Don’t lose out to bad contracts. Contracts are not just a mere compilation of standard terms and conditions but a thoughtful recreation of agreement between the parties based on their understanding of their contract obligations. Never treat the original contract creation as absolute. There is always room for negotiations and changes in the contract before signing them. Contract review is that stage that creates space for these negotiations.
What is contract review?
Contract review is a thorough, in-depth, and rational analysis of every word in the contract, ensuring that both parties understand everything stated in the agreement. It provides the contract is fair and does not contain loopholes that can be detrimental to an organization. It is a necessary contract management process that scans through the contract document and makes sure it is in agreement with both parties before signing it. It is the last opportunity to fully understand the obligations you are committed to and negotiate and alter conditions you can’t fulfill before it gets locked into an agreement. It is a tedious process that requires the expertise of your legal counsel to decipher complex legal terms, but it is less expensive than defending a breach of the contract.
Why should you get your contract reviewed?
In today’s global business scenario, various types of contracts across borders and sectors are becoming an integral part of the business. While most contracts may have standard terms and conditions, a slight change in words can flip the entire meaning of the contract. Without a dynamic contract review process, you and your business will not be aligned with your commitments as per the contract and run the risk of agreeing to contract obligations you can’t fulfill. It can damage your business reputation and waste valuable resources and time resolving disputes. A proper contract review can,
- Reveal unclear or outdated provisions
- Clear misunderstandings by interpreting ambiguous contract language
- Expose areas of improvement, opening doors for negotiating.
- Bring to light ‘issue areas’ that can adversely shift risk between parties.
Contract review is essential to get both parties in sync with the unmistakable outline and make sure they are on the same page. It reduces overall organization risk and assures a positive impact on future business performance based on the contract benefiting both parties.
What To Look for In a Contract Review?
Let’s look at 13 key areas to look for during the contract review process.
1. Key Terms and Clauses
Every term in a contract is important, but certain key terms and clauses weigh higher and need significant attention to detail. During the review, key terms and clauses involving confidentiality, indemnity, dispute resolution, and termination should be given undue attention. Ample time should be devoted to ensuring these terms are transparent and conducive to your organizations’ needs and goals.
2. Clear Quantifiable Terms
Contracts can happen between two parties located at two different points of the world. Their metric standards and currencies will differ. The contract should clearly state the primary metrics and currency. Further, the quantifiable terms in the contracts with regards to pricing, quantity, duration of the contract, and other such details should be expressed accurately as per parties’ understanding.
3. Risk Allocation
Risks in a contract should be fully accounted for to enable you to create a mitigation strategy. The contract should transfer risk to parties based on their potential to prevent losses, and it should be allocated fairly. In the case of allocation of risks that leans heavily towards one party, it should be brought for negotiation and amendment to strike a balance.
4. No Blank Spaces
Pre-designed standard contract templates where you need to fill blanks are a great way to save time. But it is critical to ensure there are no unfilled blank spaces. In case of such spaces, they should be filled with required details or deleted as it may impose a potential future threat to the business post–signing, questioning the contract’s validity.
5. Contracting Parties Involved
Complete details of the parties involved – with their full name, registered business names, and location address with contact details should be available in the contract to avoid confusion. It is essential to assess other parties that may influence the performance of the contract and include their details in the contract.
6. Termination and Renewal
No one wants to be locked in a contract longer than they wish to be. The terms and conditions relating to the termination and renewal should be clearly stated. The contract should include ways to get out of the contract in case of unfavorable performance. It should also be checked for auto-renewal terms and opt-out clauses and their impact on crossing deadlines. It allows organizations to plan ahead of those important dates and deadlines.
7. Unambiguous Language
Contracts should contain clear, unambiguous language. There should be no space for interpretation of terms that can lead to conflicts on the signing of the contract. Even if both parties interpret ambiguous terms in the same way, it is always safe to rephrase them in clear and concise language. This provides more certainty and avoids unnecessary disputes when the contract is active.
8. Important Dates and Deadlines
Key dates, deadlines, and timelines of significant milestones agreed verbally should match with those entered in the contract. It allows the organization to plan and track performance execution to meet the designated obligations on time. Creating alerts and remainders allows avoiding a breach of contract and preparing for unforeseen delays.
9. Unstated Legal Obligations
Contracts being standard documents may have implied terms. These unstated legal obligations are usually consistent with the express terms. Both parties should be on the same page regarding the understanding of these implied terms for the effective performance of the contract.
10. Reference Documents
Most contracts come with a set of incorporated or reference documents. These documents should be complete and reviewed in detail with the original contract because they may contain critical information which can prove risky to your organization if unaddressed.
11. Responsibilities and Rights
Rights and responsibilities in a contract are scattered throughout the agreement. It should be captured to state clearly who is responsible for what and their underlying liability along with their rights. It enables a better understanding of what each party is entitled to and the obligations they are responsible for.
12. Dispute Resolution
Irrespective of the efficient performance of the contract, there is always a probability of a dispute in a contract. The contract should state how a dispute should be resolved so that the performance of the contract is unaffected. Provisions of arbitrary or mediative measures should be included to avoid unwanted wastage of time and resources.
13. Remedies Provision
A contract should secure parties in the event of a breach. The provisions of remedies or recourse in undelivered promises should be clearly stated in the contract. The course of action to be followed and the transfer of liability, if possible, should be understood. This enables organizations to prepare themselves for implications in worst–case scenarios.
Tips for Successful Review
Successful review & negotiations of contracts guarantees successful business performance. Today most organizations use their legal departments to review their contracts manually. It is time-consuming and mind-numbing to go through almost similar terms and conditions looking for minor changes. It is slow, error-prone, and not generally effective. This is where contract lifecycle management software comes to the rescue.
Take Advantage of Technology
Today, many companies are opting for CLM software that has inbuilt contract review systems. Voluminous contracts can be scanned and analyzed quickly and accurately, compared with third-party documents, and broken down into parts for review. Powerful in-built search options can easily highlight key terms and clauses and bring them up for detailed scrutiny.
Review Contracts Regularly
Not just new contracts, existing contracts should also be reviewed regularly. There may be changes in the industry standards or regulations, or there may be an opportunity to improvise the contract for better performance. A constant review will allow us to make these necessary changes and prepare for negotiations during renewals.
Leverage the power of AI
Contract lifecycle management software powered with AI and machine learning can compare clients’ contracts against your standard contract language and vice versa in minutes. It indicates if the contract language is acceptable to organization standards. Deviations, if any, are brought to notice for a change. It summarizes risk factors and suggests if proposed redlines can cause a departure from intended obligations.
Did you know that you can automate 70% of review time with efficient cloud-based contract management software? Expedite your contract review process today with Ultria CLM powered with AI and machine learning Review Software. Empower your legal teams with accurate contract information to seamlessly manage negotiations before signing a contract. Make a positive impact on your future business performance by getting exactly what you want in your contracts with Ultria CLM.
Request for a free demo today.