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Turning Contracts Into Assets

Contracts have long powered the wheels of commerce. Despite such a useful purpose behind their existence, contracts have been for a long period been perceived more as a necessary legal cog in the proverbial wheel rather than anything else. There are many reasons for relegation of contract to a mere legal necessity, but the formidable challenge around contract enforcement is certainly a prime reason. However, this is changing in India due to many factors, some of which are furnished below:-

(a) Enactment of pro-enforcement legislations

The last few years have seen some notable changes geared towards expediting enforcement of a contractual dispute. E.g.: amendments to the Specific Relief Act and a revamped time bound arbitration regime.

(b) Recovery proceedings getting momentum with IBC

The IBC framework has somewhat set the notion that legitimate business dues should not be held up without adequate justification.

(c) Regulatory scrutiny of agreements

From corporate governance to tax, from privacy to foreign exchange management, increasingly regulators have called for greater scrutiny of commercial agreements.

In short, there is a distinct shift in the way contracts are perceived now – they have transformed from being archived papers to documents which are increasingly reviewed and referred for various purposes. The Big Question is can it go any further?

Can contracts turn into assets of a company?

Assets – not in the sense of an accounting term – but in the sense of being something valuable to a business.

Executed contracts of a company house the sum total of the commercial bargains that the company has agreed for. Some or most of these agreements result into a company advancing its commercial goals; some of them fail and get embroiled into disputes. Contracts and papers that are exchanged for operationalising the contract thus record experience and outcome that an enterprise has or is going through.

This experience and outcome is the real asset of a company.

Illustration

A manufacturing company undertakes a review of all their contracts to find disparate delivery and payment clauses across customers. Some of the contracts had ended in litigations with un favourable outcome for the company. Legal department reviews the disparate clauses and sets standard which are to be adopted in future. This is a prime example how executed contracts and related paper work can create valuable assets for a company.

(f) ESG Compliance

With the advent of sustainable supply chain principles, procurement professionals are required to ensure that not just direct procurement contracts but all contracts in the entire supply chain are executed keeping in mind relevant ESG principles. The necessity to turn to ESG compliant vendors and suppliers could be mandated by company policies or by funding agencies or by even regulators. One of the ways that procurement professionals are using contract intelligence today is by quickly and automatically auditing all the supply chain contracts to ensure that those contain the necessary provisions from ESG perspectives.

Use Cases

The review of executed contract portfolio serves many use cases – some of the more frequent ones are listed below:

(a) Identification of payment obligations and corresponding timelines

This ensures that payment are neither made nor received in delayed manner – thus saving one’s own interest, penalties or creating an ability to demand such from counter party.

(b) Identification of contractual clauses

This permits contracts to be terminated at convenience such that unviable contracts can be dealt in accordance with business requirements.

(c) Identifying spread of business by counter parties

Tracking by counter parties and industries, helps one understand any special concessions made for specific counter parties and contractual provisions that can be reused – thus helping to map contractual provisions with commercial transactions and avoiding reinventing wheels.

(d) Transaction or litigation readiness

Ensuring that during a business or strategic transaction or a litigation or for that matter a regulatory investigation, desired outcome is not missed out due to missing documents. All documents can be centrally stored and a searchable repository can be created.

(e) Identification of notification obligations

Typically under many contracts counter parties must be informed during cyber-attacks, privacy breaches or other serious incidents affecting the business or reputation of an enterprise. This path essentially shortens the response time and saves damages that a business may have to bear owing to late or missing notifications.

(f) Preventing Events of Defaults

Events of defaults under contracts can deny enterprises benefits available under contracts or may even accelerate cause serious business interruption. Knowing events of defaults and mapping them with business processes and stakeholders reduces the possibility of contracts ceasing to perform midway.

The Transformation Process

Here's how a product like Riverus can help with the transformation:

  1. Uploading all contract related documents is the first step. Once the contract documents are uploaded, the out of the box AI models discern important metadata and build out contract level.
  2. Cleaning out extracted contract data is the second step. The AI models supplemented with thoughtful user interface allow expeditious finalisation of contract level data. At this stage all documents related to a contract are linked together and appropriate tags/ labels (for e.g: deal specific drafts) are provided.
    Implementation support is available for cleaning out large contract level data by experienced contract lawyers to work alongside in-house legal staff to conclude the exercise within a defined time period
  3. Setting up a dashboard which allows smart retrieval of contracts by attributes is the next step. The dashboard also has rich reporting features containing various parameters based on the organisational requirements. For example, report payment obligations coming up in a specific month, a list of all contracts where there is no cap on liability, etc
  4. Going forward all new contracts and documents are stored in the repository

What do you get

  • A central repository for all your contracts with all related documents
  • A dynamic dashboard from which contracts with any specific or combination of attributes can be extracted
  • Smart reports
  • Clause and contracts that can be exported to a clause library

Want to know more, download the Riverus Contract Management Brochure.

By Dipankar Bandyopadhyay

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