How long should a contract be? Two pages, or ten, or 100? How about 400?
Of course, the only possible answer is “it depends”. It depends on the complexity of the transaction, on how many legal issues need to be covered, and on how much risk each party is willing to bear.
If it’s a straightforward “You give me that object, and I give you this money” thing, then short and (relatively) sweet is the order of the day. So most consumer and many commercial transactions are done using terms and conditions that fit on one side of A4 (in two columns of tiny print, but still).
Lots of contracts need more than that, naturally. A large scale commercial deal has to cover a lot more ground: change mechanisms, intellectual property, commercial assurances, etc etc etc. And specialist transactions need specialist clauses – five pages of TUPE provisions, anyone?
But even then there’s usually limits. I can cover most of the procurement transactions I’m instructed on in less than 20 pages of wide-spaced 11 point type, and I can do you a multi-million pound contact centre agreement in 100 pages of the same.
But for some lawyers that’s not enough. They’ll see your 100 pages, and raise you 200. Still too short? Welcome to the 400 page contract, and that’s before any technical specs or prices are added.
So how long is too long? Are some transactions so complicated that they need 400 pages of operative provisions to work properly, or is it overkill (or, even worse, fee-padding)?
Well, let’s start by excluding M&A contracts. I’m not a corporate lawyer, but I guess that if you’re buying, say, a bank you need all the assurance you can get.
And there are other organisations that justifiably require longer contracts. The public sector, in particular, has to ensure that taxpayer funds and data are well-protected, and to flow down all of those codes of practice that are required to keep government looking good and voters happy. That means lots of specialist clauses, and a lot less tolerance for letting unforeseen events be sorted out as they arise.
But I think that there’s a point beyond which adding more clauses becomes counter-productive. For one thing, someone has to pay for all of this extra assurance. It’s either going to show in the price or (if the other side takes on the additional risk at no premium) in poor service and the cost of dealing with breaches later on.
For another, it ramps up the transaction costs. It takes a lot of lawyering to draft and negotiate these enormo-contracts, and it drags in specialists from all over. Even if you accept this as a cost of doing business in a particular sector, it’s a barrier to entry into that market, especially for smaller businesses – something which governments in particular are supposed to be mitigating rather than fostering.
And it makes for bad contracts. Whisper it, but even the big PFI and projects practices at the city and national firms struggle to keep that much text and that many obligations on the straight and narrow – no-one could. So you get lots of woolly drafting, undefined terms (clearly there wasn’t enough room for them in the 20 pages of definitions) and inconsistent or impossible obligations.
You also get plenty of overdrafted and over-lawyered clauses. Dispute resolution clauses that require negotiation, then expert determination, then mediation, and finally arbitration, but we can just sue you if we want to. Obligations to perform other obligations. Worldwide taxation clauses, “just in case”. There is no sense in which these clauses are necessary.
From the buyer’s side of the transaction, this perhaps doesn’t look like a big issue; after all, all of the contractual risk is usually on the supplier’s side (even under a balanced contract this is often true, because suppliers don’t like to enforce against their clients). If you don’t like it, don’t do business with us.
But that comes back to my earlier point – it’s inefficient, and the buyer pays for that inefficiency one way or the other. Just because you can force suppliers to contract like this, it doesn’t mean that you should.
But in some corners of the private sector there seems to be a philosophy of procurement that sees coercion of suppliers as an end in itself (I could go on at length about that, but another time). In the public sector, more forgivably, a combination of risk-averse private practice lawyers and even more risk-averse public sector buyers makes it much harder to delete clauses than to add them.
In both cases, a strong bargaining position means that there is no incentive to self-examination. And the costs are somewhat hidden, or are never measured. So it’s unlikely to change any time soon.
But maybe one day a brave lawyer in a city firm, or in a corporate procurement team, will put their hand up and say, “Guys, have you ever thought that all this might be, well… a bit too much?” Well, I can dream, can’t I?
PS: Hat tips to Vic McKenna Martin (@VicMcMartin) for the discussion that led to this post, to Michael Robinson (@emmersonslaw) for the title, and to my faithful sidekick Stef (@PrincessofVP) for the pic.