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We live in a world few could have imagined even a decade ago. Digital technology is transforming everything around us. Therefore, this raises a question. If every aspect of our daily life can be digitised or automated, why not legal contracts?  In this article, we explore how digital disruption is automating every stage of a contract life cycle.

Five Stages of a Contract Life Cycle

We can summarise a contract’s life cycle into five distinctive stages: negotiation, formation, performance, management and, if needed, dispute resolution.

Contract negotiation 

Parties will negotiate and reach an agreement before entering into a legally binding agreement or a contract.  During the contract negotiation stage, parties will complete their due diligence, obtain advice from lawyers and other professionals and assess the contract terms.

Contract formation 

Once the involved parties finalise the negotiation, they take steps to form a contract. Usually, this occurs by parties preparing and signing a document. However, even oral agreements can be contracts if the parties satisfy the elements of contract formation. These elements are an offer, acceptance, consideration, and intention to be legally bound. Contracts form when:

  • a party makes an offer to enter into an agreement;

  • the other party accepts that offer;

  • a consideration (something of value) passes between the parties; and 

  • the parties intend for the agreement to have legal validity. 

Contract Performance 

Contract performance is the most critical stage of a contract life cycle. The parties must perform their obligations under the contract and remain compliant with the contract terms. If not, this is a breach, and the other party may seek compensation for any losses suffered from that breach. 

Contract management 

Contract management includes monitoring contract performance, managing any deadline under contracts, and renewing contracts where required. This tends to be more critical for larger businesses with many contracts to manage. 

Dispute resolution 

If there is a contract breach or a general dispute between the parties, the parties will need to resolve that dispute. Traditionally, the Court is the main forum to resolve disputes. However, sometimes the contract will set out the procedures to follow in the event of a dispute. Additionally, alternative dispute resolution mechanisms like settlement or arbitration are available.

Digital Disruption of the Contract

Each stage in the contract life cycle has or continues to be digitised and automated. Therefore, our description below only notes some of the digitisation trends in the contract life cycle, which COVID-19 has accelerated.

Contract Negotiation

During contract negotiation, parties spend significant time preparing the contract documents. Generally, lawyers prepare contracts using existing contracts as contract templates. They then make relevant changes before the parties negotiate the specific terms in the contract. However, this can be a time-consuming and expensive process.

Document automation tools automate the preparation of the first draft of the contracts. Firstly, the process usually involves the lawyers answering a questionnaire. Then, based on the responses to the questionnaire, the tools automatically generate the first draft. This then saves legal teams and their clients time and money. 

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Contract Formation

One of the most notable technologies enabling the digitisation of contract formation is electronic signatures. It allows parties to sign a document using digital methods remotely, removing the need for parties to come together to sign.

Electronic signature technology adoption has significantly increased after the COVID-19 pandemic. Although the technology was available in the market for several years, there was resistance in the legal market to adopt electronic signatures. For example, one reason was the lack of clarity on whether electronic signatures would be a proper way to sign certain legal documents like deeds. Another reason is that there was not enough incentive to adopt a new technology where physical signing seemed to work perfectly well. 

However, in the COVID-19 world, where organising the physical signing of documents was logistically difficult, laws were passed to explicitly state that electronic signatures were a proper way to sign documents. Further, parties had no choice but to adopt the technology to enter into contracts. 

Contract Performance 

Of the five stages of the contract life cycle, contract performance has historically been the hardest to digitise or automate. However, smart contracts are changing this and offer to automate the performance of contracts.  Smart contracts are computing programs that automatically self-execute a code when the relevant parties meet certain predetermined conditions. These computing programs are stored on a blockchain

For instance, you can automate contractual obligations to deliver certain notices once a month using smart contracts. So, the predetermined condition is the passage of time. Once the time passes, in this case, a month, a notice is created and issued without human input. 

However, the legal market tends to agree that we cannot automate every part of contract execution. Therefore, provisions of a contract that follow a boolean logic (with only two variables, true and false) are most suited for automation using smart contracts.

Contract Management Process

Contract management software has been in the market for many years. These types of software can help organisations manage contractual obligations. However, many contract management systems involve manually entering data from contracts. This is changing with the advent of data analytics tools. For example, these tools can automate the extraction of data from contracts and can store them in contract management software. The data is then presented to the users of the contract management software. 

Dispute Resolution 

Resolving disputes involving only one or two contracts may not require a lot of technology. However, there will be hundreds, if not thousands, of contracts in significant disputes like class actions or disputes involving large corporations. To help, artificial intelligence and machine learning are used in dispute resolution in the discovery phase to review contracts quickly and cost-effectively.

Therefore, this allows the legal teams to spend more time and energy on the findings from the document review exercise than reviewing the documents. 

Key Takeaways

Digital technology is revolutionising all stages of the contract life cycle. The stages of a contract life cycle have been made more efficient and cost-effective through digital technology. Therefore, digital technology is an exciting innovation in the world of contracts. Your business may be able to benefit from these new technologies, so we recommend you follow these developments.

If you need help understanding the future of contracts or would like to implement this into your business, our experienced Legal Transformation Lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

How can my business benefit from smart contracts?

Smart contracts are a fairly new development. However, they have the potential to significantly streamline your business’ operations by automating parts of the contract life cycle.

Does my contract need to be in writing?

No, your contract does not need to be in writing to constitute a valid contract. For instance, an oral agreement that meets the requirements for contract formation will constitute a contract. However, written contracts make the terms clearer for all parties.

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