Contracts hold key strategic importance for a business. Traditionally, contracts have been the wheelhouse of lawyers, who are wary of deploying automation and technology without clear benefits. However, over the last decade, the application of AI to all phases of contract drafting and review has changed that.
Recent explosive growth in Generative AI capabilities has made legal one of the biggest focus areas.
To understand this better, we spoke with Amit Sharma, Founder and CEO of ContractKen who believes that Generative AI will become an integral part of a lawyer’s toolkit.
Read more to know:
- Gaps in traditional contract review and drafting workflows
- 3 interesting ways in which Generative AI technology is being adopted by the contract management industry
- Future outlook on how Generative AI will shape contract management practices
Understanding contract drafting and review management
Contract drafting and review management involves creating, editing, and analyzing legal contracts in a systematic and organized manner. Five major tasks include:
1. Creating a contract draft
Involves outlining the legal framework for a contractual relationship between two parties by specifying the contract terms, rights and responsibilities of the parties involved, agreement terms, confidentiality agreements, and applicable conditions. Drafting a contract requires legal knowledge and precision to ensure that it is clear, comprehensive, and legally enforceable.
2. Contract review for editing
The contract review process involves careful examination by legal professionals, often lawyers, to ensure the contract accurately reflects the parties’ intentions, complies with applicable laws, and minimizes potential risks and ambiguities. Legal professionals eliminate errors, inconsistencies, and any clauses that might be detrimental to one party or the other.
3. Documentation and storage:
Involves managing various versions of the contract to track edits made and any change due to approved contract negotiations. Also includes implementing best practices to store contracts and retrieve them as required.
4. Risk management:
Involves identifying risks by evaluating the financial, operational, and legal implications of the contract terms and conditions.
5. Approval, negotiation, and execution:
Once the contractual terms and conditions are agreed upon by involved parties, the next set of tasks is to obtain signatures, meet specific formalities, and finalize legally binding agreements. Negotiations are carried out for dispute resolution or impose confidentiality agreements.
Limitations of today’s contract drafting and review management software
Amit has 20 years of experience in the Analytics industry, which includes deploying custom Machine Learning and statistical models for revenue and cost optimization. With EXL, Amit worked with numerous clients to optimize their legal costs and noticed that many incurred significant expenses spread across contract disputes, litigations, etc.
“I noticed how both from the customer and business side, a lot of information is buried in a contract, but it is hardly used as a data or business asset.”– Amit Sharma, Founder of ContractKen
With this insight and his experience in Artificial Intelligence and contract management space, he built ContractKen – a Generative AI-enabled co-pilot for contracting professionals to draft and review contracts in MS Word.
Amit spoke with 100’s of lawyers, contract managers, paralegals, and procurement professionals to understand the market landscape of the CLM (Contract Lifecycle Management) category and identify the major pain points. He articulated the summary of these gaps as follows:
- Complex learning curves: users of contracting software are lawyers, contract professionals, paralegals, etc who are always under time pressure to get contracts to signature. Most legal and contract departments do not have the luxury of getting trained on complex interfaces and learning a new tool. They use Microsoft Word for their daily contract-related work – and over-engineering, complex software can introduce more fatigue and errors into the process
- The gap between talk and reality, when it comes to AI: most leading contracting software are workflow products and use basic AI algorithms for tasks like analysis of contract text to extract key contract metadata, image text (using OCR), etc. These systems still need significant human input and supervision to carry out a contract task completely.
- Fewer customization options: creating and modifying contracts are unique to the businesses involved. Mere templating or custom field features aren’t sufficient to improve productivity in contract management – which involves many customization workflows.
How does Generative AI improve today’s contract drafting and review management operations?
Contract management software helps implement best practices for contract drafting and review workflows. But with generative AI, you can truly add ‘intelligence’ to your contracting operations.
It can assist contract professionals in not just data extraction or workflow management tasks – but actually performing substantive reviews of contracts, summarizing issues, drafting using precedents, and much more:
Improves the usage of contract language
The main responsibility of lawyers is to ensure the usage of correct contract language and clause positions in the contract to protect their employer’s or client’s interests in the business transaction. The use of pre-approved snippets of clauses or consistent contract language across multiple contracts can speed this up. However, this approach increases the risk of oversight and also reduces the possibility of customizing language fit for the specific context.
With today’s contracting tools, the choice of language rests mostly in the hands of human intelligence, where the contract professional manually adds or removes clauses. Also, many contract negotiation and modification tasks involve changing words or the overall tone used – leading to a waste of time.
This is where Generative AI can make a difference:
Instant custom contract template creation
Today’s contract management professionals have a plethora of choices when it comes to contracting templates and examples. But this makes them restricted with pre-defined fields and limited options. With Generative AI contract software, one can use custom prompts to create a complete contract document from scratch – and then edit it as per their requirements.
Amit Sharma warns about the blind usage of Generative AI to draft contracts from scratch:
“Legal teams should not depend upon Generative AI for creating new text for contracts. Companies should have repositories, playbooks, or guidelines. You may end up exposing yourself to a lot of variance.”
Consistent contract language
Generative AI can understand the language used from the industry standard repository or previous business documentation available, and make sure your new draft aligns with it by comparing the language. It can follow language guidelines set by the company, and help draft multiple documents with consistent terminologies.
For example, if your business is a marketplace with multiple vendors, it is important to ensure consistent language for all vendors across contract termination, any penalties, compensations, etc.
Assistance in contract reviews
Contracts are long, and often boring documents – but not being thorough with the contents of them can be detrimental to a business. A contract professional spends hours reviewing a single document to make sure it meets the business interests.
Here’s how Generative AI helps in the contract reviewing process to reduce manual work for contract professionals:
Provides risk alerts
Advanced Natural Language Processing (NLP) helps understand the semantics of the drafted contract – and identify risky terms used in the document. It will alert the attorney to attend to the same and suggest replacement terms or words. It also can suggest clauses to add or subtract to draft a solid contract.
Reduces manual work
Contract reviewing involves back and forth between many drafted documents and managing comments. Constant attention shifts like these reduce the focus of the professional, leading to human errors. With Generative AI software, it is possible to compare documents side by side, and it will spot errors and suggest changes.
“The better use of Generative AI or large language models is for reasoning. There were lots of use cases that we were not able to solve before GPT-3. Then GPT 3.5 was released, and our ability to include newer use cases just shot up by 10x.”— Amit Sharma, Founder of ContractKen
Does the created contract draft align with what the business intends to achieve with it?
Generative AI can analyze the document, and help you share the meaning behind what the document intends to convey. It can provide a contract professional with the necessary 3rd party contract review to better understand the effectiveness of the draft. It will also suggest changes to align further with business goals.
Reduced time in interpreting other party contracts and negotiations
Contracts are a two-way process – and negotiation of contract terms plays an essential part in it. Lawyers carry out a majority of these negotiations – and they spend hours finding arguments to present during negotiations.
Here’s how Generative AI helps in negotiating contracts and improves the productivity of a lawyer:
Summarize contracts submitted by other parties
“Summarization is an excellent way of using a Large Language Model (LLM) if you have the right tools and know how to add nuance to prompts.”
– Amit Sharma, Founder of ContractKen
Establishing a contractual relationship with a new vendor is a risk. Hence, your legal team must understand the provided contract thoroughly. Generative AI contracting software can summarize a given contract and highlight its key takeaways, and tone usage, or provide a simplified version for non-technical stakeholders. It can detect any unfavorable provisions made by the vendor, thus alerting your contract teams to take care of it in the negotiation rounds.
Identifying non-compliance by vendor contracts
“One of the use cases we have implemented of Generative AI at ContractKen is the ability for the user to select a text in the document and compare it with their internal standards or industry guidelines. These kinds of problems were hard to solve before Large Language Models”— Amit Sharma, Founder of ContractKen
Sometimes, a business may provide a vendor with specific contracting guidelines to help vendors draft their contracts. Generative AI contracting software can detect anomalies in following the guidelines and suggest the vendors align. It can identify language that could be more optimal as per terms that were agreed upon during negotiations. Your legal team can highlight these, and demand changes.
Identify changes that can favor your business
A business hires a lawyer to identify clear ways to turn the tables in the favor of the company during negotiation. A Generative AI contract software can understand the contract, and suggest potential language changes or addition/subtraction of clauses. Your legal team gets equipped with a powerful tool to identify points of agreement to present during negotiations.
Upcoming trends to watch out for in using Generative AI for contract management
Amit shares how the Contract Lifecycle Management software industry still has a lot of adoption scope when it comes to digitizing the contracting industry:
“Contract Lifecycle Management is no longer an early-stage market category in terms of its adoption. Yet, 90% of the organizations in the world have only touched the surface when it comes to leveraging the potential of information and data from contracts to drive business decisions.” – Amit Sharma, Founder of ContractKen
Here are 3 key trends that you should consider to future-proof your contract lifecycle management and operations:
Generative AI co-pilot for contract review and drafting
Generative AI technology is capable of being a co-pilot to contract professionals to help them reason better and draft an accurate and consistent contract document. Here’s how Amit Sharma, founder of ContractKen explains this viewpoint:
“The cost of intelligence has dropped by at least 10x. The premium that all businesses are used to paying for a knowledge worker will be reduced. How quickly the premium is reduced will vary – but one thing will definitely change, whether they are lawyers or data analysts, they will have to work with co-pilots.”
The usage of AI will become a best practice in contract management
Amit also expects LLMs to continue getting better at reasoning, and this innovation will not die anytime soon. He believes the usage of Artificial Intelligence will become an important best practice in the contract management industry in the coming years:
“If you’re not using AI, then you are depending on your memory and using manual ways to complete the legal process. This has worked wonderfully so far, it is laborious, error-prone, subjective, and time-consuming. So, if you’re not using AI tools like ContractKen, you will deliver suboptimal output, and expose your organization to risks. Thus, not using AI would be considered legal malpractice.”
Innovation in data privacy
Many companies would feel insecure about sharing data with LLMs due to data security issues. What if OpenAI trains their models using their proprietary or sensitive data?
“At ContractKen, we created a modulation layer, which ensures that any contract text before it is sent to an LLM for analysis is anonymized using advanced ML algorithms. The context and privacy of the contract data are preserved. Once the analysis comes back from LLM, the moderation de-anonymizes it so that the user sees relevant output.”
AppliedAI Tools would like to thank Amit Sharma for sharing his input, experience, and expertise for this article.
ContractKen enables lawyers with AI assistance to draft, review, and analyze contracts within the Microsoft Word interface.
- Playbooks to implement organizational standards
- Integration with Intelligent Repository and Clause Library
- Privacy protection with in-house moderation layer technology
Explore ContractKen’s offerings – Get started
Do you have any questions about this blog? – You can connect with Amit Sharma on LinkedIn.