Notes on Engineering Health, May 2025: Notes on Contracts

The modern contract is something of a paradox: simultaneously the most ignored and most consequential document in American life.

While we reflexively scroll past terms of service that govern our digital existence—agreements longer than the Constitution that we “sign” with a thoughtless tap—we live in an age where every human interaction seems to demand contractual precision. Every app download, every subscription service, every loyalty program enrollment binds us to terms we don’t read and don’t understand. Clicking “I agree" has become as reflexive and meaningless as saying “How are you?” to a stranger.

Friendship apps now include explicit terms about emotional boundaries and expectations. Roommates now don’t just share the rent, they enter into contracts with a range of expected behaviors spelled out. This isn't mere bureaucratic drift; it's a fundamental shift in how we conceive of trust itself, replacing the messy uncertainties of human relationship with the false comfort of legal specification.

Meanwhile, the contracts that actually matter—employment agreements, insurance policies, medical consent forms—remain deliberately opaque, written in a language designed to obscure rather than illuminate. We've created a society where reading every contract we sign would require the dedication of a medieval monk and the legal training of a Supreme Court justice, yet we've somehow convinced ourselves this represents progress. The real genius isn't in the complexity of these documents, but in how they've trained us to expect incomprehension as the price of participation in modern life.

How did we get here? What follows are some notes on contracts:

1/ Where and why were contracts invented?
The contract emerged not from the marble halls of Athenian democracy or the legal treatises of Roman jurists, but from the dusty marketplaces of ancient Mesopotamia, where merchants needed to record their promises in something more permanent than memory. The earliest known contracts, etched in cuneiform on clay tablets around 2100 BCE, reveal a startlingly modern anxiety: how do you trust someone you might never see again? These Babylonian agreements—preserved in archaeological sites like Kultepe-Kanesh in modern-day Turkey—dealt with the same fundamental problems that plague us today: late payments, quality disputes, and the eternal question of what exactly constitutes “delivery.” The Code of Hammurabi, dating to around 1750 BCE, codified these merchant practices into law, establishing principles that would eventually migrate through Greek commercial centers and Roman legal frameworks to become the foundation of Western contract law. What's remarkable isn't how sophisticated these ancient agreements were, but how little the basic human problem has changed: we still struggle to bridge the gap between promise and performance, between trust and verification, armed now with terms of service instead of clay tablets but driven by the same fundamental uncertainty about whether strangers will keep their word.

2/ What is the purpose of a contract?
The contract serves as capitalism's most essential fiction—a document that pretends to eliminate uncertainty, while actually creating entirely new forms of it. At its core, a contract attempts to drag potential future behaviors into the present moment, binding parties to decisions they made when circumstances were different and knowledge was incomplete. Legal scholar Oliver Wendell Holmes captured this paradox perfectly when he observed that contracts don't actually require people to perform their promises; they simply establish the price of breaking them—a recognition that even our most solemn agreements are really just elaborate damage calculations. The modern contract theorist Charles Fried argues that contracts serve a deeper social function: they are the legal system's attempt to give moral weight to promises, transforming personal commitments into enforceable obligations. Yet this transformation comes with a cost. By translating human relationships into legal language, contracts simultaneously enable complex economic cooperation and corrode the trust they claim to protect. We sign these documents not because we trust each other more, but because we trust each other less — hoping that the threat of litigation might accomplish what goodwill and reputation once did. The contract, in other words, is both the symptom of and the cure for our collective failure to believe in each other's word.

3/ Are all contracts equal?
To ask whether all contracts are equal is to reveal one of capitalism's most polished lies—that the law treats billionaires and baristas with the same tender care. In theory, contract law operates on the principle of formal equality: every agreement, whether it's a mortgage or a candy bar purchase, receives identical legal protection. But this theoretical equality crumbles under the weight of practical reality, where power imbalances transform “mutual assent” into a legal fiction. The Supreme Court's decision in AT&T Mobility v. Concepcion (2011) perfectly illustrates this dynamic. The case upholds mandatory arbitration clauses that effectively strip consumers of their right to sue, while contracts between corporate equals remain freely negotiable. Legal scholar Todd Rakoff has documented how “contracts of adhesion”—those take-it-or-leave-it agreements we encounter, click on, and ignore daily—represent a fundamental departure from traditional contract principles, where genuine bargaining has been replaced by corporate diktat. The dirty secret is that contract law has bifurcated into two separate systems: one for agreements between parties with roughly equal bargaining power, and another for the mass-produced legal documents that govern ordinary consumers. When Amazon updates its terms of service, it's not negotiating—it's legislating, armed with the fiction that your continued use constitutes meaningful consent to whatever new restrictions the company's lawyers have dreamed up.

4/ How are contracts interpreted and enforced?
The interpretation and enforcement of contracts reveals the American legal system at its most schizophrenic—simultaneously worshipping the “plain meaning” of words while acknowledging that language itself is a slippery, contextual beast that refuses to be caged. Courts begin with the fiction that contracts mean exactly what they say, following what legal scholars call the “parol evidence rule,” which theoretically prevents outside evidence from contradicting a written agreement. But this linguistic fundamentalism quickly collides with reality, forcing judges to become part archaeologist, part mind reader, excavating the “intent of the parties” from ambiguous clauses and conflicting testimony. The Uniform Commercial Code acknowledges this impossibility by allowing courts to consider ”course of dealing” and “trade usage”—essentially admitting that what a contract means depends as much on industry custom and prior behavior as on the black letters on the page. When interpretation fails, enforcement becomes its own theater of the absurd. As legal realist Karl Llewellyn observed, contract remedies don't actually force performance; they simply make breach expensive enough to discourage it. Optimal contract enforcement should theoretically encourage efficient breach—situations where breaking a contract creates more social or economic value than keeping it. This leads to the counterintuitive reality that contract law doesn't actually want to prevent all breaches; it just wants to price them correctly.

5/ Are contracts more common today than in the past?
The 21st century has transformed contracts from occasional encounters into the inescapable wallpaper of modern existence. This shift so profound that the average American now “signs” more contracts in a single day than their great-grandparents encountered in a lifetime. Legal historian Lawrence Friedman documents how contracts in the 19th century were primarily tools of commercial life, formal documents reserved for significant transactions between merchants and property owners. Today's digital economy has weaponized the contract, turning almost every online interaction into a binding legal agreement. Studies suggest that the typical smartphone user agrees to over 1,500 terms of service annually. This pace would require reading roughly eight hours of legal text per day to actually comprehend all the contracts being agreed. This explosion isn't just quantitative but qualitative: we've moved from a world where contracts governed discrete transactions to one where they regulate ongoing relationships, behavioral expectations, and even our digital afterlives. Privacy scholar Julie Cohen argues that this “contractualization” of daily life represents a fundamental shift in governance. Corporations now legislate the terms of social participation through private agreements rather than public law. The result is a society where clicking “I agree” has become ubiquitous, creating what amounts to a shadow legal system that governs as much or more of our daily lives than actual legislation.

6/ What should we expect of contracts in the future?
The future of contracts may unfold as a collision between artificial intelligence and human obstinacy. Legal futurists like Richard Susskind envision “smart contracts” powered by blockchain technology that execute themselves automatically when conditions are met. Imagine your car insurance policy adjusting its premiums in real time based on your driving patterns, or employment agreements that trigger immediate payment upon task completion. Yet this technological utopianism ignores the fundamental truth that contracts have never really been about the terms themselves but about the social relationships they attempt to govern. AI contract analysis, already deployed by companies like LawGeex and Litera, can parse thousands of pages of legal text in minutes, identifying clauses and predicting outcomes with superhuman accuracy. But the deeper we wade into algorithmic contract management, the more we risk creating a world where legal agreements become so complex and self-modifying that even their creators lose track of what they've agreed to. The real future of contracts may not be greater efficiency but greater bewilderment—a legal system where artificial intelligence negotiates with artificial intelligence on behalf of humans who understand neither the process nor the outcome, bound by agreements that evolve faster than human comprehension, in a language that has drifted so far from natural speech that reading your own contract becomes an act of translation rather than understanding.

On the other hand, is that description so different than where we are today with our consumer click wrap agreements and our incomprehensible insurance policies?

– Geoffrey W. Smith



First Five
First Five is our curated list of articles, studies, and publications for the month.

1/ Investing in creativity as social infrastructure
“How artmaking and creative practice in the United States can address community challenges, strengthen local economies, and rebuild human connections—and three less-well-traveled ways to support it.” Read more here >

2/ Building state and local government innovation capacity: Investing in university-government innovation partnerships
“University-government innovation partnerships can provide state and local governments with substantially increased capacity to innovate and implement more cost-effective approaches to delivering vital public goods and services. Yet they often fail to launch due to prohibitive transaction costs, such as the lack of matchmaking infrastructure, standardized agreements, or early-stage funding.” Read more here >

3/ Fundamental Development Gap Map v1.0
“This is a new web portal by the team at Convergent Research that we built out with the help of scientists and researchers in our ecosystem to explore the landscape of R&D gaps holding back science and the bridge-scale fundamental development efforts that might allow humanity to solve them.” Read more here >

4/ Beyond Answers Presented by AI: Unlocking Innovation and Problem Solving Through A New Science of Questions
“Today’s global crises–from climate change to inequality–have demonstrated the need for a broader conceptual transformation in how to approach societal issues. Focusing on the questions can transform our understanding of today’s problems and unlock new discoveries and innovations that make a meaningful difference. Yet, how decision-makers go about asking questions remains an underexplored topic.” Read more here >

5/ Science, Promise and Peril in the Age of AI
“It started as a fantasy, then a promise—inspired by biology and animated by the ideas of physicists—and grew to become a powerful research tool. Now artificial intelligence has evolved into something else: a junior colleague, a partner in creativity, an impressive if unreliable wish-granting genie. It has changed everything, from how we relate to data and truth, to how researchers devise experiments and mathematicians think about proofs. In this special series, we explore how AI is changing what it means to do science and math, and what it means to be a scientist.” Read more here >



Did You Know?
Here we seek to demystify common terms and practices in our work as investors.

Management Fees & Fund Expenses
Management fee is a recurring charge imposed by the fund manager for overseeing the fund's investments and operations. Typically expressed as a percentage of the total committed capital, the management fee is assessed annually, often ranging from 1% to 2% of the total capital committed by investors. This fee is essential for covering the day-to-day operational costs of the fund, such as staff salaries, administrative expenses, and other overhead expenses.

Fund expenses, on the other hand, encompass a broader category of costs related to the operation of the venture capital fund. These expenses include items like legal and accounting fees, travel expenses, due diligence costs, and various other operational outlays. Fund expenses are funded by the assets of the fund itself and can impact the overall returns realized by investors. The allocation and specifics of these expenses are typically outlined in the fund's operating agreement, and the responsibility for bearing them may vary depending on the terms agreed upon by the fund manager and investors.

Both the management fee and fund expenses are important considerations for investors, as they affect the ultimate returns they receive from their venture capital investments.

– Haiming Chen & Dylan Henderson

‍