Principles of Contracts: The Third Cousins Rule

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Previous Chapter: What is a Contract?
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Disputes and Contingencies

So, contracts are legal documents that obligate the signers to particular courses of actions in the event of enumerated contingencies. What about disagreements? After all, as a legal document, it’s always possible contract could wind up in court – one of the reasons that disputes are hell, particularly if not tended to immediately.

Disputes in contractual matters usually arise for one of two reasons: either one party failed to live up to their obligations specified in the contract, or the two parties disagree about what the provisions in the contract mean.

The former case isn’t something you can do anything about, other than making sure you live up to the contracts you sign your name to, and taking legal action against those who fail to live up to their end of the deal if they fail to respond to more civil communication (when it’s worth the bother to you – lawsuits are a pain in the ass).

The latter case is a nightmare. The possibility of a nasty dispute caused by an honest misunderstanding is a major reason for the proverb “never do business with friends.” This kind of dispute causes drama, factionalism, and fractured relationships and communities. It happens because two people talk through a deal and agree on the terms, but they figure that they’re doing a trade with a friend, so there are some unspoken-but-well-understood conditions to the deal. For example, if George is having a bad week and blows a deadline with Fred, he figures Fred will understand. After all, Fred is a friend, and George would be similarly understanding if the situation were reversed.

Contingencies often wind up ruling the deal. A publishing contract, for example, does not obligate a publisher to publish your book, it only grants them the right to do so under very specific circumstances. Publishers can, and do, kill books after part or all of an advance has been paid, for contingent reasons. They may be dissatisfied with the final manuscript, their staff might turn over, or their offices in the World Trade Center could collapse during business hours (this is the reason that Scott Sigler wound up podcasting his work. His publisher was in one of those towers, and the parent company decided not to continue the imprint. All the authors were left hanging, with no recourse but their reversion clauses).

It’s bad enough when contingencies ruin a deal legitimately, but things can get worse. Boilerplate contracts often contain contingency clauses that are obfuscatory, or that appear to say one thing but, due to a later sentence, mean another thing entirely. Worse still are contracts where the contingencies and specific details of the deal don’t make it into the contract at all.

This last case is pretty common in the world of freelancing, particularly among friends. The contingencies and fine details are discussed verbally, but never made part of the inked contract. Later on, when disputes arise, each party remembers a version of events that is most convenient to them. This can happen even when both parties are entirely honest, when they care about the relationship, and when they share similar goals for the project.

It’s human nature to shade memories to conform to bias, and the memories themselves are paraphrases of the past, not quotations from it. It’s a limitation of our brains that we have to cope with.

For example, let’s say that you and I discuss a delivery date for a graphic design project, and it’s a last minute job. It’s Friday, and you need the project by Tuesday, but I need certain materials to do the job. Let’s say I need a two-day lead time, and I say so verbally. You might hear “two days” and forget the part where I say “once I receive the materials,” so you might start your mental stopwatch from the time you mail the supplies, not the time I receive them. You’re more likely to do this if you’re someone who only hires graphic designers occasionally and you’ve never done a deal like this before.

Now, let’s say that the contract we sign has a 48hr clause, but it escapes my notice that the contract doesn’t specify which 48hrs we’re talking about. What’s likely to happen when the mail gets delayed due to inclement weather? Of if the usual mailman is sick and misdelivers the package? What if the job is important enough that an unexpected delay could cost you thousands of dollars, or more?

You see how easily problems can snowball from minor mistakes into friendship-ruining arguments?

Protecting Yourself and Your Partner From Drama

We see that verbal understandings – or worse, nonverbal understandings (i.e. assumptions) – make for fiascos. However, if you’re pedantic and specific in a contract it can leave you and your partner(s) feeling straightjacketed, mistrusted, and threatened (because most people are intimidated by contracts and legal language). So how much specificity is really necessary? Is the amount different with a stranger vs. a friend?

The woman who taught me contracts hammered into my head something that solves this impasse. She calls it the Third Cousins Rule.

It goes like this:

Let’s say your family and mine are both having family reunions in the same public park. It’s a perfectly pleasant afternoon until a meteor hits, killing everyone except for our third cousins, who were both not invited because they’re fairly stupid, annoying, or malicious. These third cousins inherit everything, and they have to complete the deal drawn up in our contract. They can’t ask us about verbal or unspoken understandings. They have only the contract to go on. Obviously, they can only proceed if the contract is drawn up in such a way that they will be able to understand every part of the deal, and if the contract protects each of them from the other’s less-than-honorable intentions.

Of course, nothing like that happens in the real world. Contracts are executed by the people who sign them…aren’t they?

Don’t I wish! That meteor strikes all the time. Every time a company merges, or goes out of business, or management changes; every time a freelancer gets sick, or folds; every time a client goes bankrupt and his debts are adjudicated by the court, this situation happens. Somebody’s unqualified third cousin inherits the mess. Sometimes, the contract ends up in court in front of another kind of third cousin: a judge. The judge, who has no context except for the contract itself and whatever conflicting stories he hears from the parties to the contract, must decide what will happen to the deal.

The Third Cousins Rule means simply this: Your contract should be as specific and all-inclusive as possible. It should outline the basic structure of the deal, outline contingencies, pedantically spell out the niggling details, and be structured so that the average person can understand the plain meaning of the deal without consulting a lawyer (this last part isn’t always possible, but it is nonetheless something to strive for). Above all, it should have the minimum possible level of ambiguity.

Following the Third Cousins Rule doesn’t just help you out in court, it can help keep your relationship with your business partner from deteriorating when a minor dispute arises. If you’ve negotiated and signed a contract that conforms to the Third Cousins Rule, the chances are very good that you will be able to pull the contract out, read it through together, and find the resolution to your dispute in its pages in plain language. It also ensures that everyone is signing the same deal in their minds, as well as on paper. Everyone is, so to speak, on the same page. Minimizing confusion is a simple and vastly underutilized way of maximizing good will – and it also shows respect for the other party.

Best of all, the Third Cousins Rule provides maximal protection without impugnment. By explaining that you have to protect yourself from your partner’s third cousin in the event of death, catastrophe, or hostile takeover, and that he should seek to protect himself in the same measure, you establish a base for negotiation that defuses a great deal of the adversarial nature of negotiations. If your partner thinks such things are silly to worry about, remind him that more people die in car accidents every year than were killed in the entire Vietnam war. If you’re freelancing long enough, you will do business with someone who dies, or someone whose company is bought out or goes bankrupt, before the contract term finishes. You should be protected in that eventuality. So should your prospective partner.

Next time, we’ll explore The Narrowness Principle.