Why should you review a contract, what are you looking for, and what's the process for marking and actioning changes?
Contracts are an integral part of everyday life for every business. When you make an offer of employment to a new colleague, sign with a new vendor, or create a new commercial partnership, you’ll be asked to sign a contract. For many people, signing a contract doesn’t always involve careful attention, but this casual attitude can come back to haunt them.
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What is contract review?
Contract review is the process of thoroughly reading and understanding a contract before agreeing to its terms. It can be conducted either manually or by using contract automation software.
During contract review, the document will be examined to confirm that it contains all the elements of a contract, that everything is stated clearly and accurately, without errors or discrepancies, free of potential conflicts, and important, with acceptable terms to help the parties avoid getting locked into an unsatisfactory agreement.
Although contract review can involve an investment of time and resources (depending on the nature and value of the contract), it is generally much less expensive than defending a breach of contract lawsuit.
Why do you need to review contracts?
When someone asks you to sign a contract, they are really asking you to legally bind yourself or your business to the provisions outlined in the document. Contract review is a vital part of any contracting process since it typically reduces overall risk, increases the chances that all parties to the contract will benefit, and provides both sides with the opportunity to fully understand what they are agreeing to before they sign anything.
A comprehensive contract review can:
uncover unclear or outdated provisions
highlight areas for improvement, and
expose pitfalls that might adversely shift risk between the parties.
If the contract review process is incomplete or avoided, one or both parties risk agreeing to commitments that they can’t fulfill, sustaining reputational damage, and wasting valuable time and money to resolve avoidable disputes.
Who should review contracts?
The contract review process often includes several people, depending on the stakeholders involved in the contract itself.
It might begin with the sales representative, who drafts the initial contract and decides the key values, having taken basic terms from the template. This person should review the entire agreement carefully for accuracy before forwarding it to the counterparty and the legal team.
The counterparty will review the proposed agreement to make sure that the risk, legal and commercial implications of the agreement work for them. It is considered best practice for a contract specialist or legal counsel to review a contract after every round of negotiations and before it is signed by the parties.
Contract review represents the parties’ last chance to identify and request changes before signature. After it’s signed, it’s a question of obligation management, with parties looking to anticipate specific contracting events such as re-negotiation or opt-out windows to avoid being caught off guard by upcoming critical dates and deadlines. (Learn more about contract renewal).
How a contract is reviewed depends on each reviewer’s role. The counterparty will read the contract line by line, accepting some changes and suggesting others, all the while thinking about a compromise that both sides will accept. They’ll typically send it back with changes. By way of contrast, the drafting party will only need to review whatever was changed or rejected.
Contract review process in Microsoft Word
Most lawyers still spend an average of three hours each day working with Microsoft Word documents. While Word has a rich set of features for editing offline files, critical issues with the platform are frequently encountered if you use it to review contracts. These might include:
Using Microsoft Word’s track changes option may seem like an excellent way to keep track of revisions made to the original document – at least, at first. However, once the proposed contract has gone through several reviewers, changes start to be layered over changes, metadata may be lost, and version control spirals out of control.
When the various parties to a contract work in an editable Word document format, there is no way to preserve the audit trail of changes made once the document is converted to PDF for signature. A party can conceivably make significant revisions to a contract without anyone else knowing about it, creating the risk that the parties will agree to an inaccurate or incomplete version of the agreement; it’s also impossible to learn from negotiation data to make future negotiations go more smoothly.
Word is largely built on offline files and unstructured data, which lack the advanced security features of cloud-based editors designed specifically for contracts.
A contract drafted in Word and subsequently shared with others via email can be subject to various formatting errors, including corrupted numbered sections, scrambled bullets, deleted comments and broken images.
If Microsoft Word crashes during contract review, there is a good chance that all the work done on it will be lost if it was not saved, since performing a ‘document recovery’ is by no means a guaranteed fix and can entail hours of additional work.
The limitations of Word as robust environment for contract review lead many modern legal teams to choose a digital contracting platform instead.
Contract review process in Juro
Juro is the all-in-one contract automation platform that allows users to review contracts in-browser with a seamless, flexible approval workflow and the ability to skip back through previous versions with one click.
This means legal and business teams can automate routine contract workflow in one unified workspace, with a seamless review process that enables real-time collaboration. Unlike legacy contract management platforms designed to handle offline files, Juro’s dynamic repository is built on a flexible data layer, allowing users to query contract data at any time, removing information silos across teams.
Instead of trying to make or accept changes via tracked changes in Word, which need to be reconciled over email and compared with previous versions, users can simply mark up their document in real time, directing comments either to internal colleagues or external counterparties as they need to.
Contract reviewers can also scroll back through previous version with Juro’s timeline feature, comparing different iterations with one click, but without having to hunt through static files. And all that contract metadata and negotiation audit trail is captured securely, to enable stakeholders to improve the workflow next time.
By creating a review workflow that can be completed quickly, in-browser, forward-looking legal teams can create a contract process that will scale with the business, instead of needing to hire more and more contract managers or outsource work to expensive law firms.
Common mistakes during contract review
Many businesses make all sorts of mistakes during the contracting process, such as:
Thinking a line-by-line review of a complex contract is a waste of time and money
Failing to completely fill in a contract template
Signing a contract without reviewing it first
Assuming that a contract is non-negotiable and that it must be signed as is
Believing that “standard language” does not need to be reviewed
Signing an agreement that is ambiguous or not easily understood
Pushing back needlessly on unimportant terms
Making any of these mistakes can result in a party signing a contract that is not in their business’s best interests, or worse, derailing signing altogether.
Contract review checklist
A contract review checklist is a list compiling every aspect or component that must be reviewed as part of the contract review process.
It's an effective way to ensure that legal and business teams are fully prepared when a contract reaches the review stage and is subject to scrutiny. A contract review checklist acts as a safeguard to ensure that parties can minimize risk, seek out problem areas and eliminate careless mistakes.
Usually handled by in-house lawyers or relevant commercial teams, a the checklist ensures that there are no gaps in the protection offered by a legal agreement, and that a contract is optimized with your company's strategy and goals in mind.
A contract review checklist can be helpful as you navigate your way through the contract review process. Here are some things that are worth considering when reviewing a contract:
1. Focus on the most critical clauses 🔎
Every line in a contract is essential and requires a review, but provisions outlining confidentiality, indemnification, termination, and dispute resolution are significant and merit careful analysis.
In most cases, these clauses should be the first terms you address, and you should expect to dedicate a large portion of time to assessing these. Indemnification clauses are a prime example of these critical clauses, as it defines who is responsible for paying for losses and damages, and how much these incurred costs might be.
When reviewing these clauses, you need to ensure that you've mitigated as much risk as possible and that your interests are protected as a priority.
2. Strive for clear language 💬
When reviewing a contract, you should also keep an eye out for any ambiguous language that might be left up to interpretation and lead to potential conflicts once the document is signed.
If a certain term or clause can be interpreted in a variety of ways, then it's worth clarifying this to provide more certainty around what's intended and what isn't.
By making the scope of certain terms clearer, legal teams can eliminate costly and time-consuming disputes could later arise surrounding the meaning of words and clauses.
This is an important stage, even when you're reviewing a contract on third party paper.
3. Review default terms ⚙️
Don't forget to look for default clauses that explain the potential ramifications when one side fails to fulfil their obligations along with the non-breaching party’s options. They might be boilerplate but they still apply!
By reviewing these rules, you can develop a better understanding of what happens if you fail to meet your obligations, but also what kind of remedies and recourse is available to you if the counterparty does the same.
4. Check for blanks 🏷️
Although fill-in-the-blank templates can save a lot of time during the contracting process, they can also be troublesome if any of these blank spaces aren't filled in.
Regardless of whether you're using an automated template or reviewing a contract drawn up by the other party, any blank spaces should be filled in or removed before the final contract is signed to avoid ambiguity with potentially costly consequences.
It could even raise questions relating to the validity of a contract, and whether the compulsory elements of a contract are present.
5. Read termination and renewal provisions ⏰
Before you sign a contract, you will need to confirm that you understand the termination and renewal terms.
Always be mindful of things like automatic renewal language and opt-out windows that let you know how and when you can end the agreement, along with any repercussions connected with not notifying the other party by a specific date. You can use contract renewal reminders to manage this.
6. Note significant milestones 📅
Ensure that all dates and deadlines match previous verbal agreements and begin tracking anything your organization will be responsible for once the contract goes into effect.
Reading every line of a contract can take a long time, particularly when dealing with lengthy or complicated agreements. However, contract review remains one of the most effective ways to protect a business from assuming unnecessary risk.
7. Allocate risk fairly ⚖️
When reviewing your checklist, ensure that any risks have been accounted for fully, and that the risks associated with a transaction have been allocated fairly between each party.
If a contract transfers too much risk to one party, then it probably needs amending or negotiating to reach a balance whereby the risk is shouldered fairly by all parties.
8. Understand the remedies provisions 💰
Understanding the recourse and remedies available to you in the event of undelivered promises is also a critical part of every contract review checklist, as one of the main purposes of a contract is to provide this security and safeguard in the event of a breach.
Parties should familiarise themselves with what implications they face in the worst case scenario, and how this liability can be either reduced or passed to a different party. It's also important to understand what course of action needs to be taken in the event of a default or breach, so becoming well-acquainted with these provisions is key.
9. Check the reference documents 🔗
As most lawyers will know, it's not uncommon for contracts to come with reference documents attached.
If a contract you're reviewing has this, be sure to give those documents just as much attention and care as you afford the initial contract, as there can still be critical information in these additional documents that can add risk to a deal if unaddressed.
Contract review can be a lot of work, but reviewing a contract thoroughly is critical to the health of your business and the relationships you build, so you can't afford to miss a thing. Fortunately, the use of contract automation software has transformed the process to make it more efficient. To find out more, check out our case studies, or keep reading.
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