Artificial Intelligence can Support Risk Analysis of Contracts and Definition of Mitigating Actions

In the current COVID-19 context (“coronavirus,” for simplicity), companies should map their contractual rights and obligations to determine whether risks exist and, if so, what mitigation actions could be put in place. This risk analysis can be made in a very short time (that is, a few hours or even less than an hour) with the support of artificial intelligence.

We have adopted an artificial intelligence platform in 2017 and, to support companies in this emergency situation, we will contribute by sharing our experience in the platform and the type of analysis required.

The ability to map contractual risks in an efficient manner through use of artificial intelligence would enable a company to proactively identify risks, as opposed to reactively, and to identify mitigating actions ahead of the problems arising.

Companies Should Map Risks for Buy-Side as Well as Sell-Side Contracts

To identify risks, a company should look at contracts where the company is on the buy side (that is, its supply-chain, other providers, etc.) as well as to those contracts where the company is on the sell side (that is, contracts with clients). At the same time it may be the company, or the other party, or both parties to be impacted by coronavirus. In other words, every contract should fall in one of the boxes below.

For example, company ALFA is an Italian engineering company required under one of its contracts to send engineers to another country (where there is no coronavirus impact). This is a sell-side contract for ALFA, where ALFA is impacted by coronavirus. If we were to map this in a chart, the issue would fall (from ALFA’s standpoint) in the red box below.

Let’s say instead that company BETA is from a coronavirus-free country and it expects delivery of goods from a Chinese company: this is a buy-side contract for BETA, and the other side is impacted by coronavirus. Hence this contract this time would fall in the left red box in the middle in the chart.

To Map Risks, Companies Should Look at Several Features of Each Individual Contract

To determine whether and to what extent a risk exist for any specific contract, a company should look at:

  • “geography” of the contract: where is the counterparty established/operating; where is performance/delivery to take place; etc.
  • actual content: whether the contract includes a force majeure clause or a similar one; the actual definition of force majeure (if such clause is in the contracts) and its consequences, etc.; whether the contract includes a right to suspend performance (in which circumstances, for how long, etc.); consequences of delay of performance; etc.;
  • governing law (if there is such a clause or not, if so, which is the applicable law);
  • whether the contract includes a choice of forum (and if so, whether it is courts or arbitration).

By this analysis a company would be able to collect all information necessary to identify risks and threats and to determine mitigating actions. Could my clients cancel contracts due to delays caused by coronavirus? Is my company instead entitled to cancel contracts with clients? In both cases, which are the consequences? What remedies would my company have if a supplier delayed delivery of goods? Etc.

Artificial Intelligence Comes to the Rescue

The analysis described above would normally require a significant investment of resources/time even for a modest number of agreements. An Artificial Intelligence platform, properly set up, can manage this very efficiently.

In real-life terms: we have run a test on our +5000 documents “test data room” and in about 45 minutes we were able to:

  • identify 2,000 contracts including a force majeure clause (and knowing which contracts do not include such clause is a significant piece of information)
  • easily navigate the contracts filtering them based on governing law, choice of forum, presence or absence of the force majeure clause, geography, etc.
  • create an Excel file including for each such contract: (a) the text of the relevant clause and (b) the governing law of the contract (which is relevant as force majeure will mean different things and be treated differently in different jurisdictions)
  • create a visualization showing contract geography, nature of contract (commercial agreement, real estate, etc.)
  • create tasks to assign the contracts based on their nature on the applicable governing law, etc.

With this information at hand, one could then set out to assess the current exposure and identify potential mitigating actions.

We believe that even for a limited number of contracts, the platform may bring significant savings and efficiency. On large or massive amounts of contracts artificial intelligence makes possible what would otherwise not be doable.

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