The Transaction Engine (Part I)

The ultimate combination of law and technology will be the creation of Transaction Engines: expert systems that allow users to customize a set of variables to creates and administer a living contract. The transaction engine eliminates or greatly reduces the role of the transactional attorney by relying on standardization, automating process, reducing transaction costs and focusing on efficiency. It also reduces the role of human error and delay.

As a real estate lawyer, I tend to think of these engines in that context, so let's use the example of a residential real estate transaction (or, to you non-lawyers, "buying a home"). The traditional model can be broken down into the following phases: (1) pre-contract negotiations; (2) signing the contract and removal of contingencies; (3) closing preparations; and (4) closing. I'll assume a standard transaction involving a buyer and seller, each represented by counsel, a listing broker and a selling broker, a home inspector, a title insurance company, a surveyor, the buyer's lender and the seller's lender. Most states have one or more "standard" form contracts for the purchase of real estate, and we'll assume that the parties will complete their transaction using this form, without negotiation.

In the traditional model, I work with a "selling" broker to identify a house that I want to buy. Once identified, Phase 1 begins. We make an offer by submitting a standard form contract to the "listing" broker, and we negotiate price, closing date, contingencies, and other terms. Once the offer is accepted, Phase 2 begins. Each party typically has an "attorney approval" period during which the attorney can make changes to the standard form contract (other than changing the price or other material terms). The buyer then has to satisfy or waive its contingencies, for example: hiring a home inspector to evaluate the physical condition of the home; working with a lender to obtain a commitment for mortgage financing; working with a realtor to sell the buyer's existing home. After these contingencies are satisfied, Phase 3 begins. The seller prepares for closing by ordering a survey and title insurance; getting a "pay-off" statement from its lender; removing any unacceptable title encumbrances; and preparing the closing documents. The buyer's lender also prepares closing documents. Phase 4 is the date and time when the parties exchange money and papers, and the deal is closed. Each of these Phases has difficulties and peculiarities that argue against automation and standardization.

So what's the Law My Way Model? The residential home deal can, should and will become increasingly more automated, by using the technologies that exist today to further standardize and automate these steps. In future posts, I'll try to break down the four phases and automate them. I'll invite discussion of ways in which to do so. Naysayers will contend that transactions are far too complex to be automated in any practical way. Suspend your disbelief and work with me here. Our goal is to reduce overall transaction costs by taking a reductionist perspective: break things down into small components and then try to automate them. Many lawyers tend to be expansionists: what about this risk, or that risk, or the other risk. One of the forms that automation takes is standardization. That will be a major theme in future posts.