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First, an admission. I am a commercial contracts lawyer whose whole career has been spent advising clients on the drafting, negotiating and interpreting the wording of commercial contracts. I therefore listened to an IACCM webinar titled Ask the Expert: Codes Replacing Law1 with considerable interest. I was intrigued to find out specifically what codes in the title of the recorded webinar was referring to.

What follows is not intended to be critical of the views expressed at the webinar, but it does suggest some counterpoints and also raises questions many lawyers and contract management professionals are asking these days.

The online introduction for the webinar1 refers to codes in the plural and the “wider adoption of industry codes and principles” but perhaps, instead, should it have referred to coding, because much of the discussion seemed to focus on ‘self-executing’ or so called “smart” contracts?

Clearly, quite understandably clients too often get very frustrated by what they perceive as the excessive time taken for contracts to be concluded and the often-impenetrable language used in their drafting.

Lawyers, often with some entrenched attitudes, certainly have to take a fair share of the blame for what may be described as “contractual inertia” and a failure to bring contracts into the 21st century, but they are certainly not solely responsible.

I am certainly all in favor of making the contracting process quicker and simpler and I am also in favor of contracts generally being shorter and drafted in language that non-lawyers can understand.

However, contracts come in infinite varieties across a complete spectrum and any discussion on this topic must bear that in mind. At one end of the spectrum are those bespoke contracts that are uniquely crafted to reflect a specific, individual project where a lot of negotiation and multiple drafts are typically involved. At the other end are contracts of more general application, a single set of terms governing a large volume of repetitive transactions involving little or no negotiation at all. Any commentary on the topic must account for these different varieties.

Yes, the drafting and negotiation process can be very expensive and time consuming. However, that same process can also, on occasions, be incredibly valuable both in terms of identifying issues that need to be resolved and ensuring that all contracting parties’ expectations are aligned.  

The webinar suggested that in the contracting process there is an “underlying emphasis on the possibility of a dispute and an assumption that disputes may result in litigation and finish up in a court of law.”

Is that such a bad emphasis to have? Contracts and the contracting process, I would suggest, play a key role in preventing disputes, avoiding litigation and keeping businesses out of the courts. I suspect such benefits are rarely, if ever, quantified, assuming it is even possible to do so.

Keep in mind, lawyers are, in many ways, reflective of their clients’ wishes and perspectives. Clients do not like uncertainty and tend to be very adverse to risk. They typically expect their lawyers, through their contract drafting, to reduce that uncertainty and minimize (or at least manage) the risk.

Clauses establishing limits of liability exist for a reason and are the most often negotiated terms, but I would maintain that has very little to do with the lawyers. Clients are often the ones who insist that contract terms be drafted to favor the clients – either to see if they can exploit their commercial strength or perhaps they know they will have to make concessions later on – and this often leads to incredibly unbalanced initial drafts.

Other factors need to be considered too. In many jurisdictions including England and Wales, commercial contract law terminology is a product of decided case law and related terminology that has developed over many hundreds of years. Much of this terminology has very specific legal meaning. Although many lawyers would, I suspect, like to avoid using terms like consequential loss, best endeavors, and force majeure -- it is certainly not easy for individual lawyers to fight against the weight and comfort zone of historical precedent.

In an international context, it is unfortunate but inevitable that a multitude of different laws emanate from different jurisdictions. It is equally unsurprising that clients tend to favor familiarity – wanting to insist that any contract is typically governed by a clients’ own law with jurisdiction reserved to the courts of that jurisdiction.

Given this background it is entirely unsurprising that initiatives over the years have arisen to improve the situation such as:

  • the adoption of independently developed, industry specific as well as more general standard terms of doing business;
  • alternative jurisdiction neutral methods of dispute resolution; and
  • various attempts at contract simplification.

All such initiatives have experienced varying successes – some welcomed, others, seemingly limited -- but this is a never-ending journey.  Every effort to reduce the excessive length of contracts and improve their clarity must be welcomed.

However, I would strongly argue that, in appropriate cases, the contracting process does have significant value and should not simply be dismissed or abandoned completely. Contracts are often long and complex precisely because the relationship expected is complicated, and negotiation can be extremely valuable in influencing all parties to address issues that were not considered before.

The webinar suggested several possible solutions including methods of so-called Alternative Dispute Resolution (ADR). ADR has now been around for many years and certainly has its place. Contracting parties are perfectly free to refer disputes to various forms of ADR and many now routinely do so but, clearly, ADRs are not a panacea nor are they favored by everyone.

Referring again to the title of the Webinar, Codes Replacing Law -- in many ways codes have already replaced laws. After all, each contract is a form of private code to govern the particular transaction in question. At least under English contract law, very little of a contract is derived from mandatory statutory provisions and although English common law provides a background contractual framework, the basic principle of freedom of contract overwhelmingly prevails with the contracting parties remaining largely free to determine the terms that are to govern their relationship.

As mentioned, the IACCM webinar focused substantially on issues other than the drafting and negotiation of the contract. There was clearly considerable frustration with the process of contractual enforcement, particularly in an international context -- something that I can certainly sympathize with.

Litigation can be incredibly expensive and time consuming. However, it must be remembered that litigation is comparatively rare. No doubt the IACCM have some statistical evidence on how many contracts end up being litigated, but my suspicion is that it would be a pretty small figure.

There may be many reasons for that. No doubt cost and uncertainty of outcome would be significant factors but, hopefully, the signed contract does at least play some role in preventing disputes from arising and encouraging one or more parties to reach a mutually acceptable compromise should a dispute arise.

During the webinar, it was suggested that all self-executing, computable or smart contracts could play a significant role in improving contractual enforcement and the ease of financial recovery. The contract would itself be the judicial authority.

The rationale behind the suggestion was that in the not too distant future we will see the emergence of contracts that have the ability to self-analyze the projects which they govern. The idea as expressed is of a contract which can determine and manage its own performance without human intervention and automatically allocate financial rewards accordingly.  This was based on the idea that “computers are better than humans at decision making.”   And therefore, contract enforcement and recovery would become automatic and enforcement processes, redundant.

Having said that, participants acknowledged that such “reasonableness” (or intent) of the contract language is a very difficult benchmark for a computer to take into account.

I must at this stage admit that I am absolutely no expert in the technology of smart contracts or the science of what is possible. However, certain observations and questions.

First, commercial contracts are inherently complex, and disputes are often the subjective result of human interpretation and judgment. Are such judgments readily susceptible to binary “yes” or “no” decisions?

Second, disputes often center on different interpretations of the written words based on:

  • the factual matrix which existed at the time the contract was entered into;
  • the reliability of the evidence of those involved in the negotiations;
  • arguments about whether terms should be implied in a given situation; and
  • debates about whether contractual provisions have been waived or varied through conduct.

How, then. will self-executing contracts take such matters into account?

Third, the sheer volume of contractual relationships in any year must be huge.

  • Can the technology and the companies behind the technology cope with that volume?
  • Will the contracts be able to bear the additional costs of incorporating the technology?

The notion that a smart contract is a replacement for negotiation and contract drafting seems to me to be misplaced. Even if a readymade, standardized set of contract terms exists, somebody has to exercise some skill and judgement that the terms are appropriate to govern the relationship. And then one must agree and document the specific commercial details of the deal. Often the commercial schedules take a very long time to draft and agree and are as long, if not longer, than the legal front end of the process.

How does one ensure that the computer programmer correctly reflects in computer code the agreement in human language? Who instructs the programmer and what if they get it wrong?

The contracting process is already criticized as being excessively long.

  • Will the creation of a smart contract add to the length of the process?
  • What happens in the interim given that many contracts are only signed at the very last minute or even retrospectively?

Commercial contracts are, rarely, set in stone. Contracts will typically evolve over time. In light of that, consider two more issues:

  1. Sometimes the parties will invoke a formal change control processes and as a result, presumably would the coding need to be updated to reflect those changes – or not?
  2. More frequently, contracting parties vary their relationship implicitly through a course of conduct. How would that get reflected in a smart contract?

Even if a self-executing, smart, contract makes it easier for a contracting party to obtain financial recovery in the first instance, that doesn’t necessarily mean that litigation would never occur. It may simply mean that the balance of power has shifted under the popularized axiom “possession is nine tenths of the law” but even so, wouldn’t a contracting party still be allowed to challenge the award made by the contract?

In my experience, many contracting organizations are unwilling to give up ultimate control to a human adjudicator, whether that be a judge, an independent expert or an arbitral panel except as an absolute last resort. Would they be more willing to pass over control to the contract itself?

The session certainly got me thinking. I readily admit to a healthy degree of skepticism regarding smart contracts, and it appears they are certainly fast approaching. Some important questions need to be answered as a matter of urgency.

END NOTE

  1. Codes Replacing Law, IACCM webinar, March 19, 2020

ABOUT THE AUTHOR

In his role in commercial law practice, Paul Golding advises upon the drafting, negotiation and interpretation of commercial contracts. He founded the firm TRG law in 2004.  He is a regular speaker on commercial legal topics and has organized the annual IACCM English contract law update session, Events, Webinars and Conferences, for many years.  His analysis of case law developments over more than 20 years now means that TRG has an archive of case law reports on topics relevant to commercial contracts numbering more than 400 reported cases.

 

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Paul Golding, Director TRG Law


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