How Are the Ways Agreements Are Made Changing?
With the advent of technologies, speedy progress in law making and an increased thirst for innovation in all aspects of life, the 21st century is thriving with change, but businesses, consumers, lawyers, and all sorts of individuals, must be equally speedy at catching up. This week Lawyer Monthly reached out to Mark O’Halloran, Partner at Coffin Mew, who gives an exclusive overview of how contracts, agreements and the arrangements we make in our day to day life and work are adapting to the intricacy and flexibility of today.
The basic premise of a legal agreement was unchanged for generations before the 20th Century. The parties would discuss in more or less detail what each was going to do or pay and when, and then proceed. If anything went wrong, they had the option of applying to court for a remedy. Freedom of contract was primarily the order of the day, except where the court thought the agreed contract went against broad concepts of morality and public policy.
As the economy evolved, and the difference in bargaining positions became wider and more entrenched, legislation was passed to regulate the scope of what companies could agree with each other to encourage fair competition, and what they could agree with consumers to ensure citizens weren’t given a raw deal. International and industry associations also began publishing recommended forms of contract in areas such as construction, logistics and travel which have helped simplify and standardise the way agreements are made in those sectors.
Those changes were primarily about the content of the contracts. But technology and the gig economy have now started to have profound effects not just on how contracts operate, but on what the parties think they actually mean.
The New Feudalism
Most small businesses which win work from a major enterprise customer will eventually come up against the dreaded Framework Agreement, also known as a Basic Purchase Agreement or Master Services Agreement or suchlike. On their face, they are meant to establish the basic rules of engagement and allow the parties to sign off individual Work Orders for specific projects. But one telling aspect to these Framework Agreements is their tendency to back up every single one of the supplier’s obligations with wide-ranging indemnities plus obligations to make reimbursements of monies received. That comes in addition to the usual warranties which can themselves give rise to liability for damages.
A small supplier will find the agreement a nightmare to negotiate and that their customer refuses to make any but the most cursory amendments. It would seem enough to put a small supplier off even thinking about taking on the work; until they appreciate the underlying reason why the enterprise customer wants such a comprehensive set of protections even where the supplier could not realistically ever fund a full claim against them under the agreement.
The largest customers understand the advantage of using agile and disruptive suppliers to address new challenges, but they are also mindful of their own reputational management. In the event that problems arise, they want to ensure the supplier is well-motivated to do all it can to work with them to resolve the problem, and to do so on the customer’s terms. What they don’t want to see is the supplier seeking to avoid providing that support based on any technical contract arguments.
In a roundabout kind of way, the intention is to take the relationship outside of contract law and give the customer the power to reward the supplier for doing its best without being obliged to do so. The relationship effectively becomes one of feudal lord and vassal. A backward step in some ways but one which fairly reflects the reality of most suppliers providing services to multinationals.
The New Anarchism
Many new services and products, particularly in the digital sector, are being developed by SMEs and start-ups partnering with each other in a mix of long term and ad hoc arrangements. The watch words are expertise, collaboration, mutuality and good faith and, behind these, an emphatic belief that the parties should resolve all issues between them. Agile philosophy has been a key driver by breaking down each project into manageable sprints, thereby avoiding any underlying problems accruing without being addressed.
What is evident is a general distrust of reducing the understanding and obligations of the parties into words, particularly ‘legalistic’ contracts. Instead, people have started to prefer rather general statements of principles and avoid tying anything down with what they perceive as misleading “precision”. This lack of old-school contractual detail, whilst the diametric opposite of the New Feudalism, has the same objective: to side step the need for formal legal proceedings to regulate the relationship. The difference is that, rather than giving the final say to one party, the onus is on all parties to agree the resolution and it is only the parties’ determination to take that approach that ever allows it to succeed.
Code is Contract
An alternative approach to the New Anarchism, which distrusts the excessive granularity of traditional legal drafting, is the belief that any form of contract can in fact be encoded into a computer program. Many lawyers baulk at the idea that their contracts are essentially algorithms that need only have data inputted to output a clear answer, citing the presence of qualitative criteria (such as an obligation to use “reasonable endeavours” to do something) in many agreements. Judgment calls, a lawyer might say, cannot be digitised.
Code is Contract proponents consider such arguments a poor excuse for sloppy thinking and have developed so-called ‘smart contracts’ which make use of the distributed ledger technology behind Bitcoin to automatically determine not only when there’s an obligation to pay, but also effect the payment, in an increasing number of financial transactions. Work is also being done on using the same technology to turn traditional conveyancing on its head.
Whilst smart contracts currently have limited relevance to how most agreements are formulated, there are two revolutions taking place which may really see contracts taken out of the hands of lawyers and placed firmly onto the hard drives of computers.
The Internet of Things, or Big Cooker is Watching You
The idea behind the Internet of Things (IoT) is that every single appliance, machine, vehicle and even building can have its own in-built micro-processor and sensors to be able to do two things: monitor its own usage and environment, and communicate that data through the cloud.
We’ve seen the early stages: home heating systems controlled from your phone; cars which monitor your driving and report back to your insurers; bracelets which upload your physical activities and prompt you to do more. Many people also work in buildings where their ID card tracks their presence throughout the day. Now imagine that every worker, in every location (whether outside, in the office or in the factory) could be monitored, and every machine (whether computer keyboard, vehicle or item of manufacturing equipment) was able to report on how effectively it was being used. If you could process that data, you could automatically determine if a contract was being performed as required.
It would be too much for a human overseer, of course, but real-time meaningful assessments of that much data are increasingly possible using Artificial Intelligence. Google’s Deep Mind is now the world’s best player of Go, IBM’s Watson is the Jeopardy champion of champions, both relying on their ability to quickly assess vast amounts of data and each deploying a level of qualitative assessment once thought the preserve of the human mind. Developments in neural networks and quantum computing are also reaching the stage where their human inventors cannot even now say how their computers are coming to the right decisions.
Computer as Lawyer (and Judge and Jury)
The staggering possibility is that we may not be so far away from a time when parties will tell a computer what they are planning to do, and the computer will not only spell out the ground rules they need to follow, but track them and ensure they do follow those ground rules, arbitrate any disputes between them and automatically settle payments and penalties depending on performance.
In other words, in an Internet of Things where Code is Contract combines with Artificial Intelligence, the idea of using human lawyers to wrangle for weeks over an excessively complicated agreement will seem as dated as paying a clerk by the word to fill out a parchment with beautiful but unreadable calligraphy to record a simple sale of sheep from one farmer to another.
The New Feudalism will be satisfied by early notice that things aren’t panning out as expected. The New Anarchists will take comfort from the reduced capacity for anyone to cheat. And the legal profession? Well, as Shakespeare (nearly) said, “First thing we’ll do, let’s compile all the lawyers.”
