“BAD” CONTRACTS: Leverage Follows The Money

IVAN HOFFMAN, B.A., J.D.


        There is a maxim in the law business that vague and uncertain language in an agreement is to be interpreted against the party drafting the same.  While that may be true in the limited context of a civil litigation or other formal legal proceeding, it is completely untrue in the more practical context called “real life.”  In “real life,” vague and uncertain language is almost always interpreted in favor of the party drafting the same.

“Real Life”

        Since “real life” varies with each individual, no 2 people seeing an event in the same way, I should explain my concept of “real life” for the purpose of this article.  I have been a practicing intellectual property attorney for now in my 33rd year as of this writing and I have drafted and reviewed probably thousands of agreements during that time.  “Real life” means life outside of the cloistered and arcane world of the courtroom.  I have been at both the litigation table and the negotiating table and it is my sincere belief that you never want to be at the former.   Litigation is enormously expensive, extremely time consuming, both of which are non-productive (assuming you are not in the business of merely consuming time) and, at best, involves an uncertain result at the end of the process, if indeed the process has a definable end.  No matter how “iron clad” or “air tight” a case may appear, there are always risks of decisions adverse to you.  You never know what a court or other tribunal is going to do.

        Thus I practice preventative law, best to avoid remedial law.  Preventative law is about doing things right the first time.  In this context, it is about saying the extra few words in the agreement to make the meaning clear.  This of course requires an attorney with both experience as to the substance of the transaction-- be it publishing law, web design and Internet law, music law or the like—as well as an attorney who can actually write clearly.  The former quality does not by any means imply the latter quality.  Remedial law, on the other hand, is about seeking judicial decisions about what you did not do right the first time.  And you never want to have any judge or other trier of fact be in a position to interpret what you have attempted to say in the agreement.  If you do it right in the first instance, if the agreement is well drafted, you can substantially reduce the chances that that will happen.

        Thus preventative law can be thought of as “help me” law.  Remedial law, on the other hand, should be considered “fix me” law.  And among many other benefits, help me is almost always cheaper than fix me!

Inside The Courtroom

        The maxim, for it to be applicable, requires a number of elements to be present.  First: it requires a litigation or other proceeding.  “Bad” in the extreme, as indicated above.  If you have gotten to the point where the maxim is going to be applicable, you have already essentially lost the matter.

        Second: you actually have to have a vague and uncertain set of provisions.  Just because 2 parties disagree on the meaning of an agreement does not mean that the provisions are vague and uncertain and thus are going to be interpreted against the drafting party.  That is one of the matters that a judge has to decide.  In other words, a judge must first decide that provisions fall within the scope of vague and uncertain and then must decide what they mean.  But mere disagreement does not imply the applicability of the maxim and such disagreement may actually result in a decision in favor of the drafting party.   This is one of the uncertain and thus risky results that can never be predicted.

Back to “Real Life”

        But the reason that “real life” is different than litigation in this context is because, as a practical matter, a party’s rights, duties and money are most often determined outside of litigation, via settlement, and thus vague and uncertain provisions are almost always determined in favor of the party drafting the agreement.

        And the reason that that is so is as a result of another, if more informal, legal maxim: the party that controls the money wins.

        Thus, here is how things set up in “real life.”  The party doing the drafting is usually the party with the money.  This party can be a book or magazine publisher, a web site owner, a music publisher, a recording company or other “money” party.  In nearly every instance, that party is the one that prepares the agreement and submits it to the other party.  It is rare that the party contributing the creativity to the transaction, be it a writer, artist or other such party, drafts an agreement.  Ed. Note: I do not mean to imply by any means that being a successful business or money person is not creative.  It is equally creative with the artistic party but for the purposes of this article, I differentiate in terms of “creativity” versus “money.

        When there is a disagreement over the meaning of a provision, if the party that controls the money leverages that control over money in a legally appropriate manner (we live, after all, in a free-market, capitalist system and that party is, by that system, allowed and indeed required to do so—see more below), then the pressure on the other party to accede to the money party’s interpretation of that provision often determines the “meaning” of the disputed provision.  To use other legal terms, this determination is “de facto” if not “de jure,” meaning “in fact” if not “in law.”  As between the parties to the agreement, the interpretation, as a practical matter, is what the money party says it is.  Read “Private Laws”.

        Keep in mind however, that this assumes that the other party has not, during the negotiation stage of the process, established some form of countervailing leverage.  Read “Leverage in Contract and Other Negotiations”.

        Let me give some examples.  These examples are by no means the only examples and agreements are filled with all forms of example of what I am writing about.  But this selection should bring the point home.

        Often there are provisions in a web design agreement about what the content of a web site is to be.  If those provisions and that definition are not clearly set forth (as I have seen in nearly every instance of “hand-crafted” agreements) or if, as with many situations in which there is no contract, if the site owner, the party with the money, says that the designer has to do things that the designer says he or she does not, the site owner can hold back payment until the designer complies.  Faced with the choice of litigating and hoping to win on the “maxim,” the designer tends to give in.  Thus the leverage of the power of the purse.  Thus the contract has been “interpreted” in favor of the drafting party.  Read “The Need For A Written Web Design Agreement”.

        Another example.  In a book publishing agreement, there are or should be provisions about deliverables including issues about whether deliverables are acceptable or not, sometimes including the meaningless word “reasonable” in defining the standard to be determined.  These decisions are left to the discretion of the money party, in this instance the publisher.  If the publisher has decided the deliverables are not acceptable, then the publisher can hold back the money or bring in another party to do the work, or take over the work or exercise a potentially wide variety of other rights.  Faced with the choice of litigating and hoping to win on the “maxim,” the author tends to give in and thus the meaning of the word “acceptable” is what the publisher says it is.  There can also be provisions about what form of marketing and promotion, if any, is to be done.  If these are vague and uncertain, the publisher simply does what it wants to do or refrains from the same and contract is “interpreted” in favor of the drafting party.  The leverage follows the money.

        Another example.  In a recording agreement, the recording company often has the right to suspend the operation of the agreement until the artist complies with whatever the recording company says the artist has not complied with.  This can be delivery of a number of satisfactory recordings or other such obligations.  That suspension can last for years and while the company can continue in business, marketing the recordings of many other artists, the artist must sit around until the statutory period runs out (if the particular state has such a statutory period) or until the artist accedes to the said interpretation.  Faced with the choice of litigating and hoping to win on the “maxim,” the artist tends to give in and thus the contract is “interpreted” in favor of the recording company.

        These are just a few of many, many other situations that can arise in “real life” as a result of vague and uncertain provisions, all of which are usually determined in favor of the drafting, money party.

What Must The Other Party Do?

        Therefore, when an agreement is submitted by the drafting, money party, it is the obligation, indeed the mandate, of the receiving party to either themselves understand the meaning of the agreement or obtain legal advice from an experienced attorney to explain the meaning of each provision of the agreement.  Not merely the what the words say but what they mean.  And “what they mean” means: what are the legal and business implications of the words?   These are the “what ifs” of the provisions.  What can befall the party under these words and how can the words be modified to prevent potential disasters?  An attorney with experience is an attorney who can think of the most disasters that can befall a client and then figure out how to modify the agreement to prevent the same.

        I say that this is the obligation, the mandate, imposed on the receiving party because we live, after all, in a free-market, capitalist system and there is no obligation, in an arms-length transaction, for the drafting party to look out for the interests of the receiving party.  Each party has only the obligation to look out for itself.   Whether you like this approach or not, it is what has worked very successfully for centuries and other approaches have simply faded into the trash bin of economic history.  If you believe otherwise, you are likely to be in for some very rude surprises including but certainly not limited to those described in this article.  Read “Capitalism”.

Real, Real Life

        But here is the real, “real life.”  In truth, “bad” contracts, contracts that are vague and uncertain, are actually contrary to the interests of all parties since they lead to disagreement, dispute and in the worst case scenario, the “L” word—litigation.  And in all instances these agreements can lead to a breakdown of the business relationship.  Contrary to what may seem to be a maxim but is not in fact or in law true, it is not contracts that break up relationships.  Contracts are just easy targets.  What breaks up relationships are the “I thought you said….” stuff that comes from no contracts or poorly drafted ones.

        If a contract does not work for one party, it will not work for the other party, leverage and the power of money to the contrary notwithstanding.  A contract is, after all, merely a piece of paper.  All contracts depend upon the good faith of the parties.  If one party feels oppressed, that party will generally figure out a way to frustrate the smooth operation of the transaction.

        So rather than get into a situation in which the relationship breaks down, either formally through litigation or informally through antagonism, say the extra few words to make yourself clear.  And if you are the recipient of an unclear agreement, get someone to explain it to you and if is not clear, ask for it to be clarified.  Taking care of yourself, the mandate of free market capitalism, dictates that you be precise in drafting and in understanding.

        Read “Precise Contract Language” and “Precise Contract Language-Again”.
 

Copyright © 2006 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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