Can your lawyer code? Change is on the way and hybrid legal advisers are a must

There has been a lot of talk about how ‘blockchain’, ‘machine learning’, and ‘Internet of Things’ (IoT) will ‘disrupt’ everything. How it will automate jobs, challenge existing business models, and overhaul the legal industry. But there haven’t been a lot of tangible examples of how this will occur.

This article aims to provide a snapshot of some of the technologies that are being developed, their practical applications, and the implications for businesses and legal advisers.

Automating Contract Administration

At a recent BIM (Building Information Modelling) seminar for Engineers Australia, Daniel Kalnins of Ridley demonstrated the fruits of a hackathon between Ridley and Google company Flux. The system allowed users to document the progress of work on site with mobile phones and tablets. This was then automatically processed and presented for project controls staff in an easy to follow dashboard.

This technology has tremendous promise, automating the leg work of reporting and allowing for tighter management of projects. Building on this functionality, additional capabilities could be readily added, such as:

Automatically generating chronologies of the actual progress of the project, which would link to the data used to produce the chronologies (to assist with continual improvement and dispute resolution);

Use of algorithms to detect when the risk of schedule slip reaches a certain level, and automatically identify the source of those risks;

Faster generation of payment claims and payment schedules;

Cutting the cost and delay of dispute resolution by functioning as an automatically generated ‘agreed bundle’ for the mediator/arbitrator/judge;

Automatically alerting users when notification requirements are triggered by events in the project. This would be assisted if these requirements were written in pseudo code in the contract, which would allow a computer to reliably scan contracts and automatically set up the alerts;

Electronic scoring of work by site inspectors where payments are a function of factors such as quality of materials and workmanship.

Automating Copyright Infringement Detection

Samuel Brooks of Sydney-based company, Veredictum, is solving the problem of copyright infringement where videos are copied without consent and shared on social media.

The service embeds an artist’s video with a unique marker which Veredictum searches for when users pay it to look for any infringing copies of the video. The task of searching such a large space is divided up by Veredictum and automatically outsourced to private computers. Veredictum then uses the Ethereum blockchain to record and verify the correctness of the search results. When infringements are detected the system generates infringement notices which can then be sent to the owner of the site that is hosting the infringing copies of the videos. It also employs a ‘Minority Report’ style procedure to resolve disputes – for example, when three computers search the same block of data but only one asserts that it detected an infringement.

Veredictum demonstrates how decentralised computing can be used to tackle huge repetitive tasks that are simply too time-consuming and expensive to do manually. Services like this are critical for maintaining the value copyrighted works in the social media age.

This technology could also potentially be employed to search social media sites for any comments made by a claimant relevant to their claim – a useful tool for plaintiff and defendant firms alike.

Property and Security Registries

The core function of blockchain technology is to serve as a reliable registry to record changes in the state of something (e.g. ownership of property). for instance, the Bitcoin blockchain records the changes in ownership, and issuing, of bitcoins.

The Ethereum blockchain is the next generation, it allows users to write ‘smart contracts’ so that more sophisticated transactions can be recorded on a blockchain. Smart contracts allow us to customise the attributes of the object to be tracked on the blockchain, the conditions and constraints on who can make changes to the attributes of that object, and what the effect of those changes will be. For example, smart contracts can be used to record interests in property, establish private carbon trading schemes, or issue vouchers and gift cards for retailers.

solidity
The Solidity smart contract programming language

The problem that blockchain solves can be explained by reference to the old system for tracking ownership and interests in land. The risks of fraud, lost records, and subsequent discovery of third-party interests led to the necessity of establishing the Torrens system. Similarly, blockchain performs this roll of a common registry that can reliably track the changing ownership and interests in an object. However, the cost is reduced by having computers administrate the registry, and data preservation is improved by decentralised storage of the registry.

Another use of blockchain functionality is to incorporate it as part of a decentralised application (Dapp). Truffle and Embark are two popular development frameworks for creating decentralised applications. For example, Embark provides the framework for combining the capabilities of an Ethereum smart contract written in Solidity, decentralised storage using IPFS, JavaScript, and a user interface that will open in your web browser.

Self-Executing Contracts

The next step is the development of contracts that are increasingly self-executing. For example, sensors (e.g. temperature, accelerometers, humidity etc) can be installed to measure the status of freight or buildings, that data can be transmitted to the cloud using low-power wide-area (LPWA) IoT communications technology, then fed into a smart contract via Oracalize or processed on an IoT platform like IBM Watson IoT. Australian businesses like Wisen are already offering IoT solutions that could be integrated with smart contracts.

We are also seeing other Australian IoT businesses, such as Wirefree and Blue IoT, offering IoT solutions for homes and offices. This makes the ‘infrastructure as a service’ business model available to the commercial and residential market, and in turn enables payment to be a function of on-going performance (e.g. running costs, maintenance costs,  air temperature and humidity thresholds etc etc).

As the sophistication of these business models develops, it will become necessary to express the basis for calculating performance payments in code and demonstrate it to avoid disagreements (starting out, this could be done in an Excel document, or a smart contract stored on the blockchain).

Another foreseeable application would be in the construction industry. Project bank accounts might be administered using smart contracts. Or sub-contractors could receive an alert if the head contractor or employer’s account drops below a certain level, they might then be entitled to stop work until there are sufficient funds in the account to cover the rest of the work.

Wills as Smart Contracts

Imagine a world where wills were self-interpreting (i.e. enter in the facts and it tells you the division of assets and interests) and could not be misplaced?

It is foreseeable that a will could be converted into a smart contract and stored on the blockchain. Converting a will into code would also allow for it to be tested in advance to ensure that it divided up the assets as intended. This would allow lawyers to demonstrate the will for their clients, applying the various scenarios, and to confirm that it functions in accordance with their wishes. Concerns over bugs etc could be addressed with proper commenting of the code, and storage of the final version of the code using IPFS.

Machine Learning as an Assistant

The other major area of change will be where services and systems employ machine learning to cut down the leg work of traditionally time-intensive activities such as tender evaluations, contract analysis, discovery, and progress reporting. Computers can be trained to do a first pass over a large volume of documents and flag parts of those documents for risks, relevance, or general importance to the decisions the user needs to make.

This could also be applied in personal injury matters to reduce the work of evidence gathering. For example, the client enters in the details of their health care providers and the program automatically fills out the record requests to be sent out.

The future is uncertain, but that just makes it interesting

What all this means is that the game is changing:

Advisers need to be able to understand how these innovations work so that they can anticipate and deal with the issues that will arise, as established business models are threatened and legislators struggle to keep up. (i.e. ‘you can’t manage what you don’t understand’).

Some lawyers will need to develop a working knowledge of programming languages (e.g. Solidity, JavaScript, and Python are heavily used in Daaps and IoT systems) in order to draft and advise on hybrid legal instruments (i.e. agreements that are partly self-executing or self-interpreting).

And the role of computer scientists and engineers as expert witnesses will likely increase, where questions arise as to the cause of unexpected results from autonomous systems and smart contracts.

If you’re working with smart contracts, IoT, or autonomous systems, Contact Us, we want to work with you. We can help with advice, dispute resolution, and assist with the development of hybrid legal instruments.

See also:

Securing the value of your business by protecting your IP

Internet of Things

Risk Management of Disputes on Engineering & Construction Projects Using Cloud-Based Project Management Tools

Legal disputes are a critical element of effective risk management. Disputes have the capacity to completely derail a project; blowing out the time, budget and the political capital (or social license to operate). Just like other risks on a project, there are factors that increase the likelihood of disputes occurring, and there are processes that can be implemented to mitigate the extent of their occurrence and impact on the project.

A few general observations can be made about construction and engineering disputes:

(1) Uncertainty combined with large sums of money is a recipe for disputes.

(2) Most disputes turn primarily on their facts.

(3) Time-pressures often undermine the ability of contractors to properly examine the contract or site conditions before work commences.

(4) Lawyers are often seen as an expense (rather than an insurance) and will more readily be engaged to fight claims, rather than prevent them.

(5) Legal disputes have the capacity to multiply the cost of a project.

Dispute Risk Management – Addressing Uncertainty

Therefore, an effect risk management strategy requires setting up systems and practices to mitigate the likelihood and duration of disputes. This is done primarily by addressing sources of uncertainty:

(1) Uncertainty in time limits and notice requirements for claims (e.g. extension of time, delay costs, variations, progress payments etc etc)

As soon as possible, make a list of all the prerequisites for making claims and extending time under the contract and keep it handy. You want to avoid having to rely on a verbal assurance from the other party that they won’t hold you to the strict contract time limits.

(2) Uncertainty of scope or performance requirements.

At the earliest opportunity, identify and clarify any points of uncertainty in the customer’s expectations (e.g. vague elements of the spec, boundaries of the scope etc etc) and confirm this with them in writing (be as specific as possible).

It is all well and good to just ‘leave the contract in the draw’, but if a dispute arises all that good will and mutual understanding will evaporate. If you have not thoroughly documented these mutually agreed departures from (or clarifications of) the contract, the other party will pull that contract out of the draw and rely on it with impunity (or you’ll be facing their own documentation of what you supposedly said you would do).

(3) Uncertainty in your ability to prove the facts you rely on should a dispute escalate.

It is a lesson that many learn the hard way – ‘document everything’. Don’t rely on verbal assurances (at the very least confirm them in writing by sending that person an email with any relevant pictures or documents attached). When a disagreement arises it will be critical that you can provide a clear and reliable documented chronology of what was said, who said it, what their authority was to say it, when it was said, and the circumstances of the communication that impacted on how it was understood.

Benefits of Effective Dispute Risk Management

The best way to address this is by having effective systems to keep you organised and make it easy to reliably document everything. This way, when a dispute does escalate you will have records of everything, and be able to quickly identify the relevant documents. This will:

(1) Allow your lawyer to more quickly advise you of the strength of your position.

(2) Reduce the legal costs involved in case preparation.

(3) Allow quick and comprehensive responses to claims (e.g. security of payment, EOT, delay etc etc). 

(4) Minimise uncertainty over the strength of your position, allowing your lawyer to take a more forceful and decisive approach in negotiations

(5) Ensure that you are able to meet the timetable set by the dispute resolution clauses.

As a result, the average cost and duration of disputes will reduce, you will establish a reputation that discourages other parties from ‘trying it on’ which will reduce the number of disputes, and you will have more time and energy to devote to growing your business.

Tools to Manage Dispute Risk 

Much of the above revolves around having robust systems to document everything and keep you organised. Two project management tools that were prominent at the Sydney Build Expo this year (30-31 March 2017) were Procore and Aconex (Aconex also integrates with BidContender).

Procore

Aconex

Critically, tools like these are:

(1) Cloud-based: So you won’t lose your data if you lose your device.

(2) Optimised for mobile devices: So you can document developments on the fly while on site.

(3) Simultaneously accessible by multiple parties: So you can ensure that everyone is kept on the same page as the project inevitably evolves.

(4) Designed to keep you organised: Maintaining a clear filing system and chronology of project developments so that you (and your lawyer) can quickly find those critical documents.

Remember, disputes are not resolved on the basis of what actually happened, they are resolved on what can be proved by hard evidence. The best response to that letter of demand from the other party’s lawyers is solid documentary evidence showing their case to be baseless.

Document everything, be specific, your lawyer will thank you – and most of all, you will place your self in the best possible position to protect your interests and resolve disputes economically.

Contact Us for assistance with dispute resolution and advice. 

See also:

 

Securing the value of your business by protecting your IP

It is important to remember that the value of your business is not determined by the years you’ve worked or how much you’ve sacrificed. Unfortunately, business is not about fairness. It is about leverage, profitability, enforceable rights, and controlling access to things of value.

Disappointing valuations

Business owners often don’t have the time to consciously think about what it is that governs the value of their business – aside from profitability, and perhaps trade secrets. Typically, this is because they have their nose firmly to the grindstone keeping it all running. So when it comes to selling their business, this tends to result in:

(1) A painful and messy due diligence process;

(2) A lower than expected valuation;

(3) The buyer requiring the seller to stay on in the business for a protracted period.

The source of the problem

Remember that the business is the network of systems (made up of processes, information, assets, legal rights, employees etc etc) that convert money and information into profit. You must be able to separate these systems from yourself, package them, and sell the right to use them to another party.

With this in mind, the above issues tend to derive from two main problems:

(1) The business owner has not fully externalised the business systems by establishing processes, training and delegating to employees, and documenting their knowledge. Instead, they are the critical element that makes the whole system work.

The purchaser will have to discount from the purchase price the cost of hiring and training employees to perform the roles of the business owner, plus the cost of keeping the former owner on for a protracted period to ensure that all the know-how is transferred.

(2) The business owner has not ensured along the way that the company actually owns, or has the enforceable right to use, all the IP upon which the business relies to operate. For example, contractors will have been used from time to time to help build the business systems (e.g. website, modified or custom IT systems, sales materials, and other documents) but ownership of the IP hasn’t been assigned in writing.

The purchaser will have to walk away, or discount the cost of either clarifying the ownership of these systems or building its own replacement systems.

Addressing these issues will increase the value of your business and finally allow you to take a holiday; not to mention that if the business systems can operate without the owner’s ever-present attention it can scale and grow, and even expand into new and interesting areas.

It is best to deal with these issues before you start negotiating with buyers as it will remove leverage that they can later use to keep changing the deal on you – something that you will be particularly vulnerable to if you agree to negotiate exclusively with one particular purchaser.

Optimising and growing the value of your business 

Separating the business systems from yourself is a matter of wearing the upfront cost in time to delegate, train, and document, in order to reap the long term benefits to your business’ growth and value. As this means sharing confidential information and know-how with employees and contractors, it will place increased emphasis on your intellectual property arrangements in order to protect the value of your business as you grow.

For starters, you will need to address:

  • Ensuring all employment and contractor agreements are in writing, and include clauses addressing:
    • Confidential information;
    • Assignment of IP;
    • IP moral rights;
    • Restraint of trade (for key employees).
  • Reviewing existing IP in your business and shoring up your rights to use it:
    • Getting previous contractors to assign the IP to you in writing;
    • For any licensed third-party IT systems,
      • Clarifying who owns the IP in any modifications you’ve made;
      • Confirming what arrangements are in place should the third-party provider cease to operate (e.g. escrow arrangements and who would have the ability to keep the service running);
      • Clarifying your alternatives should your ability to continue using the third-party systems be affected;
    • Registering business names and trademarks;
    • Ensuring the domain names are registered to the company;
  • Protecting your IP:
    • Consistently enforcing your IP rights against infringers (e.g. other businesses or individuals who are using your copyrighted works without payment or permission, or other parties using deceptively similar branding to market their products and services);
    • Clearly marking any confidential materials used in the course of your business as ‘confidential’ so that everyone involved is conscious of their obligations;
    • Having standardised ready-to-use agreements that are easily adaptable, such as:
      • Employment agreements;
      • Non-disclosure agreements;
      • Assignment of IP agreements;
    • Consider whether any new products under development should be patented.
  • Negotiating an affordable standing arrangement for legal advice and services, to:
    • Resolve disputes with IP infringers and debters early (ongoing disputes are expensive and seriously undermine your valuation);
    • Keep your business’ legal arrangements current, and allow you to take advantage of changes in the law;
    • Ensure that your agreements actually secure the benefits that make them worth signing;
    • Maximise the strength of your position before entering negotiations, and provide tactical advice throughout.

It is common for business owners to view lawyers as a cost, and some lawyers have not done much to rebut this opinion. However, partnering with the right lawyer will maximise the value of your business, reduce the stress and uncertainty involved in running it, and provide you with a trusted adviser who will fight your battles and protect your interests.

Contact Us

See also:

Lawyers, how to choose them and how to use them to save you money

Employee or Contractor – What’s in a Name?

Fair Dealing – Getting Paid vs. Getting Played

Designing Contracts for Project Success

The problems are well known to anyone who has had the task of rescuing a troubled project or administering a contract. Most projects run into trouble for two core reasons:

(1) Rushing the design or planning (including the contract) phase of the project; and

(2) Ineffective communication between the parties throughout the project.

These factors cause trouble because they lead to parties inadvertently taking on a number of avoidable risks:

(1) Risks to Quality and Schedule:  Customers will often compare tenders on their upfront cost only, rather than their full life cycle cost. The cheapest tender is chosen, often not considering that this involves increased risk of contractor insolvency from paper-thin margins, delays for rectification or selection of replacement contractors, reduced useful life of the project, and high ongoing maintenance costs arising from workmanship issues and cheap substituted materials.

(2) Risks to Performance: A rush to contract signature encourages re-purposing of contracts from previous projects, without assessing their suitability. For example, if quality is a high priority, a contract that incentivises cutting corners to make a profit is unlikely to see the project completed to the standard envisioned. It is not uncommon to find well intentioned incentive clauses that actually incentivise against the factors that will govern the success of the project.

(3) Ineffective Communication: Any reasonably sizable project will require effective communication to stay on course. The unexpected will occur and flexibility will be needed. Contract negotiations will stress-test the ability of the parties to resolve issues and avoid them spiralling into disputes. Far better to find out upfront that you can’t trust the other party, than to find out later when money has been spent and your lawyer tells you that the contract puts all the risk on you.

(4) Litigation Risks: As a good rule of thumb, if there are sizable payments or liabilities attached to contractual clauses, and those clauses are ambiguous or uncertain in their operation, that’s a litigation risk. Once the contract is on foot and money has been spent, you will have a difficult time getting the other party to adopt your understanding of an ambiguous contract clause when they have a strong financial incentive not to.

It is always important to remember that hope is not a strategy. When push comes to shove any pre-contractual verbal assurances and niceties will count for little. Your ability to protect your interests will come down to the terms of the contract, the depth of your pockets, and the degree of commercial leverage you can bring to bear on the interests of the other parties.

It is therefore highly advisable to take full advantage of negotiations to arrive at a contract that is designed to head off disputes and promote the successful delivery of the project.

Effective contract design:

(1) Starts with a sound understanding of what the parties intend to do, how they intend to do it, and what they’ll require to succeed. Good drafting thinks ahead to how the project will actually be carried out in practice;

(2) Works backwards, identifying the interests of the parties, the objectives of the project, and identifying the measures that need to be in place to align those interests with the objectives; and

(3) It treats the contract as a system or machine that takes events as inputs (e.g. milestones, dates, disputes, accidents, defects etc) and produces outputs in the form of rights and rewards (e.g. payments, dispute resolution, indemnities, rectification, liquidated damages etc).

The aim being to ensure that the interests of the parties will be served, and certainly not undermined, by achieving the project objectives.

Ultimately, all projects have problems. Through thorough disciplined planning, most problems can be flushed out and solved before they have the chance to disrupt the project and put the parties to significant expense. The key is having the experience to realise this, the insight to identify professionals who share your values, and the discipline to work backwards from the result you are after to ensure that you have what you need to achieve it before you start.

Contact Us today

See also:

Technical Specifications – Where the Trouble Starts

How lawyers can serve engineers better

Technical Specifications – Where the Trouble Starts

It is no secret that the source of most problems in a technology-centric contract is the specification.

(1) If the specification is vague, or mistakenly relies on the propensity of the reader to fill the gaps with the same assumptions as the writer, then each party will have a different understanding of what is to be delivered. This leads to two potential problems:

(a) The supplier delivers something different to what the purchaser actually requires; or

(b) The purchaser can continually use the ambiguity in the specification to deny payment or insist on endless rework.

Ultimately, each party will rely on its own interpretation and assert that the other party has breached the contract.

(2) If the specification turns out to be unworkable, there will need to be appropriate contractual mechanisms and an effective working relationship to resolve this. Without this:

(a) The purchaser will assert that the supplier is trying to deliver less than what was agreed to, or repudiating the contract; and

(b) The supplier will be burdened with the cost of rework or even abandoning the project.

The end result (if delivered) will likely struggle to fulfil the purchaser’s purposes for the project. Again, this difference in what each side had in mind when entering the contract provides fuel for disputes.

It is little wonder that most disputes come back to the specification, as it provides the baseline on which the major parts of a technology-centric contract rely:

(a) Payment terms rely on acceptance that certain features of the specification have been met;

(b) Warranty terms rely on answering whether the deliverables have failed to perform according to the specification;

(c) Maintenance and service level agreements rely maintaining or returning the deliverables to the requirements of the specification;

(d) Liquidated damages clauses will rely on determined whether certain aspects of the specification have been met by a certain date;

(e) Variation clauses rely on determining the extent to which a change request is a deviation from the agreed scope of work;

(f) Common law rights of termination and damages rely on discerning the disparity between what was delivered and what was required;

(g) The pricing of the contract relies on the interpretation of what is required to satisfy the specifications;

And ultimately, a failure to translate purchaser expectations into a specification, which, if delivered will satisfy them, risks the agreement ending in disputes and project failure.

The trouble with specifications is that they exist at the intersection of three project vulnerabilities:

(1) Specifications are often drafted by engineers, or other technical professionals. These professionals are accustomed to communicating using the jargon and terminology of their respective fields and not for the broader audience that a contract specification must communicate to. They risk drafting the specification in a manner that is riddled with numerous assumptions because in their mind those assumptions ‘go without saying’.

Unfortunately, any audience outside that area will apply their own assumptions to fill those gaps and arrive at a different interpretation of what is required. Furthermore, a non-technical audience (e.g. lawyers, managers and business people etc) will often be unable to traverse those assumption-gaps in the specification and struggle to read the document at all.

(2) The lawyers engaged by the parties to draft and negotiate the contract often lack the technical literacy to address shortcomings in the specification, don’t know the right questions to ask, and won’t want to concede that they don’t understand it. As a result they are likely to gloss over the specification and revert to risk-shifting clauses to pin the cost of eventual project issues on the other party. For those who desire to ‘leave the contract in the draw’ while administering the project, risk-shifting clauses provide little assistance.

(3) The more unique a project is the more difficult it is to predict all the issues that may arise. As the saying goes, ‘no plan survives first contact with the enemy’. The art in drafting specifications, is in providing adequate quality and performance goals, while allowing room to adapt to handle uncertainties as they occur during the life of the project.

For example, there may be known uncertainty at the outset about what exactly will be required, or whether certain performance levels can be guaranteed. Options to deal with this may include the use of a high level specification, with a more detailed specification to later be accepted or rejected against that high level specification once those unknown have been addressed; or the specification might provide room for the supplier to determine the best trade-off within specified tolerances.

The best way to keep a project on track is to avoid disputes from arising at all. The most fertile origin for disputes in a technology-centric contract is the specification. In the worst case, it will be a legally trained mind (i.e. a judge) that will finally determine the ‘proper’ meaning of the contract.

Therefore, the best means to de-risk a technology-centric contract is to engage professionals at the start who have the skills and expertise to critically analyse specifications from both a legal and technical standpoint. Engaging such expertise before signing the contract reduces the risk to all parties and ultimately, makes the project much more likely to succeed.

See also: How lawyers can serve engineers better

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