A Solution to the Problem of Consumer Contracts That Cannot be Understood by Consumers Who Sign Them
Written by Lewis D. Eigen
There is a way to solve the problem of Americans signing contracts that they do not understand. A solution is possible that will not require any additional government money to be spent, not require a single additional government employee, require no inspectors or additional regulators, and place very little additional cost burden on consumers and companies–no burden for many companies
The problem is well known. Every day in America people sign contracts and accept obligations and expect benefits neither of which are understood by a large proportion of the consumer contract signers. We used to think of this only as a consumer protection problem–an ethical and moral problem. However, in the 2008 meltdown of the economy, we learned that the huge number of consumers who purchased homes without understanding the contracts they signed became an economic danger and helped to cripple the real estate market. The consequence of millions of people signing contracts that they did not fully understand was not just their collective financial losses, and that of the holders of the hot potatoes called residential mortgages, but the value of all houses in America reduced, accelerating the meltdown of which we are all still suffering. Americans, executing contracts that they do not understand, represent a clear and present danger to the economy and all other Americans. The moral, consumer protection issue has also become a national economic security issue.
There is little disagreement that the problem exists–that it is undesirable ethically and economically for people to make agreements that they do not understand. However despite the plethora of Americans who believe the critical problem exists, there were no specific solutions on the public table. That was then. This is now. Here is a proposed solution for consideration, enhancement, and potential implementation.
Use the Law of Contracts
The basic principle in our legal system of our law of contracts is that two (or more) willing parties enter into an agreement that places obligations on both parties and that both parties understand and then consent to their obligations and rights under the agreement. The understanding must precede the consent. There are certain people who, under our existing legal system, may not make a valid contract. These are people who are assumed to be incapable of understanding the terms of the agreement or their implications: Children, adults who are mentally impaired, or so emotionally distressed that they are incapable of understanding and voluntary consent. However, in our existing legal system, the determination of understanding has to do with the parties and not with the contract instruments. Our present system by law assumes that if a person is an adult of sound mind, he or she is automatically as a matter of law capable of understanding ANY contract that can be written in the English language. Age and mental competency are all that are legally needed.
The virtue of that present system is that it is simple to enforce. If a mentally competent adult voluntarily signed a contract, he/she is bound be all the terms of the agreement whether or not he.she understood what was signed. In recent years, some courts have had exceptions for people who were not literate or could not read English and had no translation or interpreter. However the only factor that the legal system used to determine understanding was the capability of the individual.
At a rational level, independent of current law, we all know that the understanding of a written document depends on two independent factors: The capability of the person to be sure, but equally important in reality is the nature of the document. If a contract were encrypted in code and handed to one of us to sign, clearly we could not understand it. Or if in Russian, most of us would not be able to understand it. Our legal system therefore requires the English language. The assumption is that the competent adult can understand anything that is written in the English language. But such an assumption is patently incorrect. Few of us can understand an article published in the Journal of Theoretical Physics, or the Proceedings of the Philosophical Society of America. The reality is that there are three variables that affect a competent adult’s ability to understand a written English document: Technical terminology used and the writing style and structure of the document
First is the use of technical terminology. Few of us would not have any clue what a statement like the following meant:
“This flavor transformation mechanism causes the radioactive process of beta decay, in which a neutron (n) “splits” into a proton, an electron and an electron antineutrino . This occurs when one of the down quarks in the neutron (udd) decays into an up quark by emitting a virtual W− boson, transforming the neutron into a proton (uud). The W− boson then decays into an electron and an electron antineutrino.”
Many of us can read every word and sentence without difficulty but when finished, we have no idea of what it all means. On the other hand note the following:
“Whoever, being an officer, director, agent or employee of, or connected in any capacity with any Federal Reserve bank, member bank, depository institution holding company, national bank, insured bank, branch or agency of a foreign bank, or organization operating under section 25 or section 25(a) of the Federal Reserve Act, or a receiver of a national bank, insured bank, branch, agency, or organization or any agent or employee of the receiver, or a Federal Reserve Agent, or an agent or employee of a Federal Reserve Agent or of the Board of Governors of the Federal Reserve System, embezzles, abstracts, purloins or willfully misapplies any of the moneys, funds or credits of such bank, branch, agency, or organization or holding company or any moneys, funds, assets or securities entrusted to the custody or care of such bank, branch, agency, or organization, or holding company or to the custody or care of any such agent, officer, director, employee or receiver …”
It appears to be a paragraph but it is not even a singe sentence. It goes on for some time before the writer mercifully uses a period. Here most of us understand almost all the words and hence knows what the material is about, but few of us can understand just what it means. The structure is just too complicated and arcane for a normal literate person to comprehend. The passage incidentally comes from the U. S. Code, the basic laws of the United States.
Fortunately there are measures that educators and psychologists–learning and reading specialists–have developed that take these two factors into account and can quantify the reading difficulty. The usual form in which this metric is used is to put it on a scale of average readability depending on school grade. 7.0 is the reading level of an AVERAGE beginning seventh grader. 15.5 would be the current reading level of an average college junior midway through the school year (15th grade). 12.1 would be the reading level of the average beginning college student. Any written document can be measured and accurately rated.
This reading level of any document is calculated from the length of the sentences, complexity of the sentence and paragraph structure and the proportion and degree of polysyllabic words. This used to be very complicated and time-consuming to calculate, but today any document can be loaded into Microsoft Word on a PC, and the Reading Level will be calculated in seconds.
A complication is that most of us who may have gone to high school and college, do not read as well as adults as we used to as students. A few professionals who are editors or have a few other occupations which require reading of complex materials and they might read above a 15.0, but for most of us, our reading reverts back to our level in Junior High School. (Our math skills tend to follow this pattern also. In high school and college we were able to solve two simultaeious equations with two unknowns, but few adults can do so a few years after college.)
So even for well-educated adults, there is rare ability to read at the 10.0+ reading levels. There have been hundreds of studies conducted to measure the reading level competency of the average American adult. One study summarized the situation as: “To communicate effectively with a general audience in the U.S., we need to write at a 6th-8th grade reading level.”
The average newspaper article is written at the 8th grade level.  Newspapers like the New York Times write at a slightly higher level. JFK’s classic inaugural address was written at 10.3 and that’s about as high as it goes to communicate with American adults. Lest anyone think that American literacy is decreasing, consider that Patrick Henry’s “Give Me Liberty” speech was written at 6.6, –one of the reasons that almost everyone understood it and were galvanized by the contents. IF few Americans could read it and understand it, it would be in the class of the Federalist Papers.
Reading Levels of Consumer Contracts
We are accustomed to reading and understanding sales and marketing material from the business world that is brilliantly written at a sufficiently low reading level that we understand the reasons to buy or use the product or service. One professional article observes that “Americans (in marketing) are used to writing so clear and readable it practically reads itself. That’s the art that conceals art. Good, clear, concise writing. Writing that communicates effectively.”
However, when we examine the reading level of most contracts, the same companies who are so skilled at writing marketing and advertising material to the low reading level needed to communicate with most Americans, do not seem to demonstrate the same skill in their contract drafting.
Here is an analysis of the reading levels of a few of the consumer contracts of leading American corporations.
As a little reality experiment, I randomly went to three major corporations and downloaded their consumers contracts that were available on line.
I selected four well know companies in different consumer oriented businesses: Bank of America, Sam’s Club, and Levono (the IBM computer successor company.) The Bank of America contract was their on-line consumer banking contract. Sam’s Club was their contract for “membship”. Levono was their warranty. Scott Trade was a classic consumer brokerage account contract. Here are the readability results:
Bank of America —- 14.5
Sam’s Club —- 15.6
Levono —- 13.0
Scott Trade —- 15.9
In just this small sample. it is clear that the vast majority of the American adult population cannot read and comprehend any of these agreements. The high reading level alone makes a mockery of the principle of a contract being an agreement entered into between two parties each of whom understand what their rights and obligations will be. Perhaps, it was the case that these companies didn’t know how to write materials at levels that most people could read and understand. So I took a sample of the web promotional material that Bank of America used on the web to invite people and give them the advantages of their on-line banking. Perhaps the 14.5 grade level is as good as the Bank of America writers can produce. However, the promotional, marketing material tested at only 6.0, When the Bank of America wants to be understood and reach the vast majority of people-potential customers all—they certainly know how to write at a level almost all Americans can understand. As the early quote of this article indicated, American business knows how to write and be understood to a degree of excellence that borders on perfection. Sam’s Club might be thought to have an easier to read contract compared to a Bank. However, its contract was even MORE difficult to read and be comprehend, It was 15.6. That would be understood by less than 10% of Americans. Levono, which is Chinese owned, actually was able to write English in a more understandable manner than the other two, Still far too high for most Americans to understand. Both Levono and Sam’s Club, like the Bank of America, were able to write their sales and marketing materials at a much lower reading level. It is very hard to escape the conclusion that making contracts unreadable by many people is a deliberate policy. However, although this has surely been an attempted strategy of some companies–to increase their profits by deceiving their customers–there is another, less evil explanation. Writing marketing materials that can be understood, produces more customers and sales, Therefore marketing divisions place great importance on this and demand it of their employees. Legal departments, in contrast, have never been customer oriented in the same way, They generally don’t care about the corporation’s customer, even legally. Their job is to protect the legal rights and prerogatives of the business. If their contract is not understood, there are no business consequences. This is what makes the potential reform solution so easy and simple. All we have to do, is to make sure that the legal department that drafts the contracts will have adverse consequences if their documents are not readable and understandable. That solution also takes care of those businesses who write complex legal documents as a business strategy. The solution herein proposed, makes that strategy very dangerous. And it can all be done with no additional government regulators or enforcement personnel, Nor will there be any additional reporting burden on business. The only burden on business will be to use writers who can write “plain English” at low reading levels. Most of the companies already have these writers with the necessary skills. All they have to do is have them work for the legal department as well as the marketing department.
Out of curiosity, I also examined the contracts of businesses that have extensive consumer relations, but are “new types of businesses”–modern companies what would not exist without the digital revolution. These tend to be influenced more heavily by original founder’s visions of the change their technology could make upon society. They were less dependent on banks, brokerage firms, and other businesses than most older companies. Founders were young and set the ethical tone of the company. Would their consumer contract be as unreadable as the classic companies? I have not sampled enough different firms to answer this question to any scientific degree of certainty, but there is a suggestion that these firms are not as bad as their older counterparts with respect to the readability of thei consumer contracts. I ran a readability test on the standard Microsoft Software Liscence. I also looked at a financial contract since some argue that they are harder to write at a reasonable level. So I checked E-Bay and took the contract used by their “digital banking: operation, Pay Pal. The Microsoft readability was 10.2. This was not great, but was markedly better than the traditional companies. Microsoft also had the inherent problem of technical terms. I suspected that Microsoft wrote for the “nerd” reading level and hit it just about right. And the E-Bay Pay Pal was only 10.8. Why could they do a complex financial agreement at a 10.8 reading level when the Bank of America, with far more experience, know how, and many more skilled people, did not seem to be able. My suspicion is that E-Bay with its radically new kind of business were trying to include people in a financial relationship that was radical–that no one had ever imagined before. If in addition to all the other barriers taht these new customers faced, they also had to sign contracts that they could not understand, not by the thousands, but by the millions, the E-Bay and PayPal founders worked at getting their contract to match the readability of their target customers. Bank of America didn’t have to. E-Bay if it could even survive a few years would have been a great succes. Bank of America was an old line company trying to squeeze out. every bit of profit that they could. With the major source of retail banking profits coming from the penalties and fines for unwitting customer mistakes, the retail naking industry could make much more money if their customers did not understand all of their obligations. Perhaps that was their thinking. Of course it just could have been the attorneys and their writing style.
There was one more company contract I checked. The New York Times has recently come out with a new on-line version. There was a contract for reading the world’s newspaper of record. Would it be written as the rest of the newspaper is–in the 8 to 10th grade range, or would the attorneys of the business types produce a contract that their audience could not understand. It was pleasant to find that the contract measured 10.4–right on target for their readers.
Many Companies Hide Consumer Contracts
What was surprising to me is how many substantial consumer-oriented companies, hide their contracts, or at least do not make it easy to obtain or examine their contracts. One pretty egregious example was with Orkin, one of the nation’s “leading” home exterminating companies. This is an industry notorious for consumer complaints about the required services and guarantees of results—where the contract is very critical. I could not find the contract on their website. It was a very large website and I might just have not found it, so I called the number given and spoke to the Orkin representative.
“I am interested in possibly changing my home exterminator, so I looked at your website, but I could not find your contract for service.”
“The contract is not on the website. You will get that when you sign up for the service.”
“But how do I know if I want to sign up for your service unless I can read what your obligations and responsibilities are.”
“I will be happy to have a local exterminator visit you and check out your house and explain everything to you. There is no charge and no obligation.”
“I don’t want to waste a local representative’s time unless I have looked through the basic contract form and am sure that I want to live up my obligations and I know what the exterminator’s obligation are.”
“Oh don’t worry. This is the way we do it and there is no charge or obligation.”
Now Orkin proobably does not want a potential customer to look at the contract at the beginning of the process. This is not an oversight of web design. The representative wants to talk the customer through or around the contract and emotionally close the sale, before the consumer has a chance to study the contract. Psychologically, if a consumer sees a contract clasuse or two that they do not like, they may not invest the time in hearing the whole sales pitch. But if the consumer has been enthused by a good sales presentation, and then handed a contract to sign, he/she may not even read it or if it is read, the offending clauses will be forgiven to obtain that which was promised in the sales pitch.
Orkin is my no means the only firm which chooses policies and practices that, to a great extent, keep the consumer away from their contracts. Many companies even disguise their contracts and do not even call them contracts. “Sales Agreements” and other euphemisms are chosen, presumably to avoid the consumer thinking that he is making some kind of a weighty set of obligations. The one I love is the “Sales Order” or “Order for Service”. The consumer is told in writing that the “order” is not binding until “accepted” by the company. Unwritten legal translation: “This is a binding contract to supply you with what is ordered hereby. It is not just an order. It limits many of our obligations and specifies some for you. You are bound by this, but we are not yet until our officer signs the contract.”
In the worst instance from the consumer point of view, regulated companies like local phone and utility companies have “sales orders” and don’t even have any or many obligations for the consumer on the contract. However, the company relies on the “Tariff” that they have filed with the FCC and/or the State regulatory commission. When the consumer signs the Sales Order, he/she is signing a contract which obligates the parties in ways that appear nowhere on the contract document. This proposed solution cannot cope with the problem of Tariff’s and Websites which may be unilaterally changed, but it is not a panacea for all consumer-business problems. The one element that is recomended is that when we revise the law of contracts, we also add a clause that says that if any business wants the right to enforce a contract, the word “Contract” must appear in as prominant type as anything else at the head of the document. We would assume that surely business wants consumers to realize that they are signing a contract if they are doing so!. Actually most do, but there are many who are deliberately deceptive about this. If so, they should not be able to use the force of society’s legal system to profit from their deception.
The Proposed Solution and It’s Self-Enforcing Nature
One advantage to this proposed solution is that to a great extent, it is self enforcing. In the business world the greatest enemy is uncertainty. Most company operators can adjust their policies and practices to most situations, but few can cope with a lack of reasonable predictability. No business wants to make millions or even thousands of consumer contracts that might or might not be valid. The possibility of the company being unable to enforce what they perceive are their legal rights is anathema to be avoided. And if the cost of being sure of an enforceable contract is to write their contracts so that they can be understood by most consumers, that is a price almost all businesses will pay rather than risk the uncertainty. Even if the company executives were willing to take the chance, their accounting auditors, bankers and others would pressure them to achieve the certainty. An investor or banker is less enthusiastic of financing a business with millions of dollars of consumer contracts in force if there is doubt about the actual validity of the contracts.
In discussing this general proposal with business executives, although most think that business will benefit from the trust and transparency, is that it is going to be impossible to write a contract that every single consumer will be able to read and comprehend. It would place an impossible burden on businesses to assure themselves that each and every one of their customers has the educational and intellectual capability of understanding the contract that they write—even after Herculean efforts to try and make the contracts understandable. The contract could be written at the 6th grade reading level but the company would still have to give a reading comprehension test to every customer before signing a contract. Those that could not read at the 6th grade level might reneg on their contract. Society cannot expect business to qualify every customer as a citizen competent to read and understand a contract.
It would be absurd and ineffective to require business to qualify citizen’s competence. Even if they could, it would be a terrible precedent to allow any business to decide which Americans are qualified to exercise rights and prerogatives and can assume legal responsibilities. In effect, the ability to execute a contract is critical to full citizen participation in the economic life of the nation. Businesses cannot be allowed to allocate and decide upon such personal rights.
There is a relatively easy solution to this. We can never require that a contract be thoroughly understood by every possible adult. However, we can make a requirement that if the company knows or should have known that the contract would not be understood, then the contract can be invalidated by law. For example, a salesman is pitching a consumer and shows him a brochure and the consumer tells the salesman that he cannot read and does not understand the brochure. The salesman makes the sales points verbally and the consumer wants to buy. The salesman hands the illiterate consumer a contract, and since the customer can at least sign his name, the salesman sends the signed contract back to headquarters and the sale is implemented and payments set up or whatever. Such a contract, regardless of how well written, should be (and can be under current law in most states) invalidated as the salesman, a company agent, had reason to know that the person was not literate and a prudent person would assume that the signer would not understand the contract he was signing.
The proposed reform laws should not alter the situation where a company or its agent knows or should know that a particular customer may not be able to understand the contract. So the reform laws all will presuppose that the company has no such knowledge and no reason that they should have known.
The way to avoid the impossible burden of qualifying the customer’s competence in the absence of information is to build into the new reform laws absolute defenses and presumptions that the contract is valid. I would urge that a contract having a readability level of say 6.5 will as a matter of law be presumed to be readable, provided the contract has in large type (the largest in the contract) a statement over the signature line.
“This is a legal contract. Do not sign this contract if you cannot read and understand the whole thing!”
We refer to this as the “Consumer Caution.”
A number of companies will certainly not care for the fact that they have to write their consumer contracts in language that can clearly be understood by most consumers. Many of their sales departments have depended on the vague or total lack of consumer understanding to not only make the sales but to avoid sales time in overcoming legitimate concerns that consumers might have if they understood the contracts. However, many executives will welcome a business relationship that really is open and all parties understand their obligations. Everyone who has held mortgages or mortgage backed securities would, if they could turn back the clock, want the home buyer to have understood all of the risks before signing their contracts. The mortgage brokers, packagers and others who took their commissions and got out loved the old system as they had their money when the terms not understood were not complied with and the foreclosure process begun. Some, consumers after reading some of the sub-prime mortgages, foolishly would have signed anyway. This solution does not eliminate all human fallibility, hubris, naivety or over-optimism. It does however, eliminate the very large proportion of consumers who are really not often aware of their obligations and rights when they execute consumer contracts.
The reform laws can be written therefore so that:
- If there is or should have been foreknowledge that a specific customer could not understand the contract, that contract shall be void.
- If no foreknowledge and the contract is written at grade 6.5 or lower, and it contains the Consumer Caution, then the contact shall be assumed to be readable by law and it may not be invalidated unless the consumer can prove that there has been other elements of fraud.
Most good companies will rewrite their contracts at the 6.5 grade level and include the Consumer Caution. The cost will be minimal, and the vast majority of consumers signing contracts thereafter, will understand what they have signed, whereas today, the understanding of a consumer contract by the consumer is as almost as rare as a full solar eclipse.
However, there will inevitably be those companies who do not rewrite their contracts at the minimal grade level. It would be unfair many would argue, as a matter of law, to claim that the contract is unreadable for the average consumer. This should be left to a jury or a judge to decide if an action were brought to invalidate a contract for non understanding. One problem with the existing law is that for a particular consumer to have a court invalidate a contract, the evidence of incomprehension is dependent upon expert testimony. Experts would have to analyze the contract, then do studies or cite scientific studies to demonstrate that the vocabulary, sentence structure, etc. is such that reasonable people cannot understand it. This could be done today in all states, but it is not. The reason is that in our existing legal system, any time expert testimony is required, the cost is so great that few can afford to hire the experts—certainly on a consumer case that involves $5000 — a used car or a PC or less. There are few experts who can be hired for less than $5000 to study a case, make a report, undergo depositions, and finally appear in court for the trial. As a practical matter, the cost to provide legal proof it so high that it is a barrier to even pursuing a legal claim. Reform needs to provide a far less costly method of adjudicating such a claim.
One way of doing this is to, by law, set some standards that can be demonstrated to a court without expert witnesses needed. One that we suggest as a part of the reform law is to use as a minimum standard of understandability of the contract that the business’s employees themselves understand the contract. The reasoning here is simple. If the salesman, for example, cannot understand the contract he is inducing consumers to sign, then by law, the contract ought to be deemed non-understandable and therefore invalidated. So by simply allowing a consumer (presumably his attorney) to examine any of the employees of the company who are responsible for the selling and/or the administration of the contract, the problem will be mostly resolved. If the employee who arranges for the payments to be recorded or the manager of the division cannot understand the contract, then the consumer should be presumed to be unable to understand it.
The mere existence of such a law would mean that a company would have to at least edit and rewrite its contracts so that its own or the agents who sell the product or service—the company people could understand it.
This alone would cause a great deal of beneficial reform for the society. For example, take the classic mortgage agreement. I must confess that despite my doctorate and three other college degrees, a major in mathematics, and my authorship of 11 books and hundreds of articles, when I was first faced with a mortgage agreement, I could not understand most of it. An ordinary high school graduate with a few college courses does not stand a chance. I was in my 20’s. The attorney at the closing assured my wife and I that this was the typical standard mortgage and what everyone signed. Despite my education I was unable to understand my obligations and rights, but we were naive enough to sign anyway. If it were required that the mortgage brokers, the bank or finance company employees who process the mortgage applications, understand the mortgage documents, two things would happen—both positive. Companies would train their employees in the meaning of the contracts. This would be beneficial in that they will better be able to answer consumer questions both before and after execution of the contract. Second, if the contracts were not rewritten, even with training, the employees of the company would not all be able to understand it. As a practical matter, unless a company was depending on non-understanding to make its money, the easiest and smartest thing to do will be to rewrite the mortgage contract at the 6.5 level so that there would be no need of special training. That is what most will certainly do.
The same requirement would exist for a stock brokerage agreement, an automobile sales contract, a lease purchase, a time payment purchase, a layaway purchase, a computer software use agreement. If states adopt this kind of reform, almost all consumer contracts will soon almost all be written in “plain English” at the 6.5 reading level. There would be certainty that the contracts would be legally enforced, both parties would understand what they are signing and agreeing to. Will this solve all problems of consumer contracts? No, there will still be contracts of adhesion, and in many areas lack of competition will have consumers signing disadvantageous agreements. But it will eliminate most, and society, administratively and with juries, will be much more willing to demand that an individual who signs a contract lives by the terms if we could all be sure that the consumer really understood or should have understood what he/she was signing.
One practical point should be made about the readability level under these proposed reform laws. At first glance, it would appear that experts would need to be employed to testify to the reading level. But technology is such that the scientific, number one readability formula, the Flesch-Kincaid Grade Level Formula, is automatically calculated by Microsoft Word, the dominant world processor used in the United States and the rest of the world. Most other word processors have the same capability. All anyone has to do is load the contract text into the word processor, and click the right buttons. The reading level is given, and will never vary for the same document. The reform law should provide for that process as an acceptable legal standard. Since the same formulas are used by all computers using Word, plaintiff, defendant, the court, regulatory agents, the press, the companies and the consumer will all be on the same methodological footing and all will get the exact same readability for the same contract.
Reform Can Occur On A State By State Basis
The great Supreme Court Justice, Louis B. Brandeis described the states as “the laboratory of democracy.” One of the aspects of this proposal to make consumer contract validity contingent on understanding and readability is that it can be legislated on a state by state basis. It is in the area or contract law which is controlled mostly by state law and not federal. The Federal Government could, under the Commerce Clause of the Constitution, preempt the states on a matter like this, but a state approach has the advantage of allowing those states who are more interested in consumer protection, require the readability for enforcement, and not have their efforts watered down by a national debate where many business interests will oppose change for reasons ranging from keeping the Federal Government from interfering with business to the argument of some companies that it will be destructive to the national economy and to corporate profits if consumers have to first understand the contracts that they are being given to sign. The experience of a few states will demonstrate the advantages and the fact that consumer commerce can still be effectively conducted, will motivate the other states to follow suit.
Research & Different Methods of Reporting Readability
The data obtained here are small samples, but the area cries our for some serious well designed and sampled studies to determine why it seems to be that a set of corporations which are astoundingly skilled at written communications.
There are two ways of reporting readability scores. As you will soon see, opponents of contract readability reform prefer one to the other. Here is a quck primer of the dufference.
There are two ways of reporting Flesch readability scores. First is on a scale of “readability ease”. This scale is essentially a 1 to 100 measurement with a high score indicating that the passage is easy to read and a very low score means difficulty. A classic interpretation of this scale is:
90-100 : Very Easy – 5th Grade
80-89 : Easy – 6th Grade
70-79 : Fairly Easy – 7th Grade
60-69 : Standard – 8th to 9th Grade
50-59 : Fairly Difficult – 10th to 12th Grade
30-49 : Difficult – 13th to 16th Grade
0-29 : Very Confusing[♣]— 17th Grade +[♦]
[♣] The Flesch Reading Ease Readability Formula, http://www.readabilityformulas.com/flesch-reading-ease-readability-formula.php[♦] Mobilefish Readability Tester, http://www.mobilefish.com/services/readability_tester/readability_tester.php
So the readability ease is an inverse of grade level. The higher the grade level, the lower the readability ease and vica versa. A 6th grade level score is equivalent to a 75 reading ease score. And that is the typical readability that is needed to be understood by the vast majority of Americans.
The legal use of readability requirements in contracts is not unprecedented. Florida, for example, requires that all life insurance contracts have a readability score of at least 45 which translates to a 15.7 grade level. As early as 1976, the state of Delaware adopted a readability standard of 40 (14.5 Grade Level) for its automobile insurance contracts.
While these efforts are to be applauded, the levels that were required were insufficient to produce comprehension by most citizens. This early effort produced a requirement that is rated as “difficult” for the average person. The average grade level equivalent of the Delaware 40 requirement is around 14.5 the reading level of an average college junior. In addition, and this is a problem that often gets obscured in legislative drafting, roughly half of the population is below average. So if a reading level is set by legislation that is average for entire country—a seemingly reasonable standard, about half of all citizens would not be able to understand it—the half that is below average. In the Delaware 1976 effort, it is worse as the 14.5 standard can only be understood by a small minority of the population. Under the Delaware standard, most citizens would not be able to comprehend their auto insurance contracts. That recognized, the Delaware effort was a vast improvement. Before that only a tiny proportion of citizens could read a Delaware auto insurance contract. After the legislation, a small proportion could read the contract. In the recent Florida attempt, the 45 standard was only slightly better than the 1976 Delaware attempt. The Florida statute can be met with the vast majority of the Florida citizens still not being able to read and comprehend their life insurance contracts. As feeble a reform as this is, it is an improvement!
In 2009, the Minnesota legislators trying to improve the situation with insurance contracts that were not readable by the consumer, were snookered. There was reform legislation passed, but it really reformed nothing. By the time the insurance lobbyists and attorneys transformed the reform intent into actual legislation, there was virtually nothing meaningful left. The reason this is a particularly important effort to analyze is that Minnesota, generally has one of the better and more sophisticated state legislatures in the country. Their reform efforts being so enfeebled is a cautionary tale for all.
Starting with the “Purpose” of the new law, the legislators were crystal clear as to their objectives:
“The purpose … is to provide that insurance policies and contracts be readable and understandable to a person of average intelligence, experience, and education. All insurers shall be required … to use policy and contract forms which are written in simple and commonly used language, which are logically and clearly arranged, which are printed in a legible format, and which are generally understandable.”
The remainder of the legislation ensures that this paragraph objective will not be met. Strategically, Minnesota elected to attack the problem via regulation. Their reform effort empowers the Insurance Commissioner to ensure that all insurance contracts are readable. As a general rule, regulation tends to be expensive to implement and allows much watering down of reform efforts in the regulatory implementation assuming the regulatory will is there, and allows for non enforcement when that will is absent as it is with some administrations. Our thesis is that it is the alteration of the law of contracts that is the best way to make the reforms of contract readability. However, in the Minnesota law, the very next sentence after the purpose given above, says.
“It is not the intent of sections 72C.01 to 72C.13 to mandate, require or allow alteration of the legal effect of any provision of any insurance policy or contract.”
This sentence specifically disallows any effect of the requirements on contract interpretation or enforceability. The law requires that a contract be written at a minimum readability level, but if it is not, if the law is broken—even deliberately, there is no effect on the enforceability of the contract in the courts. In effect, Minnesota says, make contract readable, but if you do not, you may get into hot water with the insurance commissioner, but all the clauses that you wrote in violation of the law, you can still use our state courts to enforce even of the consumer could not read the contract at all.
Unless readability requirement failures have consequences on the contract’s enforceability, any enforcement will be expensive, require great political will, and take a long time. For the insurance lobbyists, this was a great victory: The Minnesota Legislature giveth, and the Minnesota Legislature taketh away.
However that was not enough weakening. The insurance industry didn’t even want to cope with an insurance commissioner who might spend the resources to enforce this legislation contract by contract administratively. So, they pointed to the existing legislative efforts in other states—Florida and Delaware—and wrote the Minnesota law to require a 40 readability score. This score translates to a reading grade level of about 14.5. Minnesota is one of the best educated states, and its citizens read better than the average, but not that much better. Even in Minnesota, contracts written to meet this standard will not be able to be understood by over 80 percent of the population. It is doubtful that all the Minnesota legislators who voted that “contracts be readable and understandable to a person of average intelligence, experience, and education” realized the implication of the 40 readability. This incidentally is why opponents of reform of contract readability always want to use the Flesch Readability Score rather than the scientific equivalent of Grade Level Readability. The latter makes more obvious the population that would be benefitted, while the former disguises it. So if you are a reformer, write everything using the Flesch Grade Level scale. If you are an opponent of reform, argue for and use the Flesch Readiblity Index. There is NO DIFFERENCE in accuracy and meaning. It is just that one disguises the effect better than the other to the person who is not familiar with the science and technology of computing readability
Pennsylvania made a modest effort in the 1990s to make contracts more readable. They too went with the regulatory route and required the State Attorney General to pre-approve contract forms. In a way, this is the most costly approach to reform, both for the state and the companies who need the preapproval. Pennsylvania took a different approach to the concept of readability, namely advocating the “Plain English Writing Movement” instead of using a formula. For contract drafters wishing to do a better job of writing understandable contracts, the Pennsylvania Appendix C: Illustrations For Test Of Readability is an excellent tool for improving contracts and is recommended to all. However, as an enforcement tool, it is a poor approach. It is very subjective and there is no reliability in different estimates of success with “Plain English.” That technique, if applied well, will reflect in an improvement in the Readability Score, so it is the latter that should be used for legal criteria, while the former is a good technique to come into compliance. Legal Writing in Plain English is an excellent comprehensive resource for contract drafting if understanding is desired.
Like Minnesota, Pennsylvania lobbyists and contract readability reform opponents diluted the potential impact, small as it would be. The law exempted, all real estate contracts, leases, deeds, mortgages etc. Eliminated were all insurance contracts of any kind, all financial contracts, and all contracts involving buying and selling and brokerage of stocks, bonds and other securities. To be on the safe side, the legislation exempts all contracts for over $50,000 even if they would otherwise be covered. The logic seems to be that it is important for Pennsylvanians to be able to understand the contracts they sign unless the contracts are for the important elements of their lives or are large. In those cases, they need not understand what they sign.
Other states have made de minumus attempts to deal with the problem but most states have done little or nothing yet. What appears to be needed is the use of the state law of contracts itself. And on the basis of the efforts to date, the barrier that most be surmounted is that of exempting some contracts. Then each lobby lines up to get itself exempted. There logic of exemption is particularly peak and nakedly transparent as pure politics of special interests. Can anyone seriously argue that it is important for a consumer to understand his contract for a box spring and mattress, but not understand that for the purchase of an automobile or a house? Is it important for a consumer to understand her contractual rights and obligations for health services, but not for repair services on his home? For borrowing money to by jewelry but not to buy a house? For buying flowers, but not for buying seeds? If there is any reform legislation which should treat all equally with no exceptions, this is it. A perennial barrier to the elimination of exceptions is that all legislatures are divided into committees and reforms that affect contracts will have implications for the contracts of the businesses of every committee of the legislature. Hopefully there is enough public interest and sense of responsibility in most state legislatures that sufficient majorities may be built to enforce the simple contractual legal principle that
Americans should be able to read and understand
the contracts that they sign!
All that would be needed to produce this consumer reform is for a State to slightly amend its existing law of contracts along the lines suggested herein. Attorneys and legislators consulted believe that the legislation would take no more than a page or two.
- No money will need to be appropriated.
- No taxes or fees would be necessary.
- No government officials would have a greater workload.
- No additional tools or methodology need be developed.
The only possible businesses which might be negatively affected are those firms whose business model depends on deliberate deception of the consumer.
It will be very easy for the State to measure the progress of the reform. Simply sample and test the consumer contracts in use for the states.
After enough states have implemented this solution with immense benefits with almost no cost, the reforms can be built into the UCC (Uniform Commercial Code) which will complete the national reform.
There is no such thing as a free lunch, but there are very inexpensive meals that are good and nourishing, and this is a reform that is sound, desirable, ethical that has no downside except for the worst of the offenders–those few whose business models will not work in an honest, fair, business enviornment. It is not a free reform, but it is as inexpensive as it gets.
The time of reform would be extremely short compared to other reforms. Provision of a year’s notice will give all companies plenty of time for rewriting their agreements. The skill to do so already exists. We only have to reform the laws of contract so that the will matches the skill.
 “Comprehension and reading level”, The Informatics Review, http://www.informatics-review.com/FAQ/reading.html
 Kathy Krajco, Reading Level for the American Audience, http://lighthouse-writing-tips.blogspot.com/2006/05/reading-level-for-american-audience.html
 Florida Statutes, 627.4145 Readable language in insurance policies, 2009
 Delaware Laws, TITLE 18, Chapter 27, Subchapter II, § 2740, 1976
 2009 Minnesota Statutes, Chapter 72C, 2009
 Pennsylvania Code, Chapter 307. Plain Language Consumer Contract Preapproval
 Bryan A. Garner, Legal writing in plain English, University of Chicago Press, 2001
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