By Arnoud Engelfriet
In the past years, we have seen a lot of innovation in the field of contracting. We have seen the rise of new companies, new products and new approaches. We have seen the birth of new terms, such as “smart contracts”, “contract automation” and “legal operations”. We have seen a lot of experimentation and a lot of new ideas. But what will the future actually bring?
The rise of legal tech
The rise of legal tech has been described many times before: All technology that has the potential to change or even transform the way that lawyers work. This could be as simple as automating that which the lawyer did by hand before, such as writing a brief or a contract. Or that speeds up the slow, such as searching case law databases. We have seen many such tools being adopted in one way or another.
The main advantages so far: efficiency gains and standardization. But legal tech has so much more potential, which we are only now beginning to see becoming unlocked. The next-generation of legal tech goes beyond these efficiency gains. It focuses on transforming the way that legal processes are conducted. And this is particularly visible in contracting.
Legal tech in contracting
Contracting processes have come a long way, but still bear clear signs of their manual-labor origins. First, the business negotiates the key items of a deal. This is noted down in a term sheet or similar document, which is then sent to the lawyers for one side who draft a complete agreement. The other side then gets to review that draft, after which specific terminology and new clauses are negotiated until (hopefully) all parties are in agreement. Finally, the executives come in and sign the agreement.
Legal tech has taken many of the aspects of this processes to the next level. Let’s name a few. Checklists for what should (or should not) be in such a contract. Libraries with model clauses from which appropriate specimens can be pulled. Redlining tools to track proposals and counters. Online collaboration and discussion tools to discuss the open issues. Signature tools to get final approval, including escalation for more important issues. And archiving with metadata for long-term contract management.
What’s the one thing that all these tools have in common? Indeed: they automate the existing processes. While the potential for error is significantly lower, interaction is much faster and the resolution of positional differences much easier, fundamentally speaking the process is still the same as in the manual-labor situation.
Transforming the process
A key insight to approach the transformation of any process is that it is never about the technology. It is about the underlying human behavior. It is about the way that humans interact with each other. And this is where legal tech can make a real difference.
The underlying problem is that of innovation. There are various types. What we described above is incremental innovation, which is mostly about improving existing products or processes. These innovations all take the existing process and try to make it better, faster or cheaper. And while there is nothing wrong with that, it is not transformational. It is not the type of innovation that will change the way that humans interact with each other.
But there is also radical or disruptive innovation, which is about creating new products or processes that are radically different from the existing ones. This is the kind of innovation that we need to transform the contracting process.
Fortunately, the scientific literature provides us with some useful guidance as to what is “radically different”. A good starting point is Clayton M. Christensen’s 1997 book “The Innovator’s Dilemma”. Clayton introduces the concept of “disruptive innovation”. This is innovation that creates a new market and eventually disrupts an existing one. A well-known example is the personal computer, which was introduced as a new market and went on to disrupt the market for mainframe computing.
Clayton’s work has been continued by others, such as Rita McGrath in her 2013 book “The End of Competitive Advantage”. Rita differentiates between “sustaining” and “dynamic” innovation. Sustaining innovation is incremental innovation: it improves existing products or processes. Dynamic innovation is radical or disruptive innovation: it creates new products or processes. The key difference lies in the target market. Sustaining innovation is about creating new products or services for the existing market. The existing market is the target market. The focus is on existing customers and their needs. Dynamic innovation is about creating new products or services for a new market. The new market is the target market. The focus is on new customers and their needs.
When we talk about transformation, we mean true disruptive innovation, innovation that creates new markets. But what does that mean for the legal market?
A new way of contracting
As noted above, it is about the human behavior. Therefore, a transformation of the contracting process requires a transformation of the underlying human behavior. So let’s take a step back and look at these humans.
First, we have the business, which is about the people who negotiate the key terms of the deal. Second, we have the executives who sign the agreement. And third, we have the lawyers. They are the most prolific actor in this process, yet at the same time the most conservative in their way of working. Transforming the contracting process thus requires transformation of how lawyers work. Or, more fundamentally: what value lawyers bring to the process.
For a long time, we have designed the contracting process around lawyers. We have asked the lawyers to negotiate the key terms, to draft a contract, to negotiate specific terms, to sign the agreement. But we are now introducing a different perspective, one that is based around the needs of the business.
Contracting is primarily a business process. It is the business that initiates the contract, the business that corresponds with the other side and the business that executes the contract. So it is only logical that the business needs should dictate the contract. However, due to the highly complex nature of contract clauses, in practice it befalls to the lawyers to draft the actual agreement - and then to interpret it as well, in case of disputes.
We can however see a glimmer of change in how many contract assembly tools work. Almost all start with checklists or frameworks that list the key issues. Model clauses are available in various flavors, and the work then becomes assembling the right issues in the right flavors. Similar things happen in contract review: a tool (typically employing natural language processing or other AI) checks each clause and generates a report on whether it is acceptable or not.
What is happening here is that the complex contract clauses are being reduced to standard issues, that we are able to express using simple words or phrases. This is of course the exact opposite of what we have been doing for centuries now, but we think it is a smart move. It is bringing the business back into the limelight, making sure that key terms are negotiated by the business, rather than by the lawyers. And it is shifting the lawyer from being a seasoned negotiator to an interpreter of issues and model clauses.
Of course, we have always had shorthand for such complex clauses. So why is this so different? The first reason is the rise of artificial intelligence, which has enabled the type of data analysis necessary to identify each variation on a clause and to reduce them to the right type of issue. So it is only now that we can actually deal with shorthand over full clauses.
What’s more important: we have - or are close to having - access to tools that can give that shorthand actual meaning, translating back and from complete legal clauses as necessary. Including the strange deviations or sly tricks that may appear from time to time. We can value different formulations, keep track of clauses that get redlined a lot, and promote clauses that work over those that don’t. Most of the necessary tooling is already here.
This will allow businesspeople to take back control of the negotiating process and assemble contracts without lawyers in the loop. (Of course, lawyers will still be there as advisers, as supportive figures.) Readers of Richard Susskind may recognize this as the ‘externalization’ step of his four-part process. Note that this is not the same as standardization: contracts will not be fully standardized, with only two or three options per issue on the checklist. The contents will still be bespoke. But assembling the contract will be a whole lot faster.
So there you have it: the future of contracting. A future in which businesspeople - not lawyers - are in charge. A future in which the actual contract is assembled from shorthand clauses and issues, translated back and forth by artificial intelligence as necessary. Where does that leave the lawyers? In the words of Andrew Arruda, former CEO of ROSS Intelligence and Member the Advisory Board of Duke Center on Law & Tech, “As the legal process is further disrupted by technology, lawyers will have to embrace machines, not fight them. We will have to take on the tasks that machines can do more efficiently than us, so that we have more time to do what we do best: solve complex legal problems.”
About the Author
Arnoud Engelfriet is co-founder of the legal tech company JuriBlox, and creator of its AI contract review tool Lynn Legal. Arnoud has been working as an IT lawyer since 1993. After a career at Royal Philips as IP counsel, he became partner at ICTRecht Legal Services, which has grown from a two-man firm in 2008 to a 80+ person legal consultancy firm.
Read more from thought leader and industry expert Arnoud Engelfriet in his series Legaltech Beyond the Myths