Thinking fast and slow for contracts – part 2

In the second part of my article on fast and slow thinking for contracts, we look at engaging System 2 (slow) thinking when reviewing our contracts. For a reminder of what the two Systems of thinking are, and how to use them to improve your effectiveness in drafting contracts, please see part 1 or watch this video by Professor Khaneman*.

If the creator of a contract has used System 2 thinking in drafting it, this will reduce the need for you to use System 2 thinking in reviewing it. However, some System 2 thinking will still be crucial as, whilst System 1 (fast) thinking will only look for errors, System 2 will enable you to spot what’s missing and ‘read between the lines’ of remaining difficult language.

As a result, you’ll be able to grasp the true meaning and value of the contract and be in the right position to suggest any necessary changes, additions or deletions to make it into a useful, viable document.

Putting the theory into practice

Some of the tips from Part 1 of this article apply to reviewing contracts as well as drafting them, such as assessing risks thoroughly and asking yourself the right questions. Here are a few more ways to make sure System 2 thinking is engaged during the review process.

Don’t get distracted

It’s very important to allow yourself enough time to engage System 2 thinking when reviewing a contract. So make sure you plan ahead:

  • Agree realistic targets for reviewing contracts. Don’t be railroaded into last-minute deadlines that will force you into System 1 thinking.
  • Don’t work under pressure, for example, reviewing and signing a contract during a meeting. Take the document away to somewhere you can’t be disturbed and give it your full attention.
  • Consider your environment and state of mind. If you’re tired or stressed, or working in a hot, stuffy office, it will be hard to use System 2 thinking. Find the right place and the right time to work on a contract. First thing in the morning is often the best time, as your thoughts won’t be prejudiced by the events of the day.
  • Don’t be afraid to ask for advice if you need it!

Set aside your emotions

To understand and evaluate a contract effectively, you need to approach it objectively – disregarding any previous dealings with the other party and assessing the project and its risks on its own merits. So if you’ve received a contract that’s been written by someone you know and trust, don’t read it straightaway.

Write down what you want the agreement to achieve for your business and list the obstacles that might stop that happening. Get other members of your team to carry out the same exercise, so you come up with a set of neutral guidelines that you can then refer to when reviewing the contract.

This ‘pre-mortem’ process puts you in a strong position to pick up on any omissions or inadequacies in the agreement.

Beware the vague or very short contract

The golden rule here is that if it looks too easy, it probably is! A half-page agreement might be enough to cover all the objectives, risks and liability issues that relate to your project, but don’t just assume that this is the case. It may only cover your primary objectives, leaving gaping holes in other areas that could lead to major problems down the line if you don’t spot the omissions during the review process.

For example, the less experienced contract reviewer may pick up on a provision which states that the other party retains the copyright in the material written for them – but may not notice if there was no copyright clause in the agreement at all.

Distinguish the surprising from the normal

In this context, ‘surprises’ are the negative aspects of a contract that you perhaps weren’t expecting to see, such as statements from the other party about liability or the use of intellectual property. The ‘normal’ here is standard clauses – often called ‘boiler plate’ – that appear in most commercial contracts.

There are two key rules to remember here:

  • Don’t skip over standard clauses. Give them as much attention as the other parts of the contract. Don’t ask yourself closed questions such as ‘Is this OK?’ or ‘Is everything covered?’ Ask open questions like ‘Does this achieve my objectives’, ‘Is this fair and reasonable?’ and ‘What’s missing – which risks haven’t been addressed here?’
  • Don’t get hung up on surprises and try not to respond emotionally to the language used. Abrupt statements such as ‘We accept no liability for….’ may rankle, but you need to take a step back. Again, ask yourself if the clause is fair and reasonable and if it isn’t, ask for further explanation or justification.

Finally, don’t jump to conclusions about sloppy language. It may not give the best impression of the writer but as always, you need to look beyond the words used to find the true meaning of the contract. Sloppy documentation only tells you that the other party isn’t very good at writing contracts – but may not tell you much about their ability to complete the project in hand.

* The theory of fast and slow thinking and the terms ‘System 1 thinking’ and ‘System 2 thinking’ stem from decades of research by Nobel prize winner, Professor Daniel Kahneman. His 2011 book Thinking, Fast and Slow summarises this research and is available to buy from all good high street and online outlets.