Supply Chain Disruptions Necessitate Better Contracting Practices: Use of AI to Add Efficiency

As we have covered in prior articles of this series, with supply chain disruptions wreaking havoc on the ability of companies to get their goods and services to market, the terms of a company’s commercial contracts have never been more important. In some cases, losses due to inefficient or ineffective contracting can add up to be a sizeable percentage of the contract’s value. As such, getting the contract terms right is extremely important to a company’s bottom line. This requires knowledgeable review and is an opportunity to utilize artificial intelligence to add efficiency

One issue, of course, is volume. Companies today can easily have hundreds or even thousands of supply contracts in place, with new agreements, amendments and renewals coming in nearly daily. Each agreement addresses a large number of critical issues, such as pricing structures, termination and renewal terms, delivery, warranties, indemnification, and limitations of liability, among others. Manual review and revision processes place a tremendous strain on the organization, from sourcing to sales, procurement to legal, and in-house and external counsel.

AI-Assisted Review Improves Efficiency and Negotiations

Businesses frequently receive contracts proposed by the other contracting party. Even if the company is able to use its own “paper,” the agreements often come back from the other side heavily revised and marked-up. In both situations, the company must review the language and determine whether it is agreeable or needs modifying.

This is where AI-assisted contract review and analysis can help significantly by adding consistency, quality control, efficiency, structure, cost savings and collaboration to the process. AI-assisted contract review can quickly and efficiently identify the key contract issues that are important to the organization. As an example, Foley has launched Foley Equipped, an AI tool powered by ThoughtRiver, which provides that efficiency to our clients and includes playbook commentary, negotiating tips, fallback positions and example contract language.

AI Helps with the Contract Revision Process

Newer AI solutions with natural language processing (NLP) and machine learning (ML) capabilities are addressing this use case. Solutions with Microsoft Word plug-ins, like Foley Equipped, are particularly useful as they provide the AI results directly in the Word document that is under review. Solutions can also incorporate advice notes, playbook commentary, clause bank language and model template-based provisions.

On the other hand, the tools designed for bulk review of post-execution documents (as is often used in M&A due diligence) typically do not integrate directly with Microsoft Word, because this is not needed in the context of an M&A or other bulk legacy contract analysis.

Issues Lists Created Automatically

AI review tools can automatically create issues lists that can be used by the company to track open issues, the parties’ positions, and proposed and agreed upon solutions. Appropriate versions of these lists can also be shared with the other party as a negotiating aid to get the deal done quickly and efficiently.

Machine Learning Adds Another “Eye”

As computers became faster and more powerful with the ability to store and analyze more information, computers have acquired the ability to “learn.” For example, through both human training and machine learning, an AI application can learn to determine whether a contract deals with limitations of liability, even though there are numerous – almost countless – different ways to word a limitation of liability provision. AI technology does this by rapidly examining hundreds of example contracts with the assistance of human training by individuals “teaching” the system what to look for. With enough human training combined with complex algorithms, the AI application can then improve its results automatically over time (i.e., machine learning).

With no end to the supply chain crisis in sight, successful companies will find ways to contract smarter, quicker and more efficiently. AI-assisted contract review like Foley Equipped can provide a useful tool and helping hand with the contract review, revision and negotiation process to achieve these goals.

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