Old wine in new bottles

Kieran Flatt reports on the Martindale-Hubbell Counsel-to-Counsel round table in London on risk management in e-commerce

Most companies are eager to tap into the potential of the internet and e-commerce. For in-house counsel, web-based business initiatives can be a minefield of grey areas, uncertain liabilities and unquantifiable risks. So how many new skills do lawyers have to develop before launching themselves into the new economy?

Trying to make sense of this question, and particularly the jurisdictional stew of the internet, were the 26 delegates attending the latest Martindale-Hubbell Counsel-to-Counsel round table in London on 16 January.

James Butler, legal director at Egg, warned that companies need to establish the right culture before launching products successfully. The right culture would allow people - including lawyers - to have new ideas and be taken seriously, to take risks, to break down into teams and give high levels of personal commitment to deadlines.

"You need people willing to face the risks of doing something new," he said. "The established world nearly always tells you it cannot be done and backs that up with hundreds of practical reasons based on the past." Butler said many lawyers relished the challenge of moving into unfamiliar areas and finding new ways of doing things.

Emphasising the value of precedents in managing the risks of the new economy, he identified two helpful approaches. The first was to not be constrained by where precedents have led in the past but to use them as a path to a new destination. The second was to look for guidance in areas that did not initially seem to be promising or relevant. This was something Butler had found many lawyers were good at.

For Butler, the role of corporate counsel involved shaping the commercial team's ideas into a product that the existing framework of applicable law would recognise immediately - or one to which the courts would be sympathetic.

This involved checks and balances to test the product against traditional disciplines, such as law and finance. Since regulators were nearly always involved it was vital to get them into a positive and trusting frame of mind.

Once the shape of the product was clear it had to be given as much protection as possible to maximise the company's rights. Getting approval from the board generally involved trade-offs and lawyers had to correctly gauge the appetite for risk. Writing terms and conditions of a contract that passed as many risks as possible on to the customer was usually not a viable proposition.

Another trade-off involved branding. Wrapping a corporate brand around components supplied by other companies would maximise the risk by association should anything go wrong. However, it also maximised commercial return.

Butler said the role of corporate counsel in the new economy had not changed fundamentally - there had always been imaginative, forward-looking and creative lawyers capable of working in teams and finding solutions - but e-business had accentuated the value of lawyers who had these qualities.

Delegates identified three key factors that were affecting their working practices. First, the speed of the new economy meant contracts became obsolete fast and the in-house lawyer could come under increased pressure because of the accelerated timescale.

Secondly, the increase of alliances between companies also raised issues such as liability, quality control and intellectual property and it was the lawyer's job to monitor all of these.

Finally, there was the newness of delivery channels and the associated lack of precedence. In-house lawyers had to educate and inform regulators. While they were used to dealing in certainties, they now often had to make educated guesses. Internet service provider (ISP) Yahoo! was cited as having a strategy where lawyers came up with 80% of the answer to a given problem in 20% of the time required to establish 100% certainty. This was apparently a level of risk that the company was happy with, balanced against its legal costs.

Another issue arising from the Yahoo! case was that lawyers needed to keep their ISPs informed of possible joint liabilities arising from the content delivered through the ISP to consumers.

One delegate said he was worried about the growing perception that e-commerce was fundamentally different and separate from the rest of the economy - the only real difference was in the delivery system.

He said the speed of e-commerce had forced him to categorise legal risks more formally. Board members had to know the risk levels and understand that the quality of a lawyer's advice depended on the timescale of the project. In balancing liability against commercial advantage, formal risk management procedures had to take into account that the lawyers would get some things wrong. However, this was not an excuse for sloppiness.

What was unforgivable was for a lawyer to incorrectly categorise the level of risk. High risks were those that were important enough to delay a project. Medium risks might merit a board meeting to decide on whether to delay. Low risks, where the greatest danger was embarrassment for the company, could generally be ignored.

Although some products were genuinely new, most delegates felt traditional analysis was normally sufficient. There were many grey areas, such as delivering terms and conditions to consumers who buy products via their wireless access protocol (WAP) mobile telephones. It was not clear whether it was a company's responsibility to ensure that customers read all the small print on their telephone's two-inch screen before allowing them to buy a product.

E-commerce has created many commercial opportunities. Most traditional organisations had established a web presence and were trying to sell new things. Lawyers needed to develop the skill to sift through lots of new and unfamiliar material rather than spending time looking for the perfect solution.

Although the speed of e-commerce caused problems for companies, in some cases it could also make the consequences of misreading the level of risk less serious. For example, most content published on an internet portal could be withdrawn or amended within an hour.

The prevailing economic climate has a powerful influence on a company's willingness to take risks. Directors tended to be less likely to take risks when the share price was falling and the model for categorising risks changed. Several lawyers from consumer-facing companies agreed that their job was simplified by the policy of not having to construct exhaustive terms and conditions to pass on the maximum amount of risk - a problem on which lawyers advising business-to-business organisations often spent a lot of time.

Karl Skovbaech Pedersen, senior vice president of Egmont Group, said that managing liabilities in e-business was essentially "the same soup on different plates" - risk assessment had always been an international problem. Building education and trust were increasingly important, as companies' offices became more disparate.

Skovbaech Pedersen added that it was also becoming more important to differentiate between risks - acceptable if correctly assessed (but assessable) - and uncertainties, which were unknown factors not yet analysed and assessed. The lack of differentiation was invariably the lawyer's fault. Furthermore, there was always an applicable law that would be invoked if a matter came to court. The primary tool would always be precedent and all other areas that could possibly contain useable precedents or analogies should be searched.

There was also some value in the herd mentality, according to one in-house lawyer. Looking at the level of risk accepted by a company's competitors and taking a similar line to the rest of the field was a useful approach. But law firms could carry out surveys on international compliance quicker than in-house counsel could because they did not usually have to start the process from scratch.

Most delegates agreed that it was better for lawyers to get involved in projects at an early stage. This would sow the seeds of compliance sooner and avoid the project managers becoming resentful, because the lawyers' advice was likely to be proactive rather than reactive.

One legal counsel present at the round table said that upon joining her company she had refused to have her own office and moved from department to department, building relationships with employees and learning about issues. She said it was important to inform people as soon as a possible that a legal issue was identified and the more communication there was with the directors, the more efficient a lawyer could be.

Another delegate warned that lawyers who became too close to the business side of a company were less able to give detached, objective advice and they generally stopped practising law to pursue business interests. However, this was preferable to accountants taking control.

The debate ended on a lighter note: a delegate said his company had come up with an effective scheme for controlling the length of documents such as terms and conditions. The company paid its lawyers bonuses based on the brevity of the documents they produced. "It basically comes down to 10p for every word you cut out."