Smart thinking: contract automation explained

Could smart contracts transform the often tortured legal
process behind many construction projects? Misha Chaplya looks at what’s
involved.

First, let’s explain the terminology: contract automation is
the technology that exists here and now and allows developers and builders to
prepare standard form contracts at the click of a button – ‘smart contracts’.

If you are a developer or a main contractor engaged on a
major project where you need to let 200 appointments or produce 100 warranties,
all based on a standard form, with only the contract particulars and appendices
being the variables, how many hours will your contracts manager or in-house lawyer
spend:

• collecting each of the contract particulars;
• inserting the scopes of works and services into the correct appendices;
• seeking management approval of high-risk items;
• drafting optional clauses or special conditions; and
• printing and collating the documents?

In addition, how much time will you spend managing the
contract execution process and then scanning and storing hard-copy originals?
And finally, have you ever issued a contract for execution only to have it
returned with last minute handwritten amendments?

There are just some of the common problems that a contract
automation system can solve.

How smart contracts work

Your business will have a template form of contract which it
uses to engage various service providers. It will contain a section where the
contract particulars are inserted – the contract sum, start date, date for
completion and so on – plus appendices such as the site plan and scope of
works. There may be some standard clauses too.

All of these variables will be programmed into an online
questionnaire, usually referred to as a ‘decision tree’. This can be as simple
or sophisticated as your business requires.

If your contractor is required to provide performance
security, you will need to insert the form and the value of that security.
Alternatively, if no security is required, then the decision tree will not ask
those questions. The decision tree can also be programmed to alert those people
in your business who are responsible for a specific contract particular.

If your company has internal governance procedures requiring
sign-off on contract particulars, alerts can be set up to notify whoever is
responsible. Access to completion of certain contract particulars can be given
to your counterparty.

Once questions are completed, the contract can be
automatically created. If you have coupled your contract automation system with
e-signature software like DocuSign, the entire execution process can be
paperless.

Once the contract is executed, it can be stored in an online
library, sorted by site, counterparty, contract sum, date for completion, or
any other category.

Set-up costs

Contract automation can increase efficiencies in your
business, but the cost and time of initial set-up can be significant. However,
evidence from adopters of contract automation shows that the benefit far
outweighs the cost.

The setting-up of the various template forms of contract
intended to be automated usually involves lawyers working closely with IT
specialists. While the technology is intended to benefit construction
businesses mainly, law firms assisting clients with preparation of standard
form contracts will enjoy efficiency gains.

And the reality is that law practices engaged in high-volume
work will have no choice but to embrace smart contracts. In the context of
programme pressure and the prospect of monies being withheld until all
warranties or appointments are in place and delivered, contract automation may
soon become the industry standard.

Misha Chaplya is an associate at Trowers & Hamlins