Why Dynamic, Real-Time, Contracts Are Legally Enforceable
As discussed last week, Clause is building a platform for autonomous and dynamic legal contracts — those with terms and conditions that continuously change and update in response to real-time data from the Internet of Things, web services, and business analytics. As an example, see the dynamic pricing functionality in the world’s first ‘IoT-enabled’ legal contract developed by Clause. These contracts are legally enforceable because of long-standing contract law practice and doctrines that enable dynamism in contractual relationships. Courts seek to enforce the intent of parties, and dynamic contracts are no different.
Dynamic contracts whose terms depend on external data are enforceable because they are no different in principle than widely-used contracts whereby parties prespecify a variable relationship between a term and certain facts. For example, businesses often draft contracts so that the price the the buyer is obligated to pay depends on facts such as the volume of goods ordered, an external price index, or a seller’s delivery date. Likewise, a common type of agreement known as a requirements contract does not even specify how many units a buyer is obligated to purchase. Rather, a requirements contract leaves the quantity term open and dependent on how much is required by the buyer at any point in time.
Indeed, the law allows parties to leave terms open and decide upon them after they execute a contract. For example, the Uniform Commercial Code section 2–305 makes it quite clear that parties may “conclude a contract for sale even though the price is not settled” and, if the price is not determined, the price will be the reasonable price at delivery time. Statutes and court opinions have a strong presumption in favor of making contracts enforceable, and accordingly have a wide variety of “gap-filling” mechanisms to enforce contracts in case terms have not been completely specified from the outset. In contrast to open terms, which are enforceable, Clause dynamic contracts specify the range of values a dynamic term may take based upon different states of physical world or relevant data.
Dynamic legal contracts created on Clause may use multiple documents to enable terms to reflect real world conditions in real time. For example, if a product is experiencing higher defects than anticipated, a Clause dynamic contract can automatically extend the terms of the warranty documents and incorporate those extended terms into the primary purchase agreement. Doing so presents no enforceability issues. As has long been the case, and as noted by a 1961 law review article, commercial contracts routinely incorporate outside materials to determine the content and meaning of their terms. These include incorporating by reference other contract documents (such as sub-contracts or purchase orders), existing laws, and technical specifications (such as Dell’s packaging and labeling requirements).
There are some limits on the ability of parties to leave the terms of their agreement to be determined later. Some jurisdictions (though not including New York or Delaware) are reluctant to enforce open-ended promises to enter a contract (or negotiate a term) at a later time — so-called “agreements to agree.” Clause dynamic contracts, by contrast, define the potential range of terms and how they are determined are hence are the opposite of such unenforceable agreements. Indeed, by enabling contracts to incorporate a wide range of data about the world in their agreements, Clause reduces the need for parties to leave terms wide open to negotiation in the first place. Furthermore, inherent dynamism provides real-time information about the state of the parties’ performance, which enables a whole host of interesting and useful applications and functionalities. These will be the subject of future blog posts.
Comments, questions, and feedback are always welcome: hello@clause.io + @clauseHQ.
