The Law of Middle-Sized Risks

As I lawyer, I have often been asked why high-priced lawyers can't seem to be able to write a contract that is litigation proof.  The lawyers tasked with contract drafting certainly have a number of advantages.  Many are a fairly smart.  Most are well trained.  Many have been plying their craft for a long time. 

Moreover, anyone who is used to paying legal fees understandably assumes that they have enough time to get it right.  Anyone who flips through the pages of a typical agreement knows that there is no such thing as a word limit.  And, anyone who actually reads the words knows that elegance of expression is not a requirement.

Despite the many benefits, fancy contracts keep landing in court, and I keep getting asked why.  The answer is one of mathematics and transaction costs.  Every new contractual arrangement entails risks—not just a few risks but a host of them.  Some risks are relatively likely (like not getting paid after performing a service); some rarely happen (nationalization of the airlines); and many fall somewhere in the middle.

Most astute businesspeople are fully aware of the most likely risks and don't need to hire lawyers to protect themselves against them.  Insisting on getting paid in advance totally eliminates the risk of not getting paid, and no one needs a lawyer to know or require that.  In addition, few businesspeople are willing to spend much time worrying about highly unlikely occurrences.  When I order a pizza over the phone, the pizza seller doesn't worry about what will happen if the bridge between me and it goes out in the next hour.  I don't worry about what happens if the electricity goes out at the pizza parlor. 

The fact that we don't worry about highly unlikely happenings isn't because we are dumb.  It is because the cost of resolving each of them (and the many others like them) in advance is not worth the effort.  The essence of highly unlikely risks is that there are usually a great number of them and the odds of any one of them taking place in a particular contractual arrangement is miniscule.  Because I can't know in advance which, if any, of the many miniscule risks will actually materialize in a particular contract, if I choose to address the category at all, I must address every single one of them, and because the cost of addressing a particular risk is never free, the cost of addressing a multitude of highly unlikely risks will quickly exceed the benefit of any added protection. 

This leaves the contract drafting lawyer with a middle domain of risks.  The most likely risks, and the solutions to them, are generally known in the industry.  The least likely are not worth the commitment of a contractual party's brain space (even ignoring the legal fees).  The risks in the middle are the ones that a good business person does not encounter often enough to know by heart, but are important enough to think through and address in a contract.

Assuming that everyone does his or her job perfectly, the most likely and the middle-sized risks are resolved to everyone's satisfaction.  That leaves the contracting parties with any number of unresolved tiny risks.  In many cases, none of those risks materializes.  However, given the hundreds of millions of contracts that are in place at any one time, from time to time, a highly unlikely risk will in fact occur, and it will cost someone a lot of money.  That contract is usually the one that lands everyone in court.  Therefore, when someone says "none of my contracts has ever been disputed in court," he or she is either spending too much time sweating the small stuff or hasn't written very many contracts.