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

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 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Artificial Intelligence and Law Springer Journals

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

, Volume OnlineFirst – Oct 13, 2021
26 pages

/lp/springer-journals/contract-as-automaton-representing-a-simple-financial-agreement-in-9eEtsFc2N0
Publisher
Springer Journals
ISSN
0924-8463
eISSN
1572-8382
DOI
10.1007/s10506-021-09300-9
Publisher site
See Article on Publisher Site

### Abstract

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.

### Journal

Artificial Intelligence and LawSpringer Journals

Published: Oct 13, 2021

Keywords: Financial contracting; State-transition system; Deterministic finite automaton; Theory of computation; Contractual complexity; D86; K12; C63