Establishing solid relationships with partners, vendors, and other actors is essential to your business. Since contracting and compliance go hand in hand, contract compliance in contract management is important and needs to be done right.
But what is contract compliance?
Contract compliance is based on conformance with a set of internal and external mandates set by the parties to a contract. These parties include governments, standards bodies, industry associations and other organisations with some sort of oversight authority.
Why contract compliance in contract management is important?
There are several reasons why contract compliance in contract management is important. Research shows that many private partners become complacent and do not execute their obligations, as the contract dictates. Therefore, it is crucial that the partners are familiar with each company’s contract management procedures in order to enhance the efficiency and success of the projects or contractual obligations.
Finally, contract management is important because a project is rarely isolated from other business initiatives. Engaging in communication and knowledge sharing is critical to the identification of improvements for future contracts. This creates a virtuous cycle.
Best practices for contract compliance
To achieve better compliance for contract management, companies can implement various best practices for contract compliance. For example, they can:
- Find, categorize and assign ownership of contract obligations
- Set up compliance testing methods and timetables
- Report on compliance levels achieved
- Deal with non-compliance
How smart contracts can automate and control contract compliance
Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make the contractual clause unnecessary. Even though the term “smart” does not justify for all the contracts that are out there, we are still far from having truly contracts that are smart. Smart contracts are presently best suited to execute automatically two types of “transactions” found in many contracts: (1) ensuring the payment of funds upon certain triggering events and (2) imposing financial penalties if certain objective conditions are not satisfied.
As just one example, smart contracts could eliminate the so-called procure-to-pay gaps. When a product arrives and is scanned at a warehouse, a smart contract could immediately trigger requests for the required approvals and, once obtained, immediately transfer funds from the buyer to the seller.
On the enforcement side, a smart contract could be programmed to shut off access to an internet-connected asset if payment is not received. For example, access to certain content might automatically be denied if payment was not received.
Smart contracts thus feed structured data in the form of reports with compliance conclusions to databases so businesses can monitor and protect their bottom line. This means automated deals and better compliance control due to the programmable conditions in the smart legal contract.
Their capacity for decentralized continuous audit and real-time reporting means companies are in a better position to adhere to changing regulations, laws and ESG-related requirements. Their goal is to make the business sector much more transparent and compliant with existing regulations.
Smart Contracts bring the chance of changing many aspects.
We are bound to see larger adoption of smart legal contracts as companies seek a different way of interacting with one another in the digital domain.
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