How AI is changing contract review and due diligence

Artificial intelligence complements but does not replace the lawyer’s job

We’ve written a lot about artificial intelligence (AI) in recent months. We’re not alone. The internet is awash with articles and blog posts about AI. Some are informed and technically sound; others are purely opinions. Many are both! AI is new, though not as new as the quantity of media coverage would suggest. ChatGPT is less than a year old, and it is this tool that has brought AI to the forefront of ordinary people’s awareness. But AI tools have been around, quietly gaining traction and improving in quality, for several years. 

One field that stands to benefit from AI is our own – the legal profession. Lawyers spend six years in a combination of studies and apprenticeship (known as “articles”) before being qualified to practise law, and this professional qualification is not about to become obsolete in the face of AI. However, there are certain tasks that can be streamlined with the help of AI, ultimately saving clients money and speeding up a traditionally lengthy and arduous process. Contract review and due diligence are two such tasks.

Contract review challenges

Historically, reviewing contracts manually was a time-consuming and labour-intensive task. It was prone to human error and inconsistencies in analysis, particularly if a team of disparate individuals was assigned a large-scale contract review. Harvard Business Review estimated, in 2018, that between 5% and 40% of value was lost on any given deal as a result of inefficient contracting. Contract management involves a number of steps, and it’s important to manage the entire process effectively to maintain good relationships and avoid disputes and litigation. 

Drafting and signing the contract, which may seem like the most important step at the outset of any deal, is just the beginning of the business relationship between the parties involved. Progress and performance against the contract terms and conditions must be monitored, and when the contract expires it will either need to be terminated or renewed, perhaps with amendments. Due to time constraints a manual review of the contract at renewal time may not yield a comprehensive analysis of all clauses and provisions. Keeping track of updates, amendments, or changes in contract terms becomes cumbersome in a manual process, and ensuring compliance with evolving regulatory standards is challenging.

All of this requires attention to detail and a robust system.

Benefits of AI in contract review

Enter artificial intelligence. AI systems can streamline the contract review process and remove the variability of the human factor. AI can analyse contracts and find clauses that are ambiguous, inconsistent or non-compliant. If multiple contracts need to be reviewed concurrently, for example for a manufacturer who renews several suppliers at the same time, the tool can identify discrepancies in definitions and terms across contracts, thus ensuring fairness and equity with all suppliers. Furthermore, AI can do this much faster than even the sharpest team of legal experts, and with greater accuracy and consistency.

Software for legal document review has been in existence for many years, but it was not AI. Traditional software simply stored and organised contracts. Modern AI can sort through large volumes of contracts and pull out individual contracts for review based on criteria the legal professional has specified. It can extract data from contracts and provide analytics about that data, even creating visualisations. This frees up legal personnel to focus on high-value tasks, such as giving legal advice, rather than spending time on review and analysis.

Due diligence

Due diligence and contract review are separate but related disciplines, which is why we have chosen to cover them together in this article. Due diligence (DD) is typically carried out in the context of an investment in or merger with another company. DD refers to “the detailed examination of a company and its financial records, done before becoming involved in a business arrangement with it”. However, you may conclude a contract with another party for a specific transaction without going to these lengths. But the process of conducting DD inevitably involves an extensive amount of contract review, as part of the detailed examination of a company’s records, which is why these topics are interrelated, and why AI can help in both cases.

DD in mergers and acquisitions can take months. There are vast repositories of information that must be scrutinised, including contracts. The length of time DD takes is directly correlated to its cost. Every day spent in DD equals billable hours for attorneys, accountants, and consultants. AI tools can significantly enhance the efficiency and effectiveness of due diligence investigations by automating document review, identifying risks and inconsistencies in contracts, extracting and categorising data from contracts (e.g., deadlines, obligations, key stakeholders), and conducting comparative analyses to arrive at a clearer picture of contract terms across the merging parties. By automating the routine tasks, the overall due diligence process is accelerated and the legal professionals can focus on the more complex and strategic aspects of the investigation. The end result is better decision-making and a faster, more cost-effective process.

Human expertise, AI elbow grease

AI can augment both the contract review and due diligence processes. It will not, however, replace, human expertise – at least not in the foreseeable future. AI can condense and accelerate data-intensive tasks in DD and can improve accuracy, quality, and time efficiency in contract management. Ultimately it stands to enhance the capabilities of legal professionals and have a transformative impact on DD and contract management. Technology has been making processes more efficient since the invention of the printing press! AI is just another way the legal profession is using technology to improve its effectiveness for clients.

For more information

SD Law is a firm of experienced attorneys based in Cape Town, with offices in Johannesburg and Durban. If you want to know more about contract management, due diligence, or how AI can help you in your business, call Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za.

Further reading:

• Drafting effective contracts
• Due diligence – why it matters
• The legal implications of generative AI in the workplace – part 1
• The legal implications of ChatGPT in the workplace – part 2
• AI and ChatGPT – what are the ethical considerations?

SD Law

View more posts from this author