Monday, March 29, 2010

Harnessing Complexity - Contractual Building Blocks

When it comes to contract automation, most lawyers think the solution is document assembly. It can, indeed, quickly and accurately generate a document based on user-selected variables.

But is hasn’t become widely adopted outside of areas such as estate planning. Why? I think there are at least three main reasons:

· It's very expensive to build and maintain
· It's a black-box that inhibits lawyerly interaction and judgment
· It works only for first draft situations; it doesn’t help with the more common task of document review

But this is not to say that document assembly is flawed in any way. It is absolutely the right tool for formulaic document generation of frequently used documents, especially where the user can benefit from guidance in selecting contract alternatives.

For all the other circumstances, are there other approaches to contract analysis and automation? I've drawn heavily on the work of Herbert Simon. His parable of the Two Watchmakers is particularly instructive to the challenges facing lawyers today.

"There once were two watchmakers, named Hora and Tempus, who manufactured very fine watches. Both of them were highly regarded, and the phones in their workshops rang frequently - new customers were constantly calling them. However, Hora prospered, while Tempus became poorer and poorer and finally lost his shop. What was the reason?

The watches the men made consisted of about 1,000 parts each. Tempus had so constructed his that if he had one partly assembled and had to put it down - to answer the phone, say - it immediately fell to pieces and had to be reassembled from the elements. The better the customers liked his watches, the more they phoned him and the more difficult it became for him to find enough uninterrupted time to finish a watch.

The watches that Hora made were no less complex than those of Tempus. But he had designed them so that he could put together subassemblies of about ten elements each. Ten of these subassemblies, again, could be put together into a larger subassembly; and a system of ten of the latter subassemblies constituted the whole watch. Hence, when Hora had to put down a partly assembled watch to answer the phone, he lost only a small part of his work, and he assembled his watches in only a fraction of the man-hours it took Tempus."

The Architecture of Complexity: Hierarchic Systems, Proceedings of the American Philosophical Society, 106, Dec 1962, 467-482.

How would this apply to legal agreements? Law firms and corporate legal departments can adopt the approach of Hora and create standard building blocks of the core contract blocks, such as Representations and Warranties, Covenants and Miscellaneous articles. These may be varied by deal type, nature of the asset and parties.

Analyzing current document sets for very similar deals reveal a remarkable varied range of clauses and specific clause language, much like the watches made by Tempus. Moreover, much of the variation in clause language is more semantic, rather than substantive.

Hierarchical modularity does not preclude rich variation. But it does avoid inefficiency. Not all clients want to buy a handmade Patek Philippe Sky Moon Tourbillon for more than One Million Euro; many would be very satisfied with equally functional, thoughtfully crafted watch for a fraction of the price.

1 comment:

  1. Great post Kingsley.

    As a document assembly vendor, I think that aspect of your post is 'right on the money':
    - There is investment required to decide on the relevant content and business rules for different permutations and combinations.
    - Lawyers don't like being disconnected from the document and being controlled by an interview process.

    Our clients (most of which are corporations rather than law firms) find document assembly - particularly the web-based variety - most valuable when it's implemented by the legal department as an online self-service tool for business users. Typically the focus is on empowering users to produce legally pre-approved operational agreements (such as leases, commercial loans, or sales/subscription agreements). For vanilla deals, they get execution-ready documents instantly. While more risky deals are automatically routed to legal for review.

    The result is faster turnaround times and increased compliance. In addition the lawyers are removed from having to do repetitive, low value work.

    Andrew Davis
    Exari (