Why are contracts hard to digitize?

Maitreyee Bapat
Maitreyee Bapat

Why are contracts important for business?

Every business builds on the foundations of a good contract. They guarantee standard business operations by clarifying the requirements and stating agreed methods to satisfy them. The law of contract, in legal terms, states that a contract is a piece of document that comes into existence by the will of the parties involved. Unlike other laws, contracts do not find their origins in any statutes. When two or more people are willing to agree on the same goal, they make an agreement. This agreement then becomes a contract after it gets sanction of law.

By this, it is clear that every business has contracts at its inception. Companies, partnerships, employee hiring, and many other business-related documents are nothing but contracts between various people. A good contract satisfies all the parties’ requirements, the applicable laws and is very unambiguous. Any party that stands in breach of the contract is liable to pay damages. This safeguards businesses from incurring financial losses as well as makes them accountable for their actions.

From a business perspective, a contract serves as a document of proof of acceptance; it gives clarity to the terms agreed upon, provides for confidentiality, and acts as a record of the business dealings. Any enterprise that aims at successful operations has to have a strong base for contracts.

In the course of recent times, businesses have evolved using technology. Many tools contributed to fast-tracking business processes like sales automation, accounts management, etc. The efficiency of business operations sky-rocketed because of automation.

But the contracting processes have somehow not kept up with the pace. The entire contracting process is still slow, unstructured, and inscrutable – causing friction in businesses that need to be agile.

What are the challenges to digitizing contracts?

Drafting and executing a good contract has always been challenging. It requires a specific set of legal and business expertise to attain finality. Let’s look at some reasons as to why contracts have not yet been a part of the digital revolution.

Dynamic nature of contracts:

Contracts are ever-changing. They go through many shifts and changes in the structure, terms of the agreement, and execution. Every minute change made in the contract by any of the parties involved must be captured by the software and notified to the remaining people. There can be thousands of changes in the existing draft. A digital platform has to be agile enough to redline, track and update all of these changes. The software works wonders to capture static data but keeping track of these dynamic data sets requires intelligent software. Such frameworks are incredibly tricky to construct.

Multiparty involvement in contracts:

Contracts come into existence because of parties willing to enter into a contract. There is collaboration and deliberation by numerous stakeholders with inputs and changes to be considered from all. Multiparty negotiations over contracts can be very chaotic, even with the help of software. There can be different opinions over the terms in debate or various parties demanding different terms altogether. Keeping up with the negotiations and facilitating a smoother deliberation process would require the platform to be smart, fast, and proactive. Once the deliberations and done, parties also need to affix their signatures to make the contracts valid. The evolution of electronic signatures has rapidly changed this scenario.

You would also need all the collaborators to use the same tool and give valuable insights for executing a contract. Getting so many parties to work on the same tool for a multiparty contract is, in itself, an arduous task.

Contracts are hard to understand:

Understanding and interpreting a contract is difficult for humans and machines alike. The language of a contract, its structure, and its fields are inscrutable. We need lawyers to make it simple for us. An insane amount of time is required to program and familiarize a machine and teach it the language of the law. Complex algorithms, clever application of artificial intelligence, dense and critical coding all play a significant role in building software that can learn and comprehend the requirements of e-contracts.

Along with that, to design a tool or software that successfully executes e-contracts, tremendous amounts of inputs are required from subject matter experts from law and tech. This makes the process not only time-consuming but also complex. The information from all the experts has to be combined, structured, and designed to build software ultimately.

Contracts have staggered timelines:

The final execution of a contract takes a huge turnaround time. It’s a process that can go from days to months. Streamlining the timeframe, along with keeping track of all the changes, becomes challenging. Doing this work manually is just as tough as teaching it to a machine. Primarily, building a device that can learn what you teach itself is a task that will take years to construct. Then the intricate process of teaching the software skills to make it functional would take more time.

In short, the entire process demands a significant amount of time investment.

Final Thoughts

All the challenges that we saw above are being solved with intelligent and smart software. Luckily, there is a way to shed the shackles of the traditional way of contracting. It is not hard to digitize contracts with the help of artificial intelligence and machine learning. Once the software is programmed and completely functional, successfully executing e-contracts becomes a walk in the park. Companies are witnessing a paradigmatic shift by employing CLMs to ease the process of managing the contract lifecycle.

Our CLM solution is a one-stop shop for all your contracting requirements. Get more clarity on how digital contracts differ from traditional ones.

Digital ContractingLaw Firm

Maitreyee Bapat

Maitreyee works as a content writer on the team. She is a lawyer by education and is passionate about creating content for the legal community that is relevant and thought-provoking.