Data-orientated Contracts

March 20, 2018

could begin provocatively by asking
about the rationale for entering into written legal contracts.
  Of course, the good reasons are many, such as
helping document and evidence the intention of parties where services or goods
are being provided between them and forcing parties to think through and detail
the operational aspects of the business transaction, any expectations regarding
the transaction (such as those defining quality and payment), each party’s
responsibilities and how to deal with events that may or may not occur during
the course of a transaction. Contracts utilise the legal framework that exists
to allocate liability and provide recourse if the transaction does not proceed
as anticipated.

Need for change

The legal profession has too often concentrated
on the legalese and drafted in a manner to achieve contractual objectives in a
legalistic form of words, often to the frustration of the non-legal community.
Too often lawyers’ drafting can be difficult to read and understand for the
businesses actually involved in the transaction – and we end up with
dysfunctional contract prose!

However, in an increasingly data driven
world, it is no longer the written word that is king.  Businesses operate through processes (which
may be efficient and organised, or not!) and, accordingly, key commercial and
operational terms, as well as risks to be monitored within contracts, need to
form a part of the business process if they are to play a part in optimising
the business decision-making, management of commercial risks and operations.  The use of technology and systems has an increasing
impact on those business processes, allowing greater efficiencies and
scalability through the medium of data. 
The downstream business processes and systems have embraced the
opportunity but, until the key data elements of the transaction contracts are
brought to the fore, there will be a stunting of business through the legal
contracting and management process.

We are on an inevitable journey to data-orientated
contracts, with a meaningful representation of the written contractual terms in
a manner that follows a consistent, predictable and structured data format.  This is required by business and operations,
who cannot reach for the written contract in every case when undertaking their
day-to-day activities.  As systems
increasingly automate those downstream processes, the legal agreement must be
provided as a data input into this.

The traditional contracting process relies
upon a common understanding of contractual language, the rules of contractual
interpretation, contract (and other relevant types of) law and regulation.  Often the contract will create ‘defined terms’,
or definitions, which can be applied to make interpretations of a contract
easier and the contracts themselves more precise and concise – and reduce risks
of ambiguity.  As such, to move from current
word-based contracts to those which allow for the automation and application of
the data elements to the wider business, meaning must be given to the
structured data variables and allowable values of those variables. Only one of
the parties to the contract (although this may involve multiple internal
stakeholders with multiple objectives and needs) needs to provide this meaning if
the data form is only to be used by that side for its own purposes.  Where both parties to the contract are to be
bound by the way in which the structured data is represented, however, then its
definitions must be mutually agreed (however, this moves the discussion into
areas of ‘computable contracts’ and ‘smart contracts’).

It can often be quite difficult to
agree (even where this is an internal, single party exercise) on the representation
and meaning of the structured data – this is often a reflection of multiple use
cases of the legal agreement data. This is therefore often an exercise best undertaken
on the basis of  analysing a number of
actual natural language contracts in order to identify the relevant variables
and their possible allowable values, in the context of these downstream use
cases.  By applying real commercial
examples, the process of defining the meaning of the data becomes more
straightforward, as does the processes for identifying and handling exceptions.
Indeed, the use of existing data standards can simplify the process, as they, through
their development, have effectively already gone through such a process.  An example of this is in the OTC derivatives
world, with the various asset class definitions (eg for equity and credit
derivatives) and their incorporation into the ‘FpML’ standard.  This is an efficient way to provide meaning
to structured data, with the added benefit of broader acceptance and

Contract negotiation platforms

Contractual parties could use a
contract negotiation platform in order to agree the commercial variables and
seamlessly convert between the natural language contract and a structured data
form.  The strength of such platforms lies
in the ability to constrain the manner in which the contract information is
entered, which in turn allows for key commercial terms to be identified as
structured data at the outset, rather than requiring its conversion at a later
date. It does however require agreement between the contracting parties to the
various constraints imposed commercially, and as such may be best facilitated
by a trusted third party, ie an industry body or trade association.

Bringing lawyers closer to business

Data-oriented contracts can unlock a
number of different business benefits, a consequence of the analytical
processes applied to them.  For example, the
identification of conflicts between opposing contractual obligations within a
contract portfolio would allow for business decisions to be made as to how to
deal with them.  Risks can be better
monitored, such as counterparty credit provisions in contracts, which have a
significant impact on the management of a commercial relationship. One can
combine the contractual data with market and transactional data, such as prices
and counterparty credit ratings, in order to give a business perspective to the
commercial terms and understand their business impact.

Much of the
frustrated criticism levelled at the legal profession arises from the
profession’s distance from the business – where they ought to be part of the
business and its decision-making.  A
data-orientated contract facilitates this transition and allows unlocking of
true business value through the medium of legal agreement data.

Akber Datoo
is Managing Partner of D2 Legal Technology (D2LT), an international legal data