If I’m not misremembering, the George Bush v. Al Gore presidential election became all about the handing chad. When the people of Florida voted, they did so using punch cards. The voting machine would literally punch a hole in the card indicating their selection. Sometimes, however, it didn’t work. The punch would not go all the way through the ballot leaving some paper clinging on for dear life. Because the election was so close, election officials had to examine each punch card to determine whether a hanging chad was a legitimate vote. In fact, the picture on this post is actually the judge who was selected to do this investagation. It caused some confusion about who would become the next President of the United States of America. (For non-history buffs, it turned out to be George Bush).

Believe it or not, hanging chads can also occur in contracts. When they do, they cause confusion–just as they did in the presidential election.

A hanging chad? Wubbiedat?

A handing chad occurs when a contract says that something is supposed to happen, but it does not assign responsibility for that action to any particular party. It can often be identified by the words “the parties will agree…”

The hanging chad can often be identified by the words “the parties will agree…”

For example, suppose you are selling a business and you want to include some office inventory but not necessarily all. A contract may include the following language: “The parties will agree on the inventory items to be included in the sale.” This is the outcome you want. But there are no duties assigned.

Another common example occurs in Operating Agreement in multi-member LLCs. The operating agreement may say something like, “At the conclusion of each fiscal year, the members will agree on an appropriate distribution.” As in the case above, there is no party responsible and a good chance for confusion.

The Problem with Hanging Chads

What happens if there is no agreement on the inventory included in the sale? What happens it the members can’t agree on the distribution? I’ll tell you what happens–the parties start pointing fingers at each other. And, honestly, they’re not wrong, but they’re not necessarily right either. Each of them should have agreed but didn’t. So there is confusion. Only two things are clear: (1) you have a hanging chad problem, and (2) hanging chad problems are expensive to resolve.

The Solution to the Hanging Chad

The simple solution is to make sure duties are assigned. In the example above, the hanging chad could be avoided by assigning duties. Here’s an example. “The buyer will present a list of items to be included in the sale within 10 days. Seller must approve or disapprove of the list within 5 days thereafter.” Doing it this way creates actual duties. This certainly raises questions (for instance, what happens if the seller disapproves of the list?), but that’s the point. You can work out the kinks in advance while everyone is excited about the deal instead of when the parties become frustrated by the confusion which results from the hanging chad.

A Personal Challenge

Go take a look at a contract you have entered, perhaps, say, your Operating Agreement or a major client contract. Can you find any hanging chads there? If you do, let us know in the comments.