What is Contract Review?

 

Contract review is the process of reviewing each line of the document/contract to ensure that the clauses and terms are fair and are not detrimental if the contract is entered into. Typically, lawyers will be in charge of this process where the common practice may be to use a contract review checklist or a contractual playbook to crosscheck that the contractual clauses being negotiated are consistent with the company’s goals and risk management principles.

The issue with potentially signing a contract without properly reviewing the contract for loopholes or an imbalance in obligations and risks can be catastrophic in some instances. After the contract is signed, changes are difficult if not, impossible to change regardless of whether the contract is beneficial or even profitable for you.

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Why Is Contract Review Important?

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Contract review is extremely important as the contract in itself will be the rules and guidelines that dictate the obligations and overall business relationship between parties. This is particularly relevant in business settings as clear boundaries are mandatory for productive working relationships. This means clear terms and clauses that both parties are satisfied with are important factors in cultivating and keeping long-term business relationships. Therefore, you can view contract review as a tool to maintain strong relationships between the parties within a commercial agreement.

 

Benefits of contract review

The direct benefits of contract review are that it reduces and minimizes the overall risk taken over a commercial agreement, it increases the likelihood of profitability for all parties, and gives all parties the opportunity to fully comprehend what the agreement actually entails.

 

What is the Contract Review Process?

 

The process of contract review can differ however general principles stand such as having a clear plan carved out such as the key clauses and terms, vital points that your company is flexible with, and areas that are non-negotiable.

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Key Clauses and Terms

 

Key clauses and terms are areas that may be more of a focus and therefore will likely be open to more scrutiny. Key clauses and terms differ depending on company and sector however some terms that may be relevant are confidentiality, indemnification, termination, and dispute resolution.

 

Errors, Discrepancies, or Loopholes

 

If errors, discrepancies, or loopholes are discovered over the review of the entire contract, these issues should be looked into, and action may be required. This action could come in the form of re-negotiating that clause or even removing that clause out of the contract completely.

 

Clear and Unambiguous Language

 

Clear and unambiguous language is also another aspect to which close attention needs to be paid, as clauses that are open to interpretation can lead to significant conflicts. Without clear language, the contract that one party signs can be vastly different from how the contract works in reality. This is solved through the re-wording and often re-crafting of clauses to be clearer cut and with no possible ambiguity as to what it means.

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What is a contract review checklist?

 

A contract review checklist generally comes in the form of a list of aspects that one should pay close attention to before signing any contractual agreement. The primary purpose of this checklist is to identify and make sure all necessary steps are taken to secure the terms of the commercial agreement. This checklist, as a result, will help you save time and eliminate any mistakes or loopholes in the contract that may have otherwise been missed.

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Contract review best practices

 

Best practices when reviewing contracts can establish the right systems and checks that proactively prevent up to 30% - 50% of losses [Ecosys]. These losses over time can really add up and heavily affect long-term relationships between parties. One practice that is widely used is the standardization of contract creation in the form of ‘boilerplate’ contracts. These contracts are stipulated far ahead of time by the company adjusting common terms to outline and specify what they are willing to accept and what they cannot accept based on their specific industry and circumstances. Therefore, building a set of standardized templates for specific scenarios can reduce the amount of time and money spent on creating individual contracts. It can also ensure fewer mistakes are made as boilerplate contract templates may remove the potential for human error.

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Contract review guidelines

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General contract review checklists may include:

• An outline of important terms and clauses that need to be thoroughly defined, reviewed, and fit for your individual company;

• Guidelines for Termination and Renewal terms as contracts will normally state a predetermined time period which will list the rules and regulations for the re-negotiation and renewal of terms or termination of the contract;

• There may be a prompt to audit and revise the dense contract and legal language to ensure that any misleading or confusing wording may be discussed;

• A default country or legal system may be emphasized in the case of a legal dispute between parties;

• Key dates, timelines, deadlines, and other crucial dates may be stipulated in the contract, therefore an awareness of these dates and an outline of specific procedures for changes or delays could be crucial in the event of delays;

• That all the details are filled in and there are no blank areas or undefined clauses;

• That risks have been appropriately allocated and the terms of the contract do not currently open you up to large amounts of risk.

• Look at the Contract Particulars or Contract Details as these are variable terms in a contract that may specify different aspects of payment, liability, etc.

 

Contract review for non-lawyers

 

Contract review can be overwhelming especially for people who aren’t lawyers. Contracts can feel like a barrier to a commercial agreement between parties as dense and heavy legal language may make things difficult to understand. As a non-lawyer, here are some common practices that may assist you in getting a grip on your contracts quickly and effortlessly:

 

Identify the type of contract

 

Depending on the type of contract whether it’s a service agreement or a Non-Disclosure Agreement (NDA), this will dictate what types of clauses you may encounter and how your company is positioned to negotiate.

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Ask yourself, “Do I completely understand this document?” 

 

Questions of who, what, why, when, where, and how, are generally questions that need to be addressed within the contract and as a result, you must be satisfied. If anything is missing or ambiguous, it is up to you to go back to the counterpart and clarify any of those clauses.

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What liabilities and expectations do you and your counterpart have?

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A clear understanding of liabilities and expectations on both sides will inform you about what would happen and how to act if one party fails to perform contractual obligations. Questions of liquidated damages, interest, or late payment fees need to be addressed. What are the terms under which dispute resolution will be governed?

 

How much to review a contract?

 

The service of contract review will typically be provided by lawyers, where they will need to analyze the contract line-by-line to assess the fairness of the terms, the amount of risk within the contract, and potential clauses that could be negotiated for their client’s benefit. The costs associated with contract review can vary depending on the length of the contract, risks involved with the commercial agreement, the number of sections needing to be revised, and the type of contract in itself. On average, most contract review costs may range from €500 or substantially higher.

 

Contract review with AI

 

Technology exists today that can utilize Artificial Intelligence (AI) to review contracts instantly and accurately with ease. This Artificial Intelligence Contract review using the combination of legal expertise and understanding of legal language with the precision of AI has been achieved using machine learning.

This process of machine learning is the use of algorithms to train software to adapt data sets to then use this newfound information to perform tasks such as identifying risky clauses or loopholes within clauses. In the process of contract review, this data set may include a set of thousands of different and real-life contracts that allow the AI to learn and distinguish between well-written contracts as opposed to highly risky ones.

An AI may be able to extract and break down all the clauses within the contract, crosscheck these terms against a boilerplate template of a standard contract and highlight what is missing, what may need additional consideration, and what may need immediate changes.

 

Want to try online contract review with AI?

 

There are no hard and fast rules when it comes to contract review, but if you need a faster, cheaper and more reliable way to review your contracts… We have you covered at Legly. Click here to try our Artificial Intelligence contract review tool that can highlight risky writing, identify missing clauses and provide expert recommendations – in a click of a button.

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