From October 1, all companies making public issues in the US (including those from outside the US) have had to ensure that their registration statements are written in plain English.
This requirement is contained in a Securities & Exchange Commission (SEC) staff legal bulletin published in January. The bulletin says companies must write the forepart of their registration statements in plain English, and the remaining portions in a clear, understandable manner, and design them to look visually inviting and easy to read.
The SEC spells out what it sees as the principles of plain English: short sentences; definite, concrete everyday language; active voice; tabular presentation of complex information; no legal jargon; and no multiple negatives. There must be clear, concise sections, paragraphs and sentences. Whenever possible, there should be short explanatory sentences and bullet lists, and descriptive headings and subheadings. Companies must avoid legal and highly technical business terminology, and reliance on glossaries or defined terms.
The SEC specifically discourages “vague ‘boilerplate’ explanations” and “complex information copied directly from legal documents without any clear and concise explanation of the provision(s)”. The SEC admits that some sections of a registration may be lengthened as a result, but the overall effect should be to reduce the document’s length by “writing concisely and eliminating redundancies”.
The move to use plain English in legal documents has been under way for some time. Bankers in New York and the UK were first affected by plain English requirements written into consumer protection legislation in the 1970s and 1980s. These had a direct impact on consumer credit transactions and the standard forms that retail banks use for lending purposes. In New York, the requirement to use plain English was introduced in 1978 and extends to any written agreement for money, property or services for personal, family or household purposes involving less than $50,000. A major driver at the time was Citibank’s simplification of its consumer loan forms – a move estimated to have halved the time the bank spent training staff. When the law was introduced, there were fears of a litigation landslide. Lawyers feared that they would be sued for failing to put documents into plain enough language. “This was avoided because the legislation was cleverly drafted to provide a sanction of just $50 for breach and class actions were capped at $10,000,” says David Spencer, a New York lawyer and former banker who advises banks on their transactions with high-net-worth individuals.
In the UK, the relevant legislation is the Unfair Terms in Consumer Contracts Regulations 1994, which follows in a long line of legislation on unfair contract terms starting in 1977. “The effect is that the most favourable interpretation to the consumer will prevail,” says Geoffrey Woolf, a banking and insolvency partner at London law firm Stephenson Harwood. “In addition, the Banking Code lays down that all written terms and conditions should be written clearly and in plain language with legal and technical language used only where necessary. A court would take note of the Code since a consumer would expect a bank that is a signatory to the Code to abide by it.”
Lawyers’ use of complicated language “is a function of inertia, safety, cost and plain laziness,” says Woolf. “It’s the usual story: ‘I wrote you a long letter because I didn’t have time to write you a short one’.” Plain English can make documents longer – “herein” becomes “in this agreement” – but the clarity of thought required by the demands of plain English tend, overall, to reduce documents’ length – a view echoed by the SEC. “The problem,” says Woolf, only half-joking, “is that short documents encourage clients to read them. And clients start worrying about whether the document is long enough to do the job.”
Woolf believes lawyers won’t lead this revolution: “They’re just too conservative and will only change their ways as clients start to realize that they can demand clear English and don’t have to put up with documents in which you can’t see the meaning from the words. The retail finance sector is driven by marketing considerations, which is why it is a joy to work with them. You don’t have to convince them about the merits of plain English. They see that it gives them a market advantage.”
Pressure from clients is beginning to produce results. Some major law firms see the way they draft their documents as a point of differentiation. It is hard to tell the difference between the technical expertise of two law firms. Clients have to rely on other signals: personal chemistry, say, or the look of the firm’s offices. But the appearance of their documents and the language they use can be indications of quality.
Simplifying language is not a simple business. ICS v West Bromwich Building Society, a UK case that reached the House of Lords earlier this year, concerned the way the courts should interpret contracts. The established rules of interpretation were based on two principles: the intention of the parties should be identified from the contract; and the meaning of words used should be found in the document itself – contracts should mean what they say. Only where words were ambiguous or nonsensical would the courts go into the factual background of a case. Lord Hoffmann, however, said that interpretation should reflect the way any serious statement would be interpreted in ordinary life by a reasonable person, with all of the background information reasonably available to the parties at the time of the contract. (That background information would not, however, include any previous negotiations between the parties.)
Lawyers fear this introduces an unnecessary degree of uncertainty. How contracts are approached will depend on the way individual judges approach the meaning of words. And courts will have to take the factual background into account even if the words are, on the face of the contract, clear. Lord Hoffmann was challenged on his view by another judge and the sharp exchange revolved around their interpretations of a conversation between Alice and Humpty Dumpty in Through the Looking-Glass. That has done nothing to banish the perception of a judiciary detached from the real world.
The debate will run and run. “Would any lawyer be able to advise with certainty on the construction this language would receive” since “a departure from technical language would, sometimes, allow of a two-fold construction” – exposing a contracting party to increased risk. Those words come from Preston’s Conveyancing , published in 1806.
