Using Clause to Improve Commercial Supply Agreements
Master supply agreements (MSAs) are a foundational document governing the relationship between companies worldwide. Due to their complexity and the involvement of numerous dynamic components, the management and operation of MSAs often leads to errors, losses, and foregone benefits.
This article explains the three general stages involved in using the Clause platform for connected contracting to make an MSA “smart” after it is executed and thereby digitize, automate, and fundamentally improve supply chain operations. It provides a framework for legal and business professionals to work with their technical colleagues whose expertise is required to complete the process. (The tutorials linked to in the third stage, however, do not require any technical expertise.)
Background: How Clause Makes MSAs More Efficient
An MSA is a legally binding contract that establishes a framework for ordering goods, invoicing and payment, and resolving any deficiencies in product quality. Standard provisions of MSAs also relate to delivery requirements, the factors that influence pricing, penalties, quantity forecasts, and termination. Even when contract lifecycle management software is used, inefficiencies still exist due to the widespread usage of manual and paper-based processes and disconnected software systems. For example, a recent study by PwC estimated that 90% of supply and other relationships involve misreporting contract data. A 2018 survey of internationally active companies found that over 90% had late payments, with 50% of invoices reported as overdue.
Clause addresses these and many other contracting problems by enabling parties to add one or more Smart Clause® templates into an otherwise traditional legal agreement. A Smart Clause® template is a contract clause that has the ability to be triggered by external data to automate the performance of obligations using external systems. Once created, a Smart Clause template can be edited and reused in a wide variety of contracts, use cases, and enterprise technology environments.
The use of Smart Clause templates increases the operational efficiency of contractual performance, improves visibility about the status of the relationships governed by an MSA, and reduces the likelihood of disputes. This is because a Smart Clause template connects the performance of contract obligations to external data sources and enterprise software systems such as IoT platforms, contract management, and payments. By doing so, one party can enforce compliance with payment and other obligations in response to a digital record of performance (e.g., when goods have been scanned as being delivered). Smart Clauses also enable parties to know the status of contract obligations in real time by using Clause dashboards, audit trails, and notifications. With Clause, the obligations and operations relating to orders, invoicing, notices, payment, and a wide variety of other contracting activities become streamlined, digitized, and automated.
We are now going to look at the three stages of making a supply agreement connected other enterprise systems.
Stage 1: Create a Smart Clause® Template
Making a supply agreement connected begins with creating one or more Smart Clause templates. You can do this using the Clause Template Studio or in your code editor of choice, such as VS Code. The purpose of creating a Smart Clause template is to replace one or more of your traditional contract clauses with a clause is capable of syncing with external business systems.
Here’s a high-level overview of how to create a Smart Clause template in the Clause template studio. To create a new Smart Clause template from scratch, click on New Template, then select Empty Clause. You can also create Smart Clause templates by modifying existing ones by searching the template library for a template to use as a starting point.
A Smart Clause template is composed of the natural language text of a legal clause, the clause’s data-oriented variables (see below in brackets), and the contract’s business logic expressed in programmable form. These three elements of the Template use the open source Accord Project Cicero library and specification.
A Smart Clause template divides natural language text into two different parts: Template language and a test contract. Template language includes parameters that can be changed when someone creates a clause from the template. The test contract, however, includes examples of what those parameters could be in a real contract.
Let’s take a look at the natural language text for a simple late delivery clause that you’ll find within most supply agreements.
Test Contract:
Late Delivery and Penalty. In case of delayed delivery of Goods, “Betty Buyer” shall pay to “Steve Seller” a penalty amounting to 10.5% of the total value of the Goods for every 2 days of delay. The total amount of penalty shall not, however, exceed 55% of the total value of the delayed goods. If the delay is more than 15 days, the Buyer is entitled to terminate this Contract.
Template:
Late Delivery and Penalty. In case of delayed delivery of Goods, [{buyer}] shall pay to [{seller}] a penalty amounting to [{penaltyPercentage}]% of the total value of the Goods for every [{penaltyDuration}] of delay. The total amount of penalty shall not, however, exceed [{capPercentage}]% of the total value of the delayed goods. If the delay is more than [{maximumDelay}], the Buyer is entitled to terminate this Contract.
The data model that corresponds to the late delivery clause template above can be found here in the Accord Project’s open source Template Library. The business logic of the clause, such as the amount of penalty that a buyer is required to pay a seller in the event of a late delivery, is captured by the Ergo programming language created specifically for legal contracts.
To draft your own Smart Clause templates, refer to the template specification and the Ergo programming language to create a data model and programming logic for your template. This process will likely take up to several hours, even for a simple template. It only needs to be done once, however, because Smart Clause templates can be used repeatedly in different contracts even with different specific prices, dates, and other variables.
Stage 2: Add a Smart Clause Template
The second stage involves bringing a new Smart Clause template into the Clause platform so that it is available to be inserted into an agreement with you and your counterparty.
After you complete your Smart Clause template on Studio, click on Export in the lower left to download the Smart Clause as a CTA file. Then, import the CTA file into your private template library on the Clause platform. To do so, log in to Clause and click on Templates then select your private organization library on the left side of the page and upload your CTA file.
To use the new Smart Clause template in your agreement, click on the Contract button in the top bar of the Clause platform and import the finalized draft of your supply agreement as a Word or PDF file. Once you are in the contract editor, add the Smart Clause template into your supply agreement in the appropriate location in the agreement, and otherwise edit the of the agreement as required.
Stage 3: Connect to External Systems
With a Smart Clause added to your contract, you are now ready to automate contract actions on external systems in response to performance triggers. These performance triggers can come from IoT platforms, market prices, ERP systems, and many others. The triggers can cause a wide variety of actions, such as issuing an invoice, making a payment, or giving notice to a counterparty.
For example, in an agreement between a credit card provider and a merchant, data about the volume of the merchant’s card transactions may be used to trigger a price discount if the volume sufficiently high. You can use this tutorial to simulate a volume discount Smart Clause being triggered by volume data on the Clause platform. Likewise, an agreement to ship fragile goods may contain a clause imposing a penalty on the seller if the goods experience a shock during transport. Using this tutorial, you can simulate a contract with a Smart Clause that is triggered by accelerometer data.
Once the agreement is signed and its automated processes are running, Clause keeps a record of its performance and operations in an audit trail that has a timeline of contract events. These events can be exported to other systems, including blockchain networks to create a tamper-proof record of contract transactions.
Smart Clauses are able to respond to external data by using widely-used technology, known as a RESTful API. For more details on connecting a Smart Clause to external systems, see the documentation located here. You can also use Node Red, Zapier, Typeform, or similar tools to create an interface to test your Smart Clause or create additional workflow integrations.
The Benefits of Connected Contracting
Unlike contract life cycle management software, Clause enables agreements to come alive and self-manage after they are signed and executed. This functionality provides new levels of visibility about your counterparty’s performance and a wide variety of opportunities to save on administrative spending and other costs through contract automation and systems integration.
Sign up for Clause or contact sales to start using Smart Clause templates in your legal agreements.
