This article is written by Shatakshi Singh, pursuing a Diploma in Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
“Our intelligence is what makes us human, and AI is an extension of that quality.”
– Yann LeCun, Facebook’s head of AI research
Imagine that a big tech company with a vast number of procurement contracts that all have different renewal dates and renegotiation conditions will take hundreds of hours to review and monitor all this information with a team of contract managers to ensure that no renewal or opportunity is missed. But what if all of this could be addressed effectively by technology?
With the rapid growth and advancement in technology, artificial intelligence (AI) has evolved into a powerful tool that enables machines to think and behave like humans.
Artificial Intelligence (AI) can be understood as cognitive computing by the machine operations to mimic human brain processes on the sets of data that is updated to the software. The above-stated statement tells us the importance and need of artificial intelligence with the manual work being done, which is being discussed in this article further. Contracts are made to prevent the liability of one person or party and specify the liability of the other person or party. The contracts need to be very clear and shall cover everything in it. However, it has been observed that the manual work is not full-proof and leaves many loopholes in the contract. So, this article provides a solution for contract management with the help of artificial intelligence.
Certain contracts do not deliver against forecast or expectations and it is this under-performance which points out that the poor contract management costs companies 9% of annual revenue, which is due to the problems in the manual review and management and the solution of this lies in the contract management with the use of AI. This can speed up the time and reduce the errors, which is further discussed further in this article.
How is AI changing contracts?
Contracting companies face the biggest obstacle resulting from a large number of contracts they need to keep track of and hence these frequently lack uniformity and are hard to coordinate, maintain, and update. Most businesses do not have a database of all the data in their contracts, let alone an effective way to retrieve all that information, so there is no orderly and easy way to interpret complicated outsourcing agreements, for instance, or see how a certain provision is worded across various divisions. Not only the contracts themselves, but also the contracting procedures and the transactions regulated by these contracts take a lot of manpower to draft, execute, and develop. It has been conducted that inefficient contracting causes firms to lose between 5% to 40% of the value on a given deal, depending on circumstances. However, with the help of artificial intelligence (AI) software the companies are now able to retrieve information effectively and can explain the content of contracts.
The use of AI contracting software has the ability to enhance how certain companies contract, and it can do so in three different ways-
- By modifying the methods and tools companies use to contract – For lawyers, this could sound like bad news, but this is not actually the case. Providing more contract data will allow companies to update their contracts more frequently, and lawyers could concentrate more on their position as counsel rather than contract reviewers.
- The other way that an AI software can enhance working of companies required to contract is by improving the contract material. Suppose, if an organization wishes to interpret the word “confidential information” in its Non-Disclosure Agreements (NDAs) in a particular way, it must ensure that all of its units are on line with this concept, and that improvements to the concept are easily and correctly enforced, otherwise the organisation may be affected by deviation. AI software can easily keep this term consistent across the models of the organisation, and it can detect other words that suggest “confidential information”.
- In addition, by recognising terms and clauses that are inadequate, AI contracting software can easily determine risk in contracts that perform risk analysis even sooner than a legal team thereby, lowering the possibility of human error in the drafting and reviewing of contracts.
- Lastly, changing the procedures by which companies contract can be enhanced by the use of AI software. When most due diligence and contract organisation or even contract drafting is conducted leveraging AI contracting software, it will shift the resources needed to generate a large number of contracts, whether basic and complex. This does not necessarily mean that businesses would need fewer attorneys, but their responsibilities will shift instead.
Case study on how companies are using AI contracts
Founder of software company Noah Waisberg, who is a former M&A lawyer has witnessed the diligence errors by junior lawyers, which made them work late nights, on weekends, and so on. He stated, “Many associates are in a certain negative mood about the efficacy of manual due diligence. Lawyers, being human, get tired and cranky, with unfortunate implications for voluminous due diligence in M&A.” Subsequently, he decided to use the AI software for work and found out that the software was more efficient than the human in getting the accuracy with due diligence by searching, highlighting and extracting the relevant information. Further, he claims that the work is being done up to 40% faster in the first use and up to 90% faster after some experience of usage.
Another AI company offering contract analytics is Legal Robot that is capable of turning the legal content into numeric values, which makes it even more valuable and focuses on better performance.
LawGeex is another example of the company that provides the contracts from the AI software. It provides the text analytical, statistical benchmarks, and legal knowledge by lawyers to the company. The company claims that its tool can cut costs by 90 % and reduce the contract review approval time by 80%.
Another example is of Ned Gannon and Adam Nguyen, co-founders of eBrevia, who believe that the lawyers can be burdened by reviewing multiple contracts and they might miss the important additions and omission which may give the problematic result in the future. eBrevia uses natural language processing and machine learning to extract relevant textual data from legal contracts and many more. The software also provides features like scanning, summarizing, customizing information with the searchable text which can also be downloaded in various formats.
How is AI used for contract management?
Contracts are difficult or perhaps impossible to figure out. They seem to be everywhere, spread over several servers, spread over many places. The unavailability of contracts makes it difficult to control them, which contributes to the possibility of missing major business opportunities hidden in such tools. Henceforth, the task of contract management does not seem to be much possible by manual review as various contracts are spreading around the globe with different natures. The record for all sorts of amendments, terminations and renewals are difficult to manage manually and to also keep them useful and available. By integrating artificial intelligence (AI) with the contract management system, market prospects have been revolutionised by redefining the true potential of these contracts hidden inside thousands of files and directories since years.
To use any AI software, an Attorney needs to save Data and applications to make that work that can run by manual review only. Replacing the mode of contract management from manually to be done by the AI is way more feasible and accessible. Applications of artificial management in contract management are-
- Classification of the contract: Arranges each contract by form depending on the substance of the clause, e.g. MSA, SOW, lease, and independent contractor agreement.
- Classification of clauses: Search through the document and grasp each paragraph’s meaning. AI will categorise the clauses on the basis of the content.
- Define an important part of the clause: highlight the specific data that the clause protects.
- Discover new clauses: If the software uses enough documents with some new clauses, in order to strengthen clause classification over time, AI can learn more about it and protect it in its clause repository.
- Supervised learning and retraining: A reviewer will adjust misclassified clauses and, depending on what the reviewer configured it for, can learn to identify them in the future.
- Classification of related documents: Recognise and distinguish related document categories.
The main AI features of today, all in one contract management framework, will speed up the process of anything from due diligence and clauses to extraction of contract provision and control change. There are several aspects that artificial intelligence enhances contract management, from data detection and extraction to risk visualisation and improved transparency. Instead of eliminating the obligations of working human beings, making the workforce redundant, AI supports professionals by fulfilling the many requirements of their jobs so that jobs can be simplified into more strategy-based ones.
How AI helps in contract reviewing?
These days, more and more companies are praising and promoting contract analysis software systems, but not all of them are created equal. The status quo methodology for legal analysis are historically faulty. It is time consuming, expensive and inefficient. Built into the very brain of contract review applications provided by business such as Evisort, this cutting-edge machine learning revolutionizes the contract review process across a wide variety of sectors, from legal to finance.
Now let’s discuss the contract analysis and management of documents within the legal profession for the purposes of our examples:
- While a great deal of contract review is carried out by general counsel, a majority of it is also actually carried out by in-house contract managers with various levels of expertise. These employees then place their results into summary charts, that take different types, including concise provisions, questions answered, and sets of factual clauses arranged.
- Contracts can be extremely complicated and nuanced, and technology has not reached the stage that an ambiguous contract, agreement, or supporting document can be thoroughly or reliably understood. Yet, by helping them to accomplish their work more effectively and efficiently, with the opportunity to evaluate negative results or positive opportunities, AI can improve and assist legal teams.
- Contract analysis or contract review software not only allows consumers to easier and more effectively review of contracts, but also allows legal professionals to coordinate the process and outcomes in a better manner.
- The AI is also used for reviewing the contract and it is very much efficient because the AI provides accessible and reading contract documents that are easy to search with an organized and systematic classification of the contract’s clauses and others. It comes in multiple languages and does not have the chance of any mistake and confusion that can happen in the manual review. The review made by AI is more reliable and suitable for any company. No human can work with this much efficiency in less time.
For example, the contract review software from Evisort simplifies contract execution using advanced AI to retrieve, monitor, and identify important elements in contracts delivered through a cloud-based platform. Users are able to upload all types of contracts easily and then view, track, scan, produce outcomes, and run reports across several business units.
How AI helps in contract drafting?
Drafting a contract is an essential part of any business. Here is how AI helps in effective drafting of contracts
- AI abridges the gap in previous applications for contract drafting. It provides lawyers with the means to draft contracts and more easily coordinate and amend current data and minimise the possibility of future contract conflicts. The AI-powered software scans past contracts, recognising significant terms and evaluating revisions, and in seconds can draught a relevant legal contract template. The lawyer can review the contract drawn up, make modifications, and then re-submit it to the AI software to learn the appropriate language and the modifications required to be made.
Suppose, a lawyer serves as in-house counsel for a company that frequently imports goods from Europe. On a daily basis, businesses negotiate contracts for a range of goods that are only marginally altered from shipment to shipment. Due to the cost of materials negotiated in the initial contract, the cost of these specific products can vary significantly. AI will adapt and change each template automatically to suit the requested items, changing the cost up to a specified level. Any improvements in foreign sales legislation will easily be adhered to by firms, and lawyers can be notified regarding trade policy updates. The lawyer can save hundreds of hours every year in the drafting of contracts because the contract templates can be adjusted automatically.
- Moreover, with remarkable precision, AI-powered software can screen existing contracts and extract useful data. For instance, Company A contracts for the supply of products with the supplier to be shipped by the end of the current year. Instead of December 31, 2020, the lawyer for Company A wrongly types December 31, 2021. The supplier delays the production of the products in the assumption that the company misled during negotiations. This delays the launch of the Company’s A product, losing the traction of consumers and the attention of investors. Had Company A used AI, provided that all previous contracts were concluded within one year, they may have identified the error.
- AI disintegrates written contracts into readily available, understandable details that can be interpreted and exploited in countless ways. At a broader level, AI looks at contracts, associating each word as part of a whole. With a rational basis, to generate useful observations and guidance, it can draw content from a large portfolio of documents. This enables all indexed contracts to be systematically and critically checked, offering unprecedented coverage from due diligence, compliance problems, and contract disputes. Therefore, AI provides attorneys with an unprecedented capacity to efficiently negotiate, foresee possible pitfalls, and prevent conflicts.
Advantages of AI in contracts
In the Indian legal sector, Artificial Intelligence (AI) is rapidly becoming the new trend. In the global legal market, the implementation of AI technology has already gained considerable popularity and Indian businesses are also looking into this possible treasure chest of creative assistance in the upcoming days to help in their own activities. The companies are getting a well-drafted contract. It has been observed that companies have succeeded to use AI for the betterment of the legal fraternity. The AI tool can also identify the contracts and their terms and content in different languages. It recognizes the various patterns and other features of the contract.
The AI software stores the data to protect conflicts and provides more specific and accurate clauses. It enables the companies to review contracts more quickly, more conveniently arranges and identifies large volumes of contract data, thereby, minimizing the potential for contract conflicts and adversarial contract negotiations and thus increasing the volume of contracts it is willing to negotiate and execute.
Furthermore, it is very cumbersome to identify each clause in the contracts manually for any further processing, with thousands and hundreds of legal documents being submitted to a contract management system. However, on the basis of its content, machine learning algorithms can help to classify the term of the clause. Then, the document can be uploaded into a contract management programme and with this qualified model and tags will be added to documents automatically.
The use of AI in contract drafting saves time and money of the lawyers. It is replacing the work of paralegals, legal researchers and litigators but on other hand increasing the opportunity in other fields. Apart from contract management and review, the AI is also helpful in the drafting work. By offering the software with the opportunity to learn from past or related contracts, AI contract drafting is done. An agreement may be rendered or broken by incomplete, wrong, or conflicting words. AI can quickly sort through current examples of contracts and minimise the risk of a negative outcome. Artificial intelligence is a good replacement for humans in terms of efficiency and quality of the work. The basis for safe and functional business relationships is efficient contract drafting.
Limitations of AI in contracts drafting
Despite all of the advantages stated above, AI still has substantial shortfalls. First, and most evidently, the AI is only as efficient as the underlying algorithm and data. AI’s strength and weakness is that it does precisely as it is designed to do.
- At the beginning, a person must programme the AI software and must oversee and evaluate the results generated by the AI system. Since, the final review of a contract is done manually and thus, failure to supervise properly will result in charges of malpractice. AI also lacks human reasoning that can provide the outcomes with a “sanity check” and lacks the personal experience that contributes to the intuitive reaction of a person to circumstances.
- This logic and expertise will make it possible for a human lawyer to determine the merits and chances of success. This also applies to AI systems, such as translation, that have a stylistic aspect. In a recent study published in the MIT Technology Review, it was stated that the fluency of the translation, which is essentially a measure of how awkward the translation is, was substantially higher for human translators than for machines in the comparison of human to computer translations. For human translators, too, the accuracy of the translation at the document level was higher. Consequently, in oral litigation, human lawyers still retain the advantage. Ultimately, overdependence on AI brings risks that are inevitable. Our legal systems, with human issues in mind, were designed by humans. Much like hearing an automated voice may be jarring, since something in the inflexion is not “quite right,” so, too, AI outcomes may not be quite right. This is particularly true since, in the end, judges and juries, or CEOs and members of the board, will make the final decisions on certain legal issues.
- Currently, at least, AI is a valuable instrument that in some applications is extremely trustworthy, but it should not be the true essence of decision-making.
Summing up, using AI software for the making of a contract is very time saving and efficient. AI is capable of contract reviewing, drafting, management and comparing. It has the ability to compare all the clauses in any language in no time and suggesting missed clauses or the clauses which suit appropriate for the said contract. The full-proof contract clauses not only save time while drafting it but also saves the time of further litigation. The more the terms and conditions, the more the litigation will be sorted and sometimes any litigant suit may not even happen because of the efficiently drafted contract. AI is completely replacing the humans but also, cannot replace it fully as it is run by the humans and afterwards finalized by the humans only. In the contemporary world, AI is at our service and we must master the art of using AI to work with more efficiency in less time.
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