Media Briefings

DRAFTING CONTRACTS, LAWS AND CONSTITUTIONS: The benefits of simplicity and vagueness

  • Published Date: September 2016

Analysing why some of America’s founding fathers opposed the inclusion of the Bill of Rights in the Constitution helps to explain why many modern-day contracts and laws are deliberately vague and simple.

In a study published in the September 2016 issue of the Economic Journal, Kim‐Sau Chung and Lance Fortnow argue that the drafters of constitutions, laws and contracts want to avoid being too specific about possible outcomes, leaving it to the courts to interpret their decision not to have a long list as an indication of seriousness. Drafters and courts are actually playing an intricate mind-reading game, they conclude.

The researchers revisit an old debate among America’s founding fathers, namely whether or not the Bill of Rights should be included in the Constitution. Some of the founding fathers such as James Iredell, subsequent Supreme Court Justice, strongly opposed the inclusion, arguing that it would be:

‘… not only useless, but dangerous, to enumerate a number of rights which are not intended to be given up; because it would be implying, in the strongest manner, that every right not included in the exception might be impaired by the government without usurpation.’

The million dollar question is: why the Constitution’s Article IX (‘The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.’) was not deemed effective by Iredell and fellows in protecting those rights ‘not included in the exception’? And regardless of the effectiveness of Article IX, how could deliberately throwing away a list of rights that fellow drafters worked hard to put together ever be helpful?

Understanding this million dollar question helps to explain why many modern-day contracts and laws are deliberately vague and simple. For example, merger agreements usually contain a ‘material adverse change’ (MAC) clause that allows either party in a merger to opt out before completing the deal. The language of the clause is typically vague, leaving it to the courts to decide what it means by a ‘material’ adverse change – one that damages one party’s business enough to justify the other party’s pulling out.

For the same reason that Article IX did not comfort Iredell, parties entering a merger agreement rarely feel comfortable replacing the MAC with a detailed list of ‘material’ changes, capped with an extra clause saying that the list should not be construed to deny other changes as ‘material’. But why? And, regardless of the effectiveness of that extra clause, how could throwing away a list of specific changes already known to be ‘material’ ever be helpful?

This study argues that in contrast with popular perceptions, courts do engage in mind reading – and that drafters of constitutions, laws and contracts understand this. As such, the drafters and the courts are actually playing an intricate mind-reading game, where courts try to figure out how serious the drafters are in not having the unlisted factors treated in the opposite manner as the listed factors, whereas drafters try to communicate their seriousness.

Communication is inevitably difficult because many factors are unlisted exactly because the drafters are not aware of them at the time of drafting. Given this difficulty, genuine seriousness would have to be communicated through costly actions instead of by cheap words such as Article IX. It follows that throwing away a list of rights that fellow drafters worked hard to put together is exactly an example of such costly actions.

In short, simplicity and vagueness in constitutions, laws and contracts are a costly signal from the drafters to the courts regarding certain aspects of the former’s mind that are otherwise difficult to communicate. The drafters understand this, and wisely avoid being too specific. The courts also understand this, and correctly treat simpler contracts as more incomplete (even though a simple contract does not necessarily contain any objective gap).

ENDS


Notes for editors: ‘Loopholes’ by Kim‐Sau Chung and Lance Fortnow is published in the September 2016 issue of the Economic Journal.

Kim‐Sau Chung is at the Chinese University of Hong Kong. Lance Fortnow is at Northwestern University.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh); or Kim‐Sau Chung via email: kschung@cuhk.edu.hk