Conducting a contract review is a key part of the contracting process, and serves as an opportunity to fully understand everything you and your business are agreeing to before putting pen to paper. A contract review helps you reduce organizational risks and increases the likelihood that an agreement will make a positive business impact for all parties involved. Without a comprehensive contract review, you run the risk of committing to obligations that you can’t fulfill, damaging your company’s brand and reputation, violating the law, and wasting valuable time and financial resources resolving disputes that could have been prevented.
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What is a Contract Review Process?
The contract review process is a thorough examination of a legal agreement before it is signed to ensure that everything stated in the document is clear and accurate, and that your company is comfortable moving forward according to the terms of the agreement. After the agreement is signed initially, contract reviews are also important leading up to specific contracting events, such as re-negotiation or opt-out windows. A contract review is typically your last opportunity to identify and request needed changes before getting locked into an agreement. And once you’re locked in, you’re stuck unless the contract contains an exit clause or the governing law provides an option to terminate agreements.
How to Review a Contract
When conducting a contract review, it’s helpful to start with a plan so you can be sure the most important areas in the contract have been carefully analyzed. If any errors or discrepancies are discovered, or any questions arise as a result of the contract review, you should not move forward with the contract until all issues have been resolved to your satisfaction.
Here are some of the key things to look for during a contract review.
Key clauses & terms
Every line in a contract is important and needs to be reviewed closely, but some clauses and terms are clearly more significant than others. Since every company and industry is different, the most important contract terms are likely to vary as well, but there are a few to pay close attention to across the board. Elements like confidentiality, non-disclosure, termination, and dispute resolution are all important sections in a contract and are worth spending extra time reviewing to fully ensure the language is acceptable.
A good approach to practice is to create checklists of clauses that need to be added. For instance, if your company typically tries to include clauses for warranties, indemnification, and limitations in commercial contracts, a clause review checklist will remind you to confirm the existence of such clauses in the contract.
Termination & renewal terms
Before signing any legally binding business agreement, you’ll want to confirm that you completely understand the contract’s termination and renewal terms to avoid getting locked into a business agreement longer than you originally anticipated. You should check on things like automatic renewal language and opt-out windows so you know up front how and when you can cancel the agreement and what the repercussions are of not notifying the other party by a certain date.
This is also a good time to start planning ahead so you don’t get caught off guard when those important dates and deadlines come around. Set calendar reminders so you and your team don’t miss opportunities to renegotiate or cancel the agreement within the stated parameters.
Clear & unambiguous language
As you read through a contract, pay close attention to how each sentence is worded and look for language that could be left up to interpretation. Even if both parties interpret unclear terms the same way, it’s best to revise the language to be more cut and dried if possible to prevent potential conflicts once the contract is signed and active. Significant conflicts may require a third-party to determine the next steps based on how the party interprets the contract, so be sure all terms are laid out explicitly.
No blank spaces
Using contract templates is a great way to save time during the contract drafting process, but requires special consideration during the contract review phase. Any blank spaces should be either filled in or removed before the final contract is signed. Depending on the circumstances, failure to fill in a blank space in your agreement could lead to costly consequences for your business.
While both parties typically have good intentions when entering into a business contract, it’s always a possibility that one side won’t deliver according to the terms of the agreement, leading to a breach of contract. Keep an eye out for default clauses so you know the potential ramifications of not fulfilling your obligations - or the options available to you if you’re the non-breaching party.
Important dates & deadlines
In addition to ensuring that all of the dates and deliverables listed are in alignment with any previous verbal agreements, the contract review stage is also an opportunity to start tracking anything your team or business is responsible for executing. Planning ahead will help reduce the chances of a breach of contract, which could lead to significant consequences for the breaching party.
It’s worth noting that the law that governs the contract shouldn’t be overlooked. Not only do different countries have different legal systems, but oftentimes, there may be variations in the law between states, districts, regions, and even cities.
For example, a contract that falls under the law of California will likely need to address California’s California Privacy Rights Act. The same applies to contracts in the European Union, which may need to include language for the General Data Protection Regulation.
Consequently, it’s important to check that the contract to be signed contains any language that is mandated by the governing law.
Introducing the Master Contract Review Checklist
This actionable checklist outlines important aspects and best practices for a successful contract management process. It can also serve as inspiration for your own contract review checklist template. It will guide you through the four primary contracting phases so that you can establish an optimal contract management process within your business.
The four main contract phases are:
Planning & preparation
Successfully navigating these contracting phases, and documenting your actions, will put you on the path to consistently and effectively churning out contracts.
The first section of focus speaks to the planning and preparation stage. It encompasses steps that take place prior to and during the negotiation phase of the contracting process. During this phase, it’s important to undertake the steps that are specifically outlined as they will go a long way towards ensuring the contract’s future success.
Some of the topics covered in this section include:
Procedures & requirements
Dealing with contract risks
During this time, your organization should set up internal policies and procedures needed to effectively manage contracts and avoid administrative bottlenecks during the next phases of the contract management process.
The pre-contract period section of the checklist reviews specific steps to take during the post-negotiation phase of the contract. During this time, you will want to review your contracts to check for errors that could potentially put your organization at risk, and take measures to organize your contracts for future optimization.
Here are a few of the pre-contract review elements you can find in the checklist:
Timeframes and extensions
Contract term and renewal information
Amendments and modifications
This section reflects on actions to take during the contract period, which includes the timeframe when the contract is active. During this time, your organization should take measures to fully optimize your contracts and understand trends and opportunities within your agreements.
Here’s an example of some of the contract review elements you’ll find in the Contract Period section of the Master Checklist:
General contract management
Timeline for deliverables
Expiration and renewal notifications
Service Level Agreements
Enforcement of defined procedures
Changes since last renewal
The final section addresses the post-contract period. This section reviews critical steps to take with your agreements during the time following the active contract period, and outlines items to consider when closing out a non-renewed contract.
Some of the post-contract period tasks to consider include:
Each of the contracting phases are essential for a top-notch contract process. To ensure that the overall process proceeds smoothly, here are some tips on actions you can take to enable good contracting.
Create a contract checklist template
By designing a contract review form, you can standardize the review process moving forward. This helps ensure consistency across all contract reviews. Contract checklist templates also enjoy a certain amount of flexibility since they’re easy to update. What’s more is that they can save time and decrease costs since you no longer have to start the review process from scratch. Lastly, contract review templates can easily be customized so that specific contracts have their own checklist. For example, a general checklist template for contracts can be repurposed and adjusted to become a commercial contract checklist.
Allow enough time for a thorough review
Reading and analyzing every sentence in a contract can undoubtedly take a considerable amount of time, especially for lengthy, complex agreements, but it’s a critical step to protect your business from unnecessary risk. Always leave plenty of time to sit with high-value or high-risk contracts before signing. One misplaced comma or ambiguous sentence could lead to costly, and avoidable, mistakes.
Have multiple people review
It’s always a good idea to have someone other than the person who drafted the document conduct the contract review. Parties reading a contract for the first time are more likely to catch an error or typo than the person who drafted the contract and has been looking at the same information for a long period of time. Having a second member of your legal team, or even a contract review lawyer, review each important agreement will increase your chances of executing a contract that delivers as intended.
Review contracts on a regular basis
Contract reviews should take place for existing agreements in addition to brand-new contracts. Any time parties are preparing to renew an agreement, the parties involved have an opportunity to improve the contract based on lessons learned since the last time the contract was signed, fix something that was previously overlooked, or change language as a result of industry law, regulations, or guidelines that have evolved since the contract was originally drafted.
The fact that an agreement was signed and accepted initially shouldn’t prevent you from regularly reviewing and looking for opportunities to optimize or refine the terms, or taking steps to terminate the contract in certain situations. It will also ensure that your organization’s dealings are always compliant with local law.
Take advantage of technology
Conducting a thorough, line-by-line analysis of a written legal document is a challenge tailor-made for modern legal technology solutions, particularly tools powered by artificial intelligence and machine learning. Contract review solutions, including some contract management software, offer the ability to automatically scan and analyze large volumes of text quickly and accurately. And unlike humans, they aren’t susceptible to errors caused by fatigue, which is a legitimate concern when reviewing lengthy contracts.
However, technology should not replace review processes conducted by attorneys, and it definitely won’t replace the value that a lawyer brings to the table. But when used to supplement a lawyer’s efforts, contract review solutions can help attorneys responsible for this process accomplish the task much more efficiently and accurately. Additionally, it frees them from spending time on grunt work so that they can guarantee contracts are in accordance with the law.
Contracts are a critical element in conducting day-to-day business operations. They govern the lion’s share of related activities, from employment and non-disclosures to transactions and corporate partnerships.
Consequently, since they play such a massive role in ensuring a company is on solid footing, it’s vital that contracts are properly reviewed. If you want to learn more about how ContractWorks can enable better contracting processes, book a demo with our team.