Flood, Mark D. and Goodenough, Oliver R., Contract as Automaton: The Computational Representation of Financial Agreements (December 16, 2014). Available at SSRN: http://ssrn.com/abstract=2538224 or http://dx.doi.org/10.2139/ssrn.2538224

“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 (a.k.a. finite-state automaton). 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 thus describes the rules according to which different sequences of event arrivals 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.”