Why AI Contract Analysis Is the Answer to Negotiating Sound Business Agreements
An unsound business agreement is often the result of a party looking for business advantage by inserting contracting language that might seem appealing on the surface but will not be acceptable to their counterparty’s business practices or compliance requirements. This can cause seemingly endless rounds of back and forth markups by both parties seeking compromise language to positions that might have been entirely avoided. A minor oversight could be enough to force the other party to renegotiate—usually with less favorable terms. In situations like these, artificial intelligence (AI) contract analysis is invaluable.
Ideally, when that first party reviews an agreement for exceptions, they won't find any. The counterparty drafting the agreement will have discussed key terms and adjusted any issues that could have made the contract unpalatable for the other party in regard to sound business practices. However, attorneys are human—they can't catch every oversight. If they could, there would be no contract disputes. To minimize these problems, attorneys can leverage AI for an unbiased, third-party review that locates contract business best practice and compliance issues and ensures they are adjusted as part of the contract negotiation.
What Makes a Contract Unsound?
Typically, no one sets out to create an agreement that would place another party in a situation of forced, prolonged negotiation. It's usually a lack of perspective for the counterparty’s business best practices that leads to one or more potential issues with the final agreement. Some examples of these may be:
- Impracticality: Problematic terms can either be caused by (a) obligations agreed to by an organization that cannot practically be performed by the client and thus will put an organization in breach of the contract or (b) overly lax obligations that allow the counterparty to perform the contract in a way that does not meet the practical needs of the organization.
- Fiscal irresponsibility: Problematic terms cause an organization to be bound to an economic deal that may be (a) suboptimal, (b) not in line with business expectations, or (c) in the worst case scenario has a negative economic impact on the organization.
- Improper risk allocation: These mistakes cause an organization to expose itself to a level of risk it is not generally comfortable with by either (a) affirmatively agreeing to be responsible for such risks or (b) allowing the counterparty to waive or cap liability for such risks.
- Inconsistency: Unnecessary variance in terms that add the need for and increase the costs of internal housekeeping projects after the fact, such as analysis of terms for a specific type of provision across all customer contracts.
While these contractual pitfalls may seem simple, avoiding them in practice is anything but straightforward. A party seeking out an error or loophole to exploit will take advantage of even a minor mistake to obtain terms that optimize their outcome.
Using AI Contract Analysis to Eliminate Oversights and Speed Contract Negotiations
Human beings have a unique ability to put text into context, even in light of misspellings, poor grammar, or missing words. While that is helpful for reading an instant message or casual email, it’s a hindrance during contract review. A busy attorney may see what's supposed to be there rather than what's actually on the page. For this reason, most lawyers will seek an external review of their contract before finalizing it.
However, this is an imperfect solution. The third-party reviewer may have their own biases and perceptions that cause them to miss critical text errors. On top of that, contracts are time-sensitive. Spending an additional eight hours reading it over and looking for mistakes wastes time and resources.
This problem is especially prevalent now, as law firms and corporate legal departments feel the pinch from COVID-19. In only the first few months of the pandemic, the legal industry lost 64,000 jobs. Even if an attorney wanted to ask a colleague to review their contract, it's doubtful they'd have the time.
AI Contract Analysis Offers a Solution
Artificial intelligence that harnesses machine learning for contract management uses data from completed contracts, natural language processing, and unique algorithms to review documents and locate errors. Some of the better programs are virtually indecipherable from a human's mark up.
AI contract review is valuable because it offers two things that a human attorney cannot: neutrality and speed. A good AI program can complete a full and unbiased contract review in a matter of minutes. Moreover, AI contract review will not add preference or personal slant to the document. It's simply an objective tool that mimics the behavior of a real attorney.
Above all, AI contract analysis can locate terms that cause problems through impractical obligations, fiscal irresponsibility, undue risk exposure, or inconsistency that lead to unsound business agreements. Spending a few additional minutes to scan documents can prevent weeks of wasted back and forth as parties negotiate unsound terms that neither business will be able to accept. AI provides a modern contract review solution, even as firms and corporate legal departments are forced to downsize staff.
Gary Sangha | Founder & CEO
Gary Sangha is the Founder and CEO LexCheck. He's a serial entrepreneur and an academic. Gary previously founded Intelligize, a legal technology company that was acquired by LexisNexis. He's affiliated with the University of Pennsylvania and Stanford University and started his career as an attorney at Shearman & Sterling and White & Case.