When you read your next complex contract, don’t hunt down your magnifying reading lens just yet. I think I’ve discovered a stronger focus -- contract design and clarity.
In my work as lawyer, I have seen a great need to modify commercial services, products and processes with human- and user-centered design. But, in doing that, I’ve found that increasingly, legal contracts have become greatly comprehensive and complex. Too much so, to be honest.
For instance, often, an insurance policy’s language is complex, and insureds cannot understand what the coverage means. By contrast, if the policy is written in clear and plain language, or even visualized – then insureds would understand the policy and comply more closely to their insurance contract.
To illustrate why insurance text must be clear to help both the insured to safeguard personal property, save money or save the insurance company from an unnecessary insurance claim applications and administrative work – consider these scenarios -- a bit absurd perhaps -- but they make a point:
If your insurance policy coverage were written in a way that you could understand and if you could remember what the policy covers, you might decide to leave your cell phone in a nearby safe place or avoid taking it to the poolside in the first place.
The point -- clarity in contracts, like insurance policies, is critical for anyone reading them. Knowing your coverage is similar to knowing what a business contract covers. But ironically, whether contracts are standardized or uniquely created, they have one thing in common: people too often have no idea what rights or obligations they have under these contracts, and such neglect is like dropping your cell phone in the pool and expecting it to continue functioning! Not knowing what your contract says and what you have signed puts your business at risk.
And that’s why legal design has become my operative word!
Legal design and contract clarity go hand-in-hand. Legal design pertains to interpreting -- or writing a law or a contract’s legalese -- according to the needs of the people the law or contract serves. The intent of legal design is to write language of commercial contracts and processes that is easier to understand and more accessible for parties affected.
A legally-designed contract may involve design elements such as videos, bulleted lists or graphics or even drawings or flow charts, etc., to accurately and precisely convey the meaning and information intended for all readers – whether they are novices or seasoned practitioners.
In a word, legal design clarifies complex legalese. Beyond that, commercial contracting legal design can do the following:
- assess efficiencies of products, services and processes;
- evaluate the total value of design impact by using economic analysis of a law-based approach and empirical findings;
- measures numerical data of design’s impact;
- improves evaluation, transparency, equality, efficiency, the support of processes, decision and policy making; and
- involves the interdisciplinary approach of other fields of science like service design, behavioral economics, psychology, neuroscience, and economics, etc. to empower our approach to law.
Legal design uses measurable or empirical contract data to evaluate procedures and make better contracting decisions. It helps us understand more clearly the real-life meaning of a contract.
Law and economics is key especially in light of Friedrich Hayek’s teaching1 and perspective from the Austrian school of economics.2 Both approaches collectively provide a more realistic interpretation of law and economics’ concepts within a legal design framework.
Although the law and economics approach is not neoclassical, it mirrors real life. It helps us assess the impact and value of legal design concepts so we can better evaluate empirical data to identify most critical decision and policy making steps we need to identify both the possibilities and the obstacles within our commercial contracting operations.
Legal design works in at least four major ways:
- It improves ethics and efficiency of products, services and processes whenever the applicable contract language uses a more human and user-centered approach;
- It empowers people, societies, communities and entities to reduce or eliminate the information and knowledge asymmetry between parties;
- It demonstrates that law and economics is not just a theoretical science of neoclassical economics – it uses empirical research to present numerical data to verify potential value and impact of a given contract;
- Its empirical data improves efficiency and ethics in decision and policy making. Design thinking frames the process for designing language that is more user friendly.
In conclusion, legal design empowers ethics and efficiency of legal products, services and processes. By using legal design efficiently, lawyers will get greater value and leverage from the contract drafting process. Unfortunately, too often lawyers are regarded as the omniscient wizards of legal matters, who handle the whole process of contracting and push clients to get the contract signed at the end of the process. And, when signing, clients too frequently do not understand what they have signed, or what their rights and obligations are under the contract.
Legal design can eliminate this asymmetry even in the worst-case scenarios involving lawyers who draft overly comprehensive contracts to avoid future or unknown legal mistakes or prevent legal proceedings demanding that they defend their contract before a court. Luckily legal design can defeat this ill-advised approach to law where contracting parties work compatibly in an attitude of ethical agreement.
Undoubtedly, it is crucial for end users, economic operators, legal professionals as well as governmental agencies to understand the advantages and limitations of using legal design as a tool for simplifying contracts.
ABOUT THE AUTHOR
Katri Nousiainen works for Hanken School of Economics, Helsinki, Finland, and is currently conducting research at the University of California, Berkeley, California. She states, “My pioneering empirical research proves my argument for how strong the impact of legal design in commercial contracting will be. Case studies in the field of insurance and legal practice are used to support this research. I continue to work with international and influential business operators, and to conduct a case study on a common legal language. As the work progresses, it will indubitably bring a significant scientific, societal and academic benefit to commercial contracting internationally.”
“And finally, the lessons I have learned in my legal practice have led me to conduct a cost and benefits analysis of legal design. I will be studying several different angles within the framework of law and economics so that I can demonstrate the total impact of legal design in commercial contracts.”