AI Contract Management: How Does Clause Extraction Help Legal

Content

• What is clause extraction?
• Why is clause extraction necessary for contract management?
• Efficient contract review
• Risk mitigation
• Reducing human errors
• Enhanced Search and Retrieval
• Scalability
• Seamless collaboration
• How does contract management software help with clause extraction?
• Clause extraction in Dock 365

Clauses are a crucial part of business contracts. Organizations must religiously organize and track individual clauses throughout the contract lifecycle to ensure desirable results. But for companies with heavy and complex contract portfolios, staying on top of clauses, terms, and obligations can be challenging. Furthermore, identifying and sorting essential clauses in each legal agreement can take up time.

To overcome these challenges, thankfully, advanced contract management systems allow businesses to use artificial intelligence and natural language processing to identify and tag clauses automatically. Efficient clause extraction can go a long way in empowering legal teams to streamline their processes, maintain contract language consistency, and mitigate risks associated with contractual agreements.

What is clause extraction?

The process of automatically identifying and extracting clauses from a document, typically a legal contract, is known as clause extraction. It enables organizations to easily sort the clauses according to the kind of information they contain, such as indemnification, termination, and confidentiality clauses. This structured representation of the contract, highlighting key clauses and their associated data, can help with comprehensive analysis or review.

These days, contract management systems come with the benefits of artificial intelligence (AI) and natural language processing (NLP) to analyze the content of contracts. It empowers the legal team to locate predefined clauses or relevant information from countless contractual agreements within minutes. Clause extraction makes it possible for businesses to overcome oversights and time constraints when handling large volumes of contracts. It typically includes the following:

• Extract essential contract data such as companies, parties, cost, dates, and key clause types.
  
  
• Sort the clauses by function, purpose, contract type, and positive or negative position.
  
  
• Using the extracted dates to set up reminders for contract renewal, expiration, or even payments.
  
  
• Organizations can use the extracted clauses to stay on top of important terms, conditions, and obligations.
  
  

Why is clause extraction necessary for contract management?

Thorough review and analysis of contractual agreements is a time-consuming process for everyone. The better course of action is to limit yourself to the essential terms and clauses rather than going through the entire document line by line. Clause extraction, supported by AI and NLP, enables businesses to do just that. It streamlines every step of the contract lifecycle, from creation to negotiation to management, allowing the legal team to concentrate on tasks of high value.

• Efficient contract review

Contract review is essential to the contract management process to ensure accuracy, completeness, and compliance with legal and business requirements. It helps the legal team to identify clauses, obligations, and potential risks. Thus, they can give necessary attention to critical parts of the contract, such as indemnification, termination, confidentiality, and dispute resolution clauses. However, contract review can be a complex and time-consuming process, but using AI contract management can help growing businesses speed up the process. It automatically recognizes and extracts relevant clauses from contracts, saving legal professionals significant time. AI can handle a large volume of contracts simultaneously, allowing legal teams to review and manage contracts at scale.

• Risk mitigation

AI can identify and extract critical clauses related to indemnity, confidentiality, termination, and other high-risk areas. It helps legal teams focus on crucial aspects and reduce the risk of overlooking important details. Extracted clauses can be categorized based on the nature of the risk they represent. This categorization helps prioritize and assess various issues, allowing for a more targeted risk mitigation strategy. Clause extraction significantly reduces the time and effort required for manual review, allowing legal professionals to focus on analyzing and mitigating identified risks. Moreover, the results of clause extraction and risk analysis in the form of reports can increase comprehension. These reports provide stakeholders with insights into contractual risks, enabling informed decision-making.

• Reducing human errors

Automated clause extraction minimizes the risk of human error in contract review. Humans may unintentionally overlook clauses or make errors during manual processes. AI helps minimize such oversights and errors, leading to a more reliable review process. Consistent identification ensures that similar clauses are treated uniformly across different contracts, reducing the risk of human oversight or inconsistency. AI contract management ensures consistency and accuracy by ensuring key clauses don’t slip between the cracks. They can maintain audit trails that track the entire extraction process. This traceability not only ensures transparency but also assists in identifying and correcting errors if they occur.

• Enhanced Search and Retrieval

An effective search and retrieval system is crucial for efficiently managing contracts, monitoring compliance, and responding to queries or legal challenges. With clause extraction, legal professionals can easily search for specific clauses within contracts. It facilitates quick access to relevant information and expedites decision-making processes. AI can analyze extracted clauses across multiple contracts, identifying similarities and differences. It enables users to conduct cross-document analyses and retrieve contracts based on comparative criteria. It provides insights into trends, patterns, and potential risks that might not be immediately apparent when reviewing individual contracts.

• Scalability

AI contract management allows businesses to efficiently handle a large volume of contracts and extract relevant clauses in a scalable manner. As organizations deal with increasing amounts of contractual data, clause extraction becomes crucial for maintaining efficiency and effectiveness in contract management. AI can improve over time, learning from user feedback and adapting to changes in legal requirements. It ensures that the system becomes more accurate and effective with continued use. Thus, businesses can streamline the entire contract lifecycle, from the creation and negotiation to renewal or termination. 

• Seamless collaboration

Clause extraction can support automated redlining during negotiations. It enables parties to track changes and modifications efficiently, leading to quicker resolution of contractual terms.  Stakeholders' ability to quickly recognize crucial provisions and obligations makes it simpler to come to agreements and complete contracts. Clause extraction can feed data into contract performance indicators, providing insights into how well contractual obligations are being met. It contributes to strategic decision-making and relationship management.

How does contract management software help with clause extraction?

Contract management software with clause extraction capabilities, like Dock 365, leverages artificial intelligence and natural language processing to automatically identify, extract, and categorize specific clauses or sections within contracts. The extracted clauses are categorized based on their type or purpose. This categorization allows for easy retrieval and analysis of specific types of clauses. Common clauses include indemnification, termination, confidentiality, and others.

Clause extraction in Dock 365

When you upload or draft a contractual agreement or document in the digital repository, the Dock contract management system offers the option of manual or automatic clause extraction.  It integrates clause extraction seamlessly into the broader contract lifecycle. Thus, businesses can effectively utilize extracted terms and data throughout the contract management process.

Automatic & Manual Clause extraction

The AI-integrated CMS application extracts all the clauses from the contract document and lists them in the Clauses tab once a contract completes its final workflow stage and its status changes to "Received Fully Executed." 

Dock CMS users with edit permissions can manually extract contract clauses with the click of a button. The CMS permits the users to select any eligible document from the documents tab for extraction. Contrary to automatic extraction, the users have the option to select documents from any of the folders.

Obligation tracking

The legal duties each party to a contract has to fulfill are known as contractual obligations. The Dock CMS application also enables users to create obligations for extracted clauses. They can assign the obligation to relevant parties to ensure compliance.

Thus, the legal team can utilize the extracted clauses for ongoing obligation monitoring and management. It is crucial for tracking deadlines, performance timelines, and other time-sensitive aspects of obligations.  It is possible to set up automated alerts and notifications based on due dates for obligations. Dock notifies relevant stakeholders when clauses are approaching their due dates, helping ensure timely compliance.

Clause reports

Dock 365 contract management software allows users to view, filter, export, and share extracted clauses by creating comprehensive contract reports. These clause reports help to generate performance metrics and analytics. It enables businesses to track compliance rates, identify trends in obligation fulfillment, and assess overall contract performance.