ai in contract law: an overview · 2020. 9. 3. · julian nyarko ai in contract law: an overview...

AI In Contract Law: An Overview

Julian Nyarko 1

August 25, 2020

1Assistant Professor, Stanford Law SchoolJulian Nyarko AI In Contract Law: An Overview August 25, 2020

Disclaimer

Julian Nyarko AI In Contract Law: An Overview August 25, 2020

AI and Law: A Primer

Much potential for the use of AI in law

E-discovery

Predictive JusticePredicting what judges will doRobo-Judges (e.g. pretrial risk assessment)

AI in Regulation (e.g. directing IRS audits, predictive policingetc.)

Contracts


AI and the Law: A Primer

Adoption of AI-based methods slow

Practitioners:Incentive problemSocialization (extreme risk-aversion)LiabilityLack of training on both sides

Researchers:Lack of training on both sidesStrong focus on “Law of AI” rather than “AI in Law”Causal Inference vs. Prediction

Predictions in the DGP


B2C Contracts

Privacy policies, EULAs, ToS . . .

Readership rate of EULAs about 0.1-0.2% (Bakos et al. 2014)

No competition on terms→ Race to the bottom

Industry Goals: Lowering reading costs


B2B Contracts

M&A, Joint Venture, Licensing, Construction Contracts . . .

Expensive to draft

Expensive to analyze

Expensive to litigate

Principal-agent problems

Industry Goals: Make contracts cheaper


Project 1: Contract Analysis at Scale


Background: Atlantic Marine v. U.S. District Courts

Atlantic Marince Construction Co. enters into contract for childdevelopment center in Texas

Subcontract with Texas corporation (J-Crew) to provide labor andmaterials

Dispute about payment under subcontract

Where to sue? Texas? Virginia? Courts? Arbitration?


Background: Theories about Choice-of-ForumProvisions

Anticipate litigation over where to litigate

Theory says CoF is determined factors such as . . .CostSpeedExpertise

Bargaining power irrelevant (size of the pie)

Arbitration trumps courts

No empirical evidence


The Project

What CoF provisions do parties actually use?

The Data507,852 “material contracts” reported to the SEC (2000-2016)

632,442 companies and individuals registered with the SEC Parties

7,708 law firms Lawyers


Language Models: BoW


Language Models: Word Embedding Models


Language Models: Contextual Embedding Models


Training a Text Classifier

5,255 hand-labeled paragraphs


The Evidence

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2000 2005 2010 2015Year

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ForumCourtsArbitration


CoF by Industry

Table 1: Select Industries in the Dataset

Industry Obs. Freq. Courts Arb. Forum Law

Agriculture 13 0.00 0.23 0.38 0.54 0.85

Services 99,596 0.20 0.32 0.21 0.46 0.75

Other 9,360 0.02 0.33 0.18 0.46 0.83

Mining 31,451 0.06 0.32 0.18 0.44 0.77

Transportation 45,472 0.09 0.31 0.18 0.43 0.74

Manufacturing 175,413 0.35 0.30 0.19 0.43 0.73

Trade 40,671 0.08 0.30 0.18 0.43 0.75

Finance 100,608 0.20 0.28 0.19 0.42 0.77

Construction 5,268 0.01 0.30 0.15 0.41 0.74


The Conventional Wisdom

”Omitting a choice-of-forum provision is sloppy work.”

–Associate at White & Case

”Not including a forum selection clause is borderline malpractice.”

–Senior Partner at Arnold Porter

”I would be surprised if any of our contracts did not include a FSC.”

–Former GC of Apple


Is CoF Inclusion Governed by Law Firms?


Is CoF Inclusion Governed by Law Firms?

Regression Table Collapse Analysis


The Role of Templates


After Atlantic Marine


Shocks to the System

Figure 1: ARIMA Model

Figure 2: Goodyear Figure 3: Atlantic Marine

Synthetic Controls


Takeaways

Lawyers often draft “sloppy” agreementsPrincipal-agent dilemma

Issues persist even when stakes are very high

Many theoretical results do not holdContracts not optimized

Default rules matter even in high-stakes scenarios


Role of AI in Research

AI with a specific scopeInformation extraction

Small N→ Big N

Generating data

Descriptive work

Use of AI may complement, but does not replace causal inference

Use of AI as a necessary, but not a sufficient condition forgenerating insights


Role of AI in Practice

AI may help remedy many of the deficiencies

Contract analysis tools (e.g. Kira Systems) can help with ...... monitoring

... analyzing

... drafting


Limitations of AI

Data availability“Material contracts” X

Day-to-day contracts?

International contracts?

Domain-SpecificityLegal language and legal syntax idiosyncratic

Example: Structure and Text Segmentation

ExpertiseLegal startups still use BoW

Contract analysis software lacks nuance (e.g. exclusive vsnon-exclusive CoF)


Future of AI in Contracts


Computable (or “Smart”) Contracts

Contracts expressed in code

Fully automatically implemented and enforced

No lawyer

No disputes

No judges

No costs

Throw in some Blockchain→ No tempering


Computable (or “Smart”) Contracts

Key issues:Ambiguity and Vagueness: Bug or Feature?

Ex ante design vs ex post enforcement costs

Rules vs Standards

Contract review vs code review


Identifying Lawyers

Back to The Project


Project 1: Contract Analysis at Scale

ai in contract law: an overview · 2020. 9. 3. · julian nyarko ai in contract law: an overview...

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