Designing and constructing commercial agreements in the 21st century.

AuthorRitter, Jeffrey
PositionSymposium on Contracts

In the 21st century, commercial agreements crafted by attorneys structure relationships in which the administration and execution of those relationships is largely, if not exclusively, governed through the use of digital technologies. These technologies communicate information, record and report activities taken by the parties in furtherance of their relationship, make payments of monies and other compensation, and provide the evidence with which disputes among the parties will be resolved. All of these functions are designed and executed through technology systems that monitor and record activities that are the basis for determining compliance with the requirements of those agreements at a level of granularity and detail that is simply amazing.

Here are two examples: First, RFID chips installed in boxes packed on cargo pallets loaded into shipping containers transported by ocean cargo ships enable all stakeholders in the goods--buyer, seller, freight forwarded, shipper, bankers, customs authorities, dock worker crew schedulers, warehouse operators, ground transport companies, and insurers for each of them--to continuously confirm the unit counts of merchandise in the boxes, the geo-location of the boxes, the sealed condition of the containers, the integrity of the hold in the cargo ship, the projected time of arrival, the unloading and transfer velocity, duration of ground transport, and the sufficiency of the crews and personnel scheduled at each location through which the goods will move. Any adverse changes in any conditions, including increased headwinds the cargo ship captain must navigate, are immediately inputted into the data flows, enabling all of the schedules, workloads, and related cost impacts to be instantly calculated and, if suitable, allocated among the different parties. (1)

Second, within warehouses in which merchandise is received, packaged into smaller units for delivery to retail locations, and re-loaded onto ground transport vehicles, individual workers wear RFID bracelets that communicate their physical location and rate of activity in moving between pallets, conveyor systems, transfer stations, and transport loading docks. The bracelets track the number of boxes transferred per minute by each worker and deviations in the worker's physical conduct, such as a sudden set of movements to clean up a box that fell to the floor and cover up the loss. Deviations are immediately detected, scheduled time windows for delivery are adjusted to the impact of the deviation, and remedial adjustments in charges and product inventory counts are immediately calculated. Such data is transferred to the buyer of the goods to be shipped and the purchase prices and quantity counts are adjusted pursuant to previously established mathematical formulas. (2)

Each example emphasizes shifts in how companies design, build, and execute their commercial activities. These are no longer incremental evolutions from the merchant traditions dating back to the 16th century. Instead, the 21st century is marking the birth of new structures in how commerce is conducted--structures that have gained such tremendous momentum that traditional contract drafting methods are increasingly inadequate. Contracts, particularly in common law jurisdictions, simply fail to embrace the reality that digital technologies introduce a new set of rules to the execution of commercial transactions. These rules demand precision in design, measured performance, and persistent documentation of compliance.

Yet, rather than enhance the commercial relationship's objectives and the shared business values of the actors, most contracts, globally and across many different industries, continue to persist in embracing vocabularies, architectures, and governance methods that do little to enrich and stabilize what the contracts are intended to achieve--an orderly transfer of wealth in compensation for goods or services properly delivered and performed. Instead, these agreements preserve semantic ambiguities and imprecisions in the expression and application of the rules and standards of conduct. Such imprecision invites conflicts, disagreements, and losses that then require claims, lawsuits, and arbitrations--the near-exclusive venues in which lawyers, who make very good livings as the appointed gladiators of their clients, are compensated from the incomes that their clients otherwise intended as profits.

In the upper-class graduate courses that I have developed and presented, both in law schools and information systems engineering, students are introduced to a different portfolio of tools and drafting skills. These tools and drafting skills are designed to enable the students--both lawyers and engineers--to design and author contractual agreements and corporate governance programs that align more effectively to the business values and objectives of all stakeholders seeking wealth in a digital age. Developed over three decades of substantive experience in commercial law and technological innovation, this portfolio has proven effective at serving an incredibly diverse collection of clients, ranging from the most humble start-ups to one of the five largest companies in the world, across industries as diverse as chemical manufacturing, information technology, financial services, specialty retail, online commerce, and cloud-based services.

This essay next presents three essential drafting principles which contribute to the foundation for the tools portfolio. Based on those principles, one of the tools included in the portfolio is then introduced, named the "Rules for Composing Rules" or, in short, the RCRs. The RCRs are a unified set of criteria that, when applied in developing the work products that contracts and agreements represent, connect those work products more closely to the business objectives and digital operational methods with which the commercial relationships will be executed.

The first principle (i.e. the first RCR) is that oral testimony from human witnesses is not relevant to and will not be relied upon in the resolution of disputes between the actors (i.e., the parties to a commercial agreement). Instead, all disputes, if any arise, will be resolved exclusively on the basis of the digital information assets which the parties create and maintain to document their conduct in furtherance of the commercial relationship. This concept, of course, categorically repudiates the essence of the Hearsay Rule in evidence that business records are not the preferred evidence to prove the truth of the facts documented by those records. (3) To the contrary, this principle recognizing the supremacy of digital business records and information as evidence of historical actions, events, and communications, reflects the pragmatism in a digital age where those records are, for all substantive purposes in governing an organization, considered to be the controlling documentation of the events, dates, times, actions, actors, and impact of these moving parts in the operations of any business. It is no surprise then, that commercial relationships placed into force by contracts and agreements are structured and executed with similar reliance on the digital information created, sent, received, processed, and retained between and among the parties and their extended eco-systems of contractors, sub-contractors, suppliers, and customers.

The implications of this drafting principle for contracts are significant. It immediately highlights that an attorney assigned the responsibility of preparing a contract cannot work in isolation, sequestered before their keyboard armed with the form and substance of previous contracts as models for adaptation and reuse (the prevailing learning method used after law school to develop an attorney's drafting skills). Instead, the attorney must work as part of a corporate team that includes information architects, security managers, records managers, auditors, and financial executives, as well as business operations managers. Collectively, this team already has the responsibility, even without the attorney, to develop the digital information processes, work flows, records, data formats, data dictionaries, security controls, and archiving and retention practices which will be the rule bases with which the information records for the relationship under contract will be developed and executed.

Applying this first principle, however, integrates into a requirement that the contract design be developed by an attorney that has the professional training and skills to understand the requirements for digital information assets to serve as evidence. The digital records of a business transaction have multiple evidential purposes, whether to document the company's activities for taxation or regulatory reporting to support ongoing financing and management governance by the company, or to serve as documentation of compliance (or non-compliance) with the full portfolio of rules that govern the commercial relationship. The attorney cannot come to this collision of rules and information assets at the traditional point in the timeline: after a dispute has ripened for which evidence must then be assembled. Instead, even before the contract is drafted, the attorney must join the client team in understanding the information assets that the commercial relationship (and underlying production or services) generate and how those assets will be managed within the systems, devices, and applications of the company.

One of the most important features of how...

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