Emerging Contract Technology: Automating the Contract Life-Cycle

Topics: Automated Contracts, Law Firms, Legal Innovation

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It has to be said: the use of technology by transactional lawyers has lagged behind even the notoriously slow adoption of automation by lawyers in general. Innovation has proceeded at a truly glacial pace. Today’s contract markup process can be traced back to 1392, when the Worshipful Company of Scriveners first employed scribes to artfully copy one document to the next. Of course, we now use computers and have access to the world’s libraries at our fingertips. But, the process is much the same: adapt a prior precedent to the needs of the current transaction.

The reason for the limited use of technology in practice is largely attributable to prevailing opinion among lawyers that the intellectual rigors of contract drafting and review cannot be automated. Common opinion holds that understanding language and exercising judgement exceeds the capability of technology. In March, Oliver Goodenough explained opposing views in his post: A Tale of Two Conversations: Is what lawyers do really special enough to be an exception to automation?

As in other industries, the pace of innovation is accelerating, driven outside of traditional practice by innovative firms and start-ups. These innovations will push us to constantly reexamine deeply held beliefs and reexamine our business models. Over the next few years, the technology will rapidly evolve, promising to become a “virtual associate.” In a series of posts—and hopefully a discussion—we will examine a wide range of advancements poised to radically change practice including natural language parsers, contract analysis, computable contracts, contract standards, and contract performance metrics.

Contract Life-Cycle

As a starting point, and frame of reference, we can categorize current and emerging contract technology using a simplified contract life-cycle. The right side of the feedback loop starts with contract drafting and review. This side typically focuses on pre-signature processes, involving individual agreements. The left side of the cycle addresses the needs of contract management and analysis. It manages entire contract portfolios, post-signature.

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Currently, we have tools to draft and manage legal agreements. Many corporate legal department and a few law firms maintain templates as a starting point for a new contract. Some automate the form fill-out process with document assembly tools. Law firms maintain document management systems to manage their work in progress; while corporate legal departments also deploy contract management systems to manage the full life-cycle of the agreement. Until recently, however, we lacked tools to assist with the stages of contract review and contract analysis.

Automated Contract Review

Contract review is the next segment of the life-cycle that is being automated. Here technology can be applied to individual agreements as part of the contract review process, and to large volumes of agreements in the context of due diligence. The technology has two main components: i) extraction business terms; and ii) identification legal terms.

Business Terms—Business terms are the material terms and conditions in a legal agreement. For example, a term sheet for a venture capital financing agreement include: (i) amount raised; (ii) price per share; (iii) pre-money valuation; (iv) liquidation preference; (v) voting rights; (vi) anti-dilution provisions; and (vii) registration rights. The term sheet may also include administrative data elements such as names, places, dates, and amounts that can be tabulated in a spreadsheet.

Until recently, the process of extracting business terms was performed, if at all, manually. For example, a contract profile used in a contract management system typically requires operators to fill in the names of the parties, the effective date, the renegotiation dates, jurisdiction, and other critical contract terms. Now, emerging technology, developed by a number of vendors, promises to automate the process and extract these terms from a database of agreements.

Legal Terms—The legal terms of an agreement are represented by the selection of particular clauses and specific language. Traditionally, subject matter experts craft agreements based on accumulated experience.

Technology is also making progress in this area of the contract life-cycle. First, computer systems capture attorney experience by analyzing a large sample set of agreements. Algorithms quickly determine what clauses they contain, how they are organized, what language is used, and the full range of alternatives. With supervision, the software creates a checklist of transaction terms and a clause library of provisions to be applied in deal-specific circumstances. Second, the software benchmarks and compares any contract under review to the standard. It computes an overall compliance score, shows what terms match the standard, which terms may be potentially missing, and which terms diverge from the standard.

Automated Contract Analysis

Automated contract analysis seeks to optimize legal agreements to maximize value, improve quality, and lower costs. Significant work lies ahead to establish comparative baselines, contract benchmarks, and contract performance metrics. However, when contracts are viewed not just as documents that we need to produce in order to come to a deal, but rather the instruments that control the exchange of trillions of dollars of goods and services, then the value of contract optimization becomes clear and has potential to radically affect business revenues.

If the business terms (which can now be automatically extracted) are the key drivers to drafting the legal terms, then with the application of “big data” metrics, technology will be able to identify the correlations between the business terms and the resulting legal agreements. In the near future, an algorithm will be able to predict the optimal form of contract.