April 19, 2022

How AI Is Embracing Contract Management & Risk Assessment?

Michael Mills, the Co-Founder of Neota Logic demonstrate the impact and applications of Artificial Intelligence in the legal profession through his white paper.

As per Mills’ analysis “AI is a big forest of academic and commercial work incorporating the science and engineering to make intelligent machines. We can now see how AI complements the legal areas like e-discovery, compliance, contract analysis, legal research, case prediction, document automation, etc”.

Artificial Intelligence and Contract Management-

Artificial intelligence (AI) is all set to shape professional methods over diverse projects and industries. However, advancements and transformation in AI are advantageous in terms of contract management software system applications. Let’s say contract intelligence engines developed upon a foundation of ML (machine learning) are provided with a nutritious diet of precise and accurate contract data.

On the other hand, contracts are complex to sort as we have a bulk of them everywhere, scattered across many repositories, and multiple locations. The inaccessibility of contracts makes the task management cumbersome which might lead to the risk of missing out on crucial business opportunities.

The manual handling becomes difficult while dealing with the amendments, terminations, and renewals of the contracts. That’s how we can realize the need for digitizing contract management and implementing the essential contract lifecycle management (CLM) solutions.

There’s much value to automating the contract management with a huge number of areas like-

  • Routing contracts using foreordained workflows for review and sign-off
  • Initiating compliance checks and soliciting relevant documentation
  • Securing contract renewals to be flagged in good time and internal procedures followed

In fact, AI offers far greater scope in revolutionizing the contract management domain than automation alone. The other known sector AI has shown the influence is managing contract risk.

“I don’t see that human intelligence is something that humans can never understand.” – John McCarthy. In 1956, John McCarthy said this at the famous Dartmouth conference, ever since AI has fueled popular imagination, therefore, driving fair applications, opportunities, and concerns.

Applications of AI in Contract Management-

New technologies like AI help in the identification and entire analysis of clauses and other data. It supports -

  • Quick contract review
  • Sorts large scale contract data easily
  • Helps in contract negotiations
  • Raise the volume of contracts to negotiate and execute

Here are some applications that you should know about AI in contract management-

1. Contract Classification

2. Clause Classification

3. PinPoint Core Part of the Clause

4. Master New Clause

5. Supervised Learning and Retraining

Artificial Intelligence Techniques for Contract Management Solutions-

The bedrock of any groundbreaking contract management system is its potential to read contracts. There has been an increase in contract documents making it unstructured and complex. Its accuracy and coverage of the process can influence the success of the adoption and advocacy of the solution.

This is where AI makes an entry ideally augmented with ML and Deep Learning algorithms. Indeed, there are multiple AI techniques and frameworks used in day-to-day life like:

  • Heuristics
  • Support Vector Machines
  • Artificial Neural Networks aka ANN
  • Markov Decision Processes aka MDP
  • Natural Language Processing aka NLP

AI has a compatible impact and use case for contract management, not all techniques can be used across CLM systems today. Artificial Neural Networks and Natural Language Processing follow AI in contract management. That’s not all, you might be curious to know the contribution AI puts to contract risk management. Here are some basic facts for you!

Role of AI in Contract Risk Management-

Basically, AI in contract management allows contract professionals to underline the strategy and seize the informed decisions. They can now assure with an enhanced understanding associated with contract risk and the plus/minus relationships between data, contract language, and contract procedures.

Despite the advancements, contract AI cannot remove the contract management professionals; instead, it is delineated to streamline data insertion, extraction, protection measures, along with risk identification tasks. This is pursued with automated data entry and risk assessment mapping.  

AI contract management software stirs up the contract data and static contract documents into dynamic building blocks. Using this piece, the contract management professionals can enhance contract oversight, identify proactive opportunities, and risk mitigation.

There are many companies providing the services to minimize the risks associated with contract management. Though modern contract management companies are embracing AI technology to create better and smarter software, however, this tech comes with risks many of the legal teams don't even consider. Check out the standard contract provisions associated with risk allocation.

Standard Contract Provisions in Risk Allocation-

Risk allocation in commercial contracts portrays a key negotiation point where each party to a commercial contract aspires to reduce the risk while increasing its reward. This intention creates an inherent tension within these contracting parties. So for instance, parties can use any common provisions to tackle risk while drafting and negotiating a contract.

You might be aware of the well-known project ‘Speed Legal’ that needs a perfect introduction. This company has already explored the use cases- Real Estate, In-House Legal, and Boutique Law. Speed Legal seems the risk-averse partner. Using the innovative machine learning technology, this project identifies risks and shade light, so you are safe with this platform.

Allocation of risk is at the core of all commercial contract negotiations. Each party seeks to decrease its risk and raise its reward, which creates an inherent tension within contracting parties. Parties can tackle risk by cautiously negotiating and drafting generic contractual provisions.

The price is reasonable and affordable with transparent security. The automated risk analysis provided by the team of experts at Speed Legal saves users’ time and helps the person understand the risks associated.

You can find various provisions in terms of a commercial contract that can be implemented to eventually allocate risk. Though some of the key provisions are now commonly used as risk allocation tools.

Check out the below-mentioned exhaustive list of contractual risk allocation mechanisms that will help you understand tons. Parties can use almost any contract provision for risk allocation.

Here we go:

1. Indemnification

The Contract indemnity is an express agreement that a party agrees to compensate another party by accepting certain costs and expenses. A well-drafted indemnification provision enables the parties to adjust their risk allocation by various factors to the scope of indemnity-

  • Person indemnified including third parties
  • The claims covered and recoverable damages
  • Required nexus event with indemnified party’s damages
  • Any exceptions to indemnification
  • Duration of the indemnity obligation
  • Indemnification procedures

2. Limitation of Liability

Parties can use this clause to detail the scope and enormity of the contractual liabilities. Through this clause, the parties can prelude liability for the types of damages-

  • Indirect damages
  • Consequential damages
  • Punitive damages

3. Express Contractual Remedies

  • This provision can make up a commercial contract’s express remedial venture to allocate risk by:
  • Reducing or expanding available general law remedies
  • Cutting down uncertainty for the scope of potential liability
  • Based on the transaction nature and the party’s contractual commitments, the following provisions can be carried out:
  • Unilateral or mutual
  • Applicable to only a particular contract term or the whole contract

4. Payment Terms

The parties can use payment terms to shuffle and tackle risk. Any delay or acceleration in terms of payments might influence the risk. It can be deferred or advanced. The deferred payment terms are-

  • Sellers can reduce the amount of time to deliver and pay:
  • Risk is minimized by the buyer’s nonpayment
  • Seller gets more time to recoup its investment
  • Buyers can expand the period of delivery and payment:
  • Utilize available cash for business activities
  • Examine goods and confirm their status
  • The advance payment terms might be either mandatory or optional.

5. Product Warranties

As per the goods legislation sale, the law foists implied conditions and warranties for the sale of goods. The buyer/seller can issue the risk by contracting out of the applicable warranties or by a bounding agreement.

The buyer has strong negotiating power where they can ask a seller to provide express warranties under statutory implied conditions-

  • Certify a fact about the goods
  • Vow about the performance characteristics or durability of goods
  • Describe the goods
  • Present a sample/model of the goods

6. Force Majeure

This term emerged from the French meaning "a superior force". This provision allows a contracting party to ease its risk of breach levy to the events/circumstances it did not cause or anticipated. The Obligors and Obligees need to cautiously consider the scope of force majeure provisions-

  • Obligors risk breach: If an event is not identified as a force majeure event wards off the performance of contractual obligations.
  • Obligees risk forfeiting a breach claim: If an Obligor fails to conduct its contractual obligations levy to an event that the parties identified as a force majeure event.

Final Words-

Knowing how to estimate risk is a prime step in a risk management strategy. Once you identify the risk, the person needs to understand the probability and its consequence. Later, parties should apply the score and then evaluate risk thresholds that are justifiable. Risk assessment can also be done by clear contracts readings.  

To stay up to date on the latest updates, and best practices in Legal Tech; keep a close eye on SpeedLegal blogs.