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How to make contracts more certain and less costly

Stop believing the myth that lawyers can provide legal protection with words alone. In addition to words, protection in contacts requires knowledge and know-how regarding business process, policies, training, standards, and codes of conduct.

The reason is that context has become as important as content. The context of a contractual or other legal relationship between two or more parties has become as important as the words the parties choose to communicate and set the terms between each other.

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The increased importance of context considerations relative to content (eg contract text) means contracts and other legal documents should be designed bearing in mind how courts interpret them. We'll give some practical guidance in this article.

Interpretation of contracts: from content to context

When it comes to who is right and who is wrong in a  misunderstanding or dispute, in some cases the context of the legal relationship between the parties is as important as the word-based content of the written or oral arrangement between them.

Using a wall of words to block claims is not as effective as it once was.

How the law arrived at this content plus context approach to legal interpretation formed part of the topic of a speech in 2007 by Justice Spigelman, Chief Justice of the Supreme Court of New South Wales.

Alex Boxsell (writing in "Trafficking words in today's contract" Lawyers Weekly Online, 5 April 2007), quoted Justice Spigelman saying:

"Over the last two or three decades the fashion in [legal] interpretation has changed from textualism to contextualism. In constitutional, statutory and contractual interpretation there [also] does appear to have been a paradigm shift from text to context.

Ideas which have found their origin in statutory interpretation have come to be applied in the interpretation of contracts ...  Such convergence in approach also reflects changes in the broader intellectual milieu."

Does commercial uncertainty necessarily follow?

The benefits of certainty for people in commerce is an occasional touchstone in contract law. Justice Spigelman spoke to this. He expressed a concern regarding a negative consequence of the shift from content to context. Boxsell quotes him stating:

"A significant concern is whether the change in the general style of contractual interpretation - from text to context - has undermined the desirable objective of ensuring commercial certainty.

There is a real question whether the expanded scope of matters to which consideration can be given in the course of interpretation has so decreased the capacity of all relevant parties to rely on the words as to raise the level of uncertainty about the obligation to deliver the relevant bucket of money or of monies worth."

The concern for commercial certainty expressed by Justice Spigelman deserves a lengthier analysis than we intend here. For present purposes here are two practical solutions to reduce or overcome uncertainty.

  • Take a project management or process approach to drafting.
  • Recognise the hidden clause architecture of business contracts. The placement of clauses should generally follow the chronological and practical needs of the subjectmatter of the deal between the parties.

Both solutions for uncertainty apply a pre-performance methodology used by actors in rehearsal. They both seek to draw out deep meaning. They both recognise that understanding improves when text is read, text is recited out loud, and text is put it into action. Project management, process and architecture are about practical needs. Each rehearsal step helps cut out guff that gets in the way of meaning.

Do higher legal costs necessarily follow?

Does the shift from content to context increase legal costs in legal disputes? We think, not necessarily.

Boxsell notes the NSW Chief Justice expressed concern regarding the significant increase in the legal costs of legal dispute resolution. This topic deserves extended discussion which we won't attempt here.

  • Costs certainly increase if parties in a strained or broken business relationship only have documents that contain an unstructured wall of words. Legal design is recommended.
  • Costs also increase if before they began their relationship contracting parties failed to read, process and rehearse their words. Rehearsal is recommended.
  • Legal fires will not be smothered by throwing a thick wet blanket of contract text at them. Courts may de-emphasise the contract text and look at the context to interpret the legal position.

The increased importance of context relative to content does not increase costs if clients and lawyers use documents designed to cope with the shift. In our firm over many years we have prepared in response to the shift. Have you planned to deal with the shift in your in-house standard agreements and most important contracts?


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