What Is Digital Contracting? - The Future of Lean Legal Contracts

We now live in a fast-paced, connected world where information is spread at the speed of light and business transactions are completed with just a few clicks. The traditional methods of signing, storing, and managing legal agreements can feel like relics of a bygone era. The piles of paper, the countless hours spent in meetings, and the constant back-and-forth with lawyers can make even the simplest contracts seem unnecessarily complicated.

But as the old saying goes, "necessity is the mother of invention,” and the digital age has indeed produced a groundbreaking innovation: digital contract signing. This revolutionary concept is changing the landscape of legal agreements and promises a future in which the often arduous process of creating and managing contracts is as simple as sending a text message or sharing a document on the Internet.

What is Digital Contracting?

The term “digital contract” refers to the process of creating, managing and executing legally binding agreements using electronic means. Unlike traditional paper contracts, digital contracts exist in a virtual environment and use a range of technologies to facilitate their creation, storage, and execution. These contracts can include a wide range of arrangements, from employment contracts and real estate transactions to licensing agreements and service contracts.

What Are the Advantages of Digital Procurement Compared to Traditional Methods?

Switching from traditional paper-based contracting processes to digital contracting offers numerous advantages over old-fashioned approaches. Let's look at these benefits in more detail:

• Digital contracts can be created and executed at remarkable speed. This efficiency is primarily due to the elimination of physical paperwork, which often requires time-consuming processes such as sending, scanning, or handing over documents. The entire contract life cycle is streamlined, resulting in fewer administrative bottlenecks and faster business transactions.
• Digitalization significantly reduces various costs associated with paper contracts. These cost savings come from reduced spending on printing, shipping, and physical storage. As the likelihood of human error with digital contracts is minimized, there are also potential savings in mitigating and resolving such errors.
• Digital contracts can be accessed, checked and signed from anywhere with an Internet connection. This level of accessibility significantly improves remote work and collaboration. It allows parties to work on contracts without geographical restrictions, making it easier for global companies to work and collaborate effectively.
• Digital contracts often include advanced security features, such as blockchain technology and encryption. These measures make digital contracts extremely secure and forgery-proof. They provide an audit trail that ensures that any changes or modifications to the contract are recorded and time-stamped and can be traced back to their source. This increased security protects sensitive and confidential information and offers a level of protection that paper contracts cannot provide.
• The abandonment of paper through the introduction of digital contracts contributes to sustainability efforts. Traditional paper-based contracts use large amounts of paper, contribute to deforestation, and consume energy and resources in the production process. By reducing the need for paper, digital contract drafting is a more environmentally friendly option that is in line with companies' social responsibility and sustainability goals.

Why is Digital Contracting Relevant?

In the past, traditional contracts relied heavily on paper documents, which often resulted in extensive paper trails that made managing and retrieving contracts cumbersome. These physical documents also hampered the speed of communication, which often relied on mail or personal meetings. In addition, the manual nature of traditional contract preparation increased the risk of errors, as contracts were rewritten and amended by hand. These mistakes could lead to disputes and complications in the future.

Accessibility was another challenge with traditional methods, as physical contracts stored in filing cabinets were not easily accessible for remote work or collaboration. This restriction was particularly evident with the shift to remote work during the COVID-19 pandemic. In addition, the lack of transparency of traditional contracts made it difficult for stakeholders to see contract status and changes in real time, which could lead to misunderstandings and inefficiency.

On the other hand, digital contracting is changing the way we manage contracts. It uses technology to automate and improve various aspects of the contract process. That means you can sign contracts electronically and collaborate in real time, which speeds up negotiations. In addition, digital tools help prevent errors, as the Contract management software Tracks changes and ensures that all parties involved work with the latest contract terms. Digital contracts also offer greater accessibility as you can access them from anywhere with an Internet connection, which is beneficial for remote work and seamless collaboration.

In addition, digital contracts are more secure as they often include robust security measures, such as encryption, to protect sensitive information. This is a significant improvement over physical documents, which can easily be lost or damaged.

Which Technologies Enable Digital Contracting?

1. Electronic Signatures

Electronic signatures, commonly known as e-signatures, are a modern replacement for the traditional handwritten signature. They are a digital representation of an individual's consent or approval of a contract. E-signatures come in various forms, such as typed names, scanned signatures, or even a simple “I agree” button on a website.

However, e-signatures are more than just a digital convenience; they have legal weight. legislation such as the United States' Electronic Signatures in Global and National Commerce Act (ESIGN) and the eIDAS Regulation of the European Union have recognized the validity of electronic signatures. These laws ensure that electronic signatures are legally binding and enforceable in court.

The advantages of electronic signatures are manifold. First and foremost, the contract signing process is significantly streamlined, which increases both efficiency and convenience for all parties to the agreement. This saves companies time and resources, as they can dispense with cumbersome paperwork and no longer have to be present in person during the signing process. In addition, electronic signatures increase security as they include advanced encryption and authentication measures that ensure the integrity of signed documents and the authenticity of the parties involved.

2. Blockchain and Smart Contracts

Blockchain and smart contracts have ushered in a new era for digital contracts that removes numerous limitations of traditional contract management. Through decentralized verification, blockchain ensures unparalleled security and transparency, making every transaction immutable and resistant to fraud or unauthorized changes.

The decentralized nature of blockchain reduces reliance on middlemen such as banks, which in turn enables faster transactions, cost reductions, and direct interactions between parties. In addition, this framework offers robustness; even in the event of a network segment failure, the system remains fully functional.

Conversely, smart contracts embedded in coded conditions are revolutionizing digital contract design by automating processes and enforcing agreements when predefined criteria are met. This minimizes human errors, reduces administrative burdens and ensures timely fulfillment of obligations. In addition, precise execution based on the agreed code promotes trust between the parties involved and gives them the assurance that the contract is being faithfully executed.

3. AI and Contract Automation

The integration of artificial intelligence into Contract automation is a significant step forward for the legal sector. With the help of AI, the long-standing inefficiencies associated with creating, reviewing, and managing contracts can be drastically minimized. Contracts, which are often complicated and fundamental to business transactions, require precision and due diligence.

With the traditional approach, people would painstakingly write, review, edit and complete these documents, which is not only time-consuming but also prone to errors. In AI, machines are trained using large data sets of legal documents so that they can recognize patterns, nuances, and legal terminologies.

As machines learn from the data, they become adept at analyzing contracts, predicting potential pitfalls or benefits, and even proposing changes or clauses that might be important for the given situation. That doesn't mean that human lawyers or legal experts are marginalized. Instead, they are now complemented by an AI tool that can efficiently complete repetitive tasks so that they can focus on the more complicated facets of legal work.

In addition, AI's capabilities in analyzing contracts go beyond simply drafting them. For companies that are juggling numerous contracts, AI can help categorize them, highlight renewal dates, or even inform affected parties about performance criteria. This ensures that contracts remain compliant and beneficial throughout their lifetime.

The Most Important Challenges and Concerns in Digital Contracting

By this point, you've probably realized that digital contracting has truly become a powerful means of change. However, it is important to address various issues and uncertainties that need to be addressed to ensure effective implementation. So here are the frequently asked questions about digital contracting.

How can we ensure that sensitive contract data remains protected?

Security is a primary concern when concluding digital contracts. Because contracts often contain sensitive and confidential data, it is critical to protect this information from unauthorised access or breaches. The following are some important aspects to consider when it comes to this topic:

• Encryption and data security: Strong encryption methods must be used to protect contract data. This means that generally accepted encryption techniques are used, which ensure that even if someone intercepts the data, they cannot understand it without the correct keys. This is particularly important for very sensitive contracts, such as in healthcare or finance.If you want
• access control: Only authorized persons should have access to contract data. The introduction of role-based permissions to restrict access based on tasks and responsibilities not only increases security, but also ensures that sensitive information is only available to those who really need it.If you want
• Periodic reviews: Frequent review of existing security measures is a proactive way to find vulnerabilities and fix them quickly. Continuous monitoring of contract data contributes to their security, as unusual activities or potential security breaches are quickly identified.If you want
• Regulatory compliance: Compliance with data protection regulations such as GDPR or HIPAA through your digital contracting platform is absolutely essential, especially if your contracts contain personal or sensitive data. Failure to comply with these regulations could result in significant legal penalties and damage your company's reputation.

How do the legal requirements differ and what challenges does this pose?

Digital procurement is subject to different laws in various places. Understanding and working within this legal framework can be quite complex. Here are a few important factors to consider:

• Jurisdiction specific rules: Different areas may have different rules for digital contracts. These regulations can include anything from acceptance of electronic signatures to detailed requirements for how digital contracts must be stored. Knowledge of these regulations is essential to comply with the regulations and avoid legal problems.If you want
• Electronic signature laws: While there are laws on electronic signatures in many countries, the details of these laws can vary significantly from one country to another. To ensure the legitimacy of digital contracts, it is important to become familiar with the laws applicable to your location. It is also advisable to seek advice from legal experts who are very familiar with the intricacies of electronic signature regulations.If you want
• settlement of disputes: In digital contracts, it is important to include provisions to resolve conflicts. However, legal requirements and available methods for resolving disputes may vary by location. Identifying these differences and adjusting your contracts can help avoid lengthy and expensive lawsuits

Why are some companies or freelancers reluctant to introduce digital contracting?

The introduction of digital procurement has quickly become an essential part of modern business processes and offers efficiency, convenience and reduced environmental impact. But despite the numerous benefits, many companies and professionals remain reluctant to fully adopt this transformative approach for the following reasons:

• Fear of technical complexity: The view that digital contracting is a complicated and technical process may discourage its introduction. This applies in particular to industries in which experts are only slightly familiar with the technology. Offering easy-to-use platforms and comprehensive training can alleviate these concerns and ensure a smoother transition to digital contracting.If you want
• Trust issues: Trust is with Contract Negotiations of fundamental importance. However, when it comes to digital contracts, doubts can arise about their reliability, validity, and security, often due to ignorance or concerns about data security. To overcome this skepticism, it is important to create trust in the trustworthiness of digital contracts. This can be achieved by highlighting existing security measures and demonstrating successful implementations.If you want
• Old system: Companies with existing contract management systems may be reluctant to switch because they fear that their current processes will be interrupted. The transition to digital contract management should be carefully planned to minimize disruptions and ensure that the new system fits seamlessly into existing workflows.

What Does the Future Hold for Digital Contracting?

KPMG predicts that by 2025, every organization will be able to use their Contract Lifecycle Management (CLM) system as the most reliable and authoritative source for all their contracts.

But what does it mean that the CLM is the “central source of truth” for all contracts?

In essence, this means that the CLM system becomes the ultimate, final repository for all contract-related information within an organization. Think of the CLM system as a digital safe in which all contract data is securely stored. This gives you access to all details of your contracts in a single, trustworthy and comprehensive location.

In addition to these findings, KPMG also foresees a significant shift towards the digitization of contract processes. It is expected that this change will bring about the completion of Business will speed up.

Currently, most contract negotiations are still based on traditional methods, such as sending documents back and forth via email and making manual changes (known as redlining). KPMG predicts that these old-school methods will be outdated.

Instead, we're moving on to Online platforms for contract negotiations to use. These platforms will enable teams to create a standardized process for contracts across the organization. This means a consistent approach to drafting, internal approval, signing, and storage of contracts. These platforms are also connected to other information systems, making it easier to access the data needed for negotiations.

Standardizing contract preparation is not only more efficient, but also reduces the likelihood of errors and risks. It ensures that both the legal team and divisions use the latest templates, and controls are added to prevent deviations from standard wording. Automated escalation points and careful version control further improve the process. In addition, the move towards automation and standardization creates the conditions for better monitoring of the value of a contract over time.