with the use of appropriate tools and technologies. According to him, there are social, cognitive and motivational advantages of using visualisation in contracts. The illustration helps users collaborate, avoid misunderstandings, focus the attention on key issues, and increase the ability to remember what has been said, leading to new insights.
Contract as a voice: A communicational approach to contract simplification
Chris Heffer, Senior Lecturer at Cardiff University, believes that contracts arise from a deficit of trust in society. In order to plug that gap, we need to take into account the ‘big’ communicational picture when we consider how to simplify contracts. He suggests that we should consider contracts in terms of two parties attempting to convey their voice to the other. In the case of standard form contracts, which constitute the vast majority of contracts, the parties to the contract do not have equal voice and the ‘consumer’ party does not enter the contract as freely as classical theories would suggest. This has major implications for how contract communication works (or doesn’t). According to Heffer, we need to give equal weight to the drafting of the contract (by the commercial party) and its reception by the consumer. We thus need to consider both ‘voicing’ (how the contractual terms are conveyed in text) and ‘hearing’ (whether the contract is attended to at all and, if so, how it is understood and interpreted). He notes that the major challenge is to get consumers to read the contract in the first place and offered some possible strategies for achieving this.
From visualisation to legal design: A collaborative and creative process
In their keynote speech titled "From visualisation to legal design: A collaborative and creative process", Thomas Barton, Professor, California Western School of Law and Gerlinde Berger-Walliser, Assistant Professor, University of Connecticut Business School began by stating that the digital revolution has prompted a strong, and accelerating interest in “Visualisation” of both data and knowledge. Visualisation refers to the use of images, photos, icons, diagrams, charts, or videos to enhance or supplant printed language. Their view is that we should: 1) work toward simplified language, 2) adapt documents to audiences with multiple needs, 3) support legal functions through the optimal mix of language and graphics, and 4) find the right images.
Legal design combines Preventive/Proactive Law (PPL) - a mentality and set of values about how law should function - with principles of information design. The result are contracts that are not simply new in format – ie more beautiful or eye-catching. Visualised contracts will also function consistently with PPL and business goals.
Michael Mainelli, Executive Chairman of Z/Yen Group, described distributed ledger technologies as an indelible, immutable database. He noted that they enable a persistent, pervasive, and permanent tracking of records, whereby users can only add to the already existing records. Records can be shared confidently and tracked openly, allowing the user to always access the full audit trail. He said, "Ledgers are […] exceedingly boring, but they underlie all the financial services", adding, "Distributed ledgers are a new type of ledger technology."
What makes this development exciting is that the technology eliminates the need for a central third party. It is therefore ideally suited for financial services, where a high number of transactions need to be done over a short period of time, and contractual relationships can last for a long time.
When asked to compare the speed of the technology's adoption in the banking versus the insurance sectors, Mainelli remarked, "The insurance industry is ahead of the banking and some of the trading sectors in the true adoption of this technology."
Nick Szabo, CEO of Global Financial Assets Inc, coined the term "smart contracts". It refers to “programmable money” or self-automated algorithms that can carry out the terms of any contract. An important feature of a smart contract is the ability to reduce risks through non-discriminatory execution. And since smart contracts would be embedded into a distributed ledger such as the blockchain, the entire process would be decentralised, ie without the need for a central third party to trigger or validate transactions. Proponents of smart contracts argue that this would enable such contracts to service markets with greater efficiency. The financial services industry is thus particularly interested in smart contracts, since it allows for a rapid execution, and a considerable reduction of the overall cost for financial transactions.
Amongst the many opportunities that blockchain technology would offer to global companies such as Swiss Re, one is the reduction of the number of bank accounts down to for instance a single bank account per currency at the holding level. This would represent an additional way to reduce bank fees considerably. As for the smart contract technology, its use would also enable companies to efficiently forecast cash levels.
Finally, next to speeding up the entire transaction process, using smart contracts in the financial industry would allow to track transactions, and therefore enhance governance. The result would be a significant reduction of recurring risks linked to unsecured banks or unreliable counter parties.
Text mining analytics tools
In the insurance world, those who are responsible for contracts often have too many documents to read. These contracts however tend to be too technical and risk-bearing to be left entirely to the commercial staff. For every contract, three or four types of expertise are required to get an overall view and deeper understanding of that particular contract and how it could affect the business. Therefore, experts from various fields such as legal & compliance, underwriting or contracts need to collaborate on a daily basis.
Thankfully, the collaboration process is considerably eased today, by the development of text mining analytics tools, namely software that recognises strings of words in a document and compares them against a database of clauses. This software matches up the text with stored clauses or contracts and imports expert comments on that particular clause or contract, insofar as they are already in the system. It then uses a graphic user interface to create a rating system in the form of a traffic light system indicating levels of risk. This can then be used to conduct further analysis and adjust the content as needed.
Text Mining Analytics tools also allow an overview of a collection – or "book" of contracts – and can produce reports on content, replacing human reading and therefore the need to rely on sampling.
They can also be reverse-engineered to allow drafting of both standard and tailored contracts. The presentation by Simon Kilgour, Partner at CMS and Rory Unsworth of Swiss Re underlined that the technologies were developed in connection with insurance, but could be applied to any "book" made up of contracts that contain some repeatable clauses.
Simplifying contracts with language and design: Experiences and challenges
Rob Waller and Jenny Waller of the Simplification Centre provided a real-life case study of the challenges and opportunities in the area of contract simplification. They noted that more emphasis should be placed on the use of plain English in contracts – ie common words, short sentences, active constructions, and the use of personal pronouns such as ‘we’ and ’you’. They also cautioned against overestimating your audience’s knowledge, overestimating your audience’s cognitive capacity, going against natural English language structures and failing to engage.
The pair noted that while some of the origins of complexity are accidental due to legacy (eg “We’ve always done it this way”) and professional limitations (eg “It’s the best I can do in the time I have”), some of the complexity is intentional. Some use the intelligent reader defence (eg “Our audience is educated – this is appropriate”) or they fear that they are “dumbing down” the text. In the latter case, proponents of complexity may even argue that complex is good, and clear is for dummies. Rob and Jenny Waller concluded by pointing out that most objections to simplification are predictable, and there are well-argued responses available.
Simplifying contract negotiations
Professor George Siedel of the University of Michigan School of Business states that while contract simplification should be the goal, short contracts are not necessarily better. He argues that clarity is much more of a key goal in contracting. He also believes that we can use visualisation to clarify the pre-contract negotiations and the post-contract negotiations that relate to performance of the contract and to speed resolution. Siedel supports the notion that visualisation can be used beyond the contract document. For example, he notes that the use of decision trees allows one to clarify what the key decisions and the key uncertainties are. While Siedel does not advocate making decisions solely based on a decision tree, he stated that decision trees can provide a perspective and generate a productive discussion about the decision that was taken.
Therapeutic jurisprudence is dedicated to the reform of legal methods and ideas, so that human interactions with the law will contribute to human well-being, rather than cause distress to individuals and social relationships. As it relates to the world of contracting, the parties to a contract often do not talk fully through their interests, goals, or the particulars of the exchange relationship – nor do they even read the contracts that are made for them. For consumers, this can lead to potential exploitation, and for business people, it can lead to lost opportunities for innovation, value, and stronger commercial relationships.
Thomas Barton, Professor at the California Western School of Law, believes that the focus should be on the contract not so much as a legal document, but as a framework or tool that enables both parties. He states, "We must use contracts not just to document and secure transactions, but to facilitate relationships, innovation, and increased productivity." But the challenge nevertheless remains - how do we get parties to strengthen their economic exchange and personal relationships by abdicating less to their lawyers, and instead talking more strongly to one another about their respective interests and goals?
The solution may be, according to Barton, to look at contracts as three distinct, but overlapping relationships. The first is the “exchange” relationship, which voluntarily transfers goods, services, or the use of property. The second is the "personal" relationship, which involves qualities like trust, loyalty, empathy, and cooperation; but also suspicion, competitiveness, and potential exploitation. The third is the "legal" relationship, which involves enabling each party to call upon the State to back up particular rights and duties embedded in the contract.
For contracts to be successful, Barton states that the three relationships must support each other and be appropriately balanced, given the particular nature of any given economic exchange.
Mindfulness in contracting: Comics as contracts
A comic contract, according to Robert de Rooy, an attorney from South Africa, is a contract where the characters represent the parties. The interaction of the dialogue represents the terms and the parties sign the comic as their contract. The need for such contracts arose due to the extreme inequality, poverty and illiteracy in some areas of the world. For those who are poor and/or illiterate, the standard approach to contracts is oppressive. First, the contracts are very hard to understand due to their form, layout, length, and density of text. Second, standard contracts often conceal oppressive clauses. Robert de Rooy then wondered, "How can I make it possible to step outside the text paradigm of contracts and maybe try to do a contract where visualisation is dominant?"
When the first comic contracts were introduced, there were concerns if a contract without text would be accepted. There was also the issue of cultural sensitivity as some parties objected to how they were depicted in some of the earlier versions of the contracts. The upside is that comic contracts do not cost much more than a normal text agreement. You don’t have to develop any software for it. Robert de Rooy is confident that others will come up with better ways of representing some of those clauses. There are also opportunities to test whether people actually memorise these contracts better and understand them better.
Implications for insurance
Rory Unsworth, Head Contracts Centre, Swiss Re notes that contract complexity is a challenge to resilience in the world because it contributes to misunderstanding, disputes and risk. Complexity in insurance also contributes to underinsurance. Why? Because insurance contracts are often full of exclusions, exceptions and write-backs. To fully understand what is being purchased, one would have to invest significant time reading and annotating the contract.
Unsworth remarked, "Contracts have become so complex out of a misguided sense of self protection. People have the impression that if they use them as a wall of separation between them and their customer that they will be better protected." He goes on to add, "Actually the mindset is wrong there. It's really about contracts as an instrument for collaboration with our customers. We tend to throw everything into the contract and we leave it there. We don't spend the time that's needed to simplify." He then challenged participants to "imagine a time in the future when contracts might not have that frightening feeling of the law, of a legal text" and what that mean for everyone involved.
Outcomes for the future
On the third day of the Conference, the London Market Reform Contract was "hacked" by the participants and will be delivered to the form's managers as a suggestion for improvements. By popular demand, a breakout group decided to host a fourth day with both eyes firmly on the future. The decision during this last day was to create the F.I.T. Contracts Initiative, aimed at promoting the use of functional, inclusive and transparent contracts and contracting processes.
"I felt I was present at the very beginning of an important and slightly daunting journey. As a society, we really need to simplify our contracting." Müge Cöteli, Swiss Re.Article by Brian Rogers, Senior Business Development Manager. The article is based on the "International Conference on Contract Simplification" which took place on 29 March 2016 at the Swiss Re Centre for Global Dialogue.