Contract as automaton: representing a simple financial agreement in computational form

We show that the fundamental legal structure of a well-written financial contract follows a state-transition logic that can be formalized mathematically as a finite-state machine (specifically, a deterministic finite automaton or DFA). The automaton defines the states that a financial relationship c...

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Bibliographic Details
Published inArtificial intelligence and law Vol. 30; no. 3; pp. 391 - 416
Main Authors Flood, Mark D., Goodenough, Oliver R.
Format Journal Article
LanguageEnglish
Published Dordrecht Springer Netherlands 01.09.2022
Springer
Springer Nature B.V
Subjects
Alphabets
Artificial Intelligence
Automata theory
Automated reasoning
Automation
Computer Science
Contracts
Financial services industry
Finite state machines
Information Storage and Retrieval
Intellectual Property
IT Law
Language
Legal Aspects of Computing
Loan agreements
Logic programming
Media Law
Natural language
Ontology
Original Research
Philosophy of Law
Risk assessment
Semantics
Standardized terms of contract
State laws
Financial contracting
Theory of computation
C63
State-transition system
Deterministic finite automaton
Contractual complexity
D86
K12
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Summary:We show that the fundamental legal structure of a well-written financial contract follows a state-transition logic that can be formalized mathematically as a finite-state machine (specifically, a deterministic finite automaton or DFA). The automaton defines the states that a financial relationship can be in, such as “default,” “delinquency,” “performing,” etc., and it defines an “alphabet” of events that can trigger state transitions, such as “payment arrives,” “due date passes,” etc. The core of a contract describes the rules by which different sequences of events trigger particular sequences of state transitions in the relationship between the counterparties. By conceptualizing and representing the legal structure of a contract in this way, we expose it to a range of powerful tools and results from the theory of computation. These allow, for example, automated reasoning to determine whether a contract is internally coherent and whether it is complete relative to a particular event alphabet. We illustrate the process by representing a simple loan agreement as an automaton.
ISSN:0924-8463
1572-8382
DOI:10.1007/s10506-021-09300-9