Reduce Risk in Your Contracts with Artificial Intelligence

Michael Bruton | Chief Product Officer, DocLens.ai

All business opportunities involve some degree of risk. It is not surprising that the documents memorializing a business relationship include provisions that either impose obligations (create risk) or provide benefits (mitigate risk). Most often, these Legal risks remain latent until an adverse event occurs. At that point, the lawyers reach for the document to determine which party has responsibility and the related financial exposure. Discovering the risk after the event, including the potential disputes over contract terms is a very costly mitigation strategy. For many organizations, the only alternative is a periodic manual review of every contract to find the provisions that create risk so steps can be taken to mitigate that risk to the extent possible. Because this manual due diligence is time consuming and expensive, most organizations review a small sample of contracts and hope that no adverse event occurs. Organizations make risk-based business decisions without the data to inform those decisions. Advances in technology now offer an effective and efficient alternative.

Identify Risk Provisions

Technology can read documents. Moreover, organizations can use technology to identify specific types of provisions in contracts. Utilizing a combination of techniques, including Artificial Intelligence, models can quickly review an individual contract or an entire portfolio to, with a high degree of accuracy, identify provisions that impact risk. For example, technology can answer key risk questions:

• Does the contract impose or provide data security and privacy protections?
• Is your organization entitled to indemnification?
• What insurance is your organization required to obtain or is another party required to provide insurance covering your organization?
• Is there a limitation or cap on liability provision?
• Can the other party hire your organization’s employees?

Armed with the answer to these and other risk related questions, your organization can make data driven decisions on the level of risk to accept in a contract. You can also focus resources on mitigation strategies before the adverse event reveals the risk.

Evaluate Risk

Technology not only efficiently identifies the risk, but it can also evaluate the risk. The mere presence or absence of a contract term can create risk. For example, if your organization provides customer personal identifying information to a vendor but there is no data protection or security provisions in the contract with that vendor, your organization is exposed to potentially costly risk. In addition, technology, for example, through sentiment modeling can determine if a contract provision is favorable or unfavorable to your organization.

Mitigating the Risk     

Technology is not a substitute for the business judgment on the acceptable level of risk for an organization. But it can efficiently provide the data necessary to make an informed judgment. During negotiations, you can use technology to focus on the provisions that matter, to reject contracts outside the organization’s risk tolerance range and to fast-track review of those contracts with acceptable levels of risk. 

In the in-force portfolio, you can use technology to prioritize contracts that warrant amendment, to confirm compliance with terms that impose an obligation on your organization and to monitor the risk profile trend in a portfolio of contracts.

Your organization can devote resources and time to build and maintain the technology necessary to identify and evaluate the risk embedded in contracts or it can explore Service as a Service (SaaS) platforms that offer cost effective solutions.