Akber Datoo explains how a new mindset is needed for contracts if they are to be effective in a data-driven world.
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 operability.
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 consultancy: https://d2legaltech.com