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Exhaustive contracts raise risks that broad-stroke agreements do not

Dan Ariely, writing in the Harv. Bus. Rev., March 2011 at 40, describes a thought-provoking contrast between what he terms “complete contracts” and “incomplete contracts.” He believes that “business’s increasing dependence on (I would say, fetish for) absurdly detailed contracts in every situation” leads to problems. If some situation arises that the detailed contract doesn’t address “there’s no default to goodwill – it’s happy hunting season for all.” If nothing was said, anything goes.

By contrast, incomplete contracts “lay out the general parameters of the exchange (the part that we shake hands over), while the unexpected consequences are covered by social norms governing what is appropriate and what is not.” They are constitutions of broad understandings more than civil codes of precise and comprehensive coverage. The contract incorporates honorable business dealings.

The distinction makes sense to me, and suggests one minor and one major implication. The minor implication: if your law department negotiates an alternative billing arrangement with a firm, lean toward incomplete contracts. Trust, after all, and a goal of fair and longer-term service, make or break such arrangements. Likewise for outside counsel guidelines (See my post of Feb. 6, 2008: shorter is sweeter; and March 5, 2008: detailed and strict guidelines compared to short and constitutional.).

Of much more significance would be the suggestion that over-lawyering contracts not only takes more time but also risks the immoral exploitation Ariely describes if the parties disagree. If all bets are off when a complete contract has holes, legal fees if not litigation loom. Square dealing and long-running business equity serve better.

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