With the rise of contract analytics, there is a growing interest in—or at least awareness of—computable contracts. This post will seek to explain the concept, delve into the rationale for contract analytics, and introduce the notion of auditable contracts.
“Auditable contracts” is a term I first heard used by Brad Peterson, a partner at Mayer Brown. It is an agreement that can be reviewed by a computer system with a high degree of accuracy to determine, for example, the presence or absence of clauses, discrete items of information (such as names, dates, amounts, etc.), and examine the nature of contractual language.
Contract Continuum—from Prose to Code
Auditable agreements are one class of contracts that can be plotted on a continuum, illustrated in the chart below:
At one extreme, agreements are written in a prose style; at the other extreme, agreements are coded in a computer language. As we move from left to right, contracts become more amenable to computer analysis. At the far right, they can be quantified and analyzed with complete accuracy. The key reason helping to facilitate such quantification is that the continuum restricts sentence forms and limits vocabulary. The journey moves from Proust, to Capote, to Hemmingway, to Prolog (or some other high-level computer language), and finally to machine code.
However, it should not be assumed that the continuum restricts creativity. One of the reasons I enjoy programming is the power and flexibility of computer languages. The C-language, for example, dictates only code structure—the sentence forms. Programmers have complete freedom to create “words,” and define their meaning.
Why Make Contracts Auditable?
Of course, you can hear a loud chorus of lawyers saying: why should we draft in a manner that makes the agreement more amenable to computer analysis? Agreements do not need to conform to some standard. They should serve the client’s needs.
There are, in response, many reasons to move to auditable contracts. First, as described in a previous post, the lifecycle of legal agreements demands a range of processes. Drafting and reviewing individual agreements can be made more efficient and produce higher quality agreements through the use of automation tools and contract standards. The task of auditing entire portfolios of agreements, analyzing their contents, and seeking to optimize their value can be greatly enhanced with high-performance, scalable computer programs. Where, for example, an organization seeks to review 100,000 contracts, each document requiring one hour of expert review, the review will take 11½ years of attorney time to complete. A computer performing the same task in 5 seconds per contract would require just five days.
How Can Contracts be Made Auditable?
In brief: use a style guide to ensure greater consistency. The guide should address two main topics: contract structure and drafting principles. Agreements should be organized in a hierarchical manner with clear captions that can be read as a checklist of deal terms. Each clause should be modular, self-contained (to the extent practical), and cover one substantive topic. Each sentence should be drafted in a clear, comprehensive and concise manner. As an example, the contracts standards guide is available online.
Drafting in a consistent manner does not mean that all contract terms can be accurately extracted and analyzed. The purpose of auditable contracts is to accelerate the process of contract review—not completely automate it. It is a compromise between current drafting practices and the need for efficiency and quality control. In order to fully automate contract review, agreements must be either term-sheet generated or drafted in machine-readable or machine-coded forms. But, it is unlikely that the market is ready to adopt algorithmic forms of drafting.