Third party contracts can be a headache for legal teams. But what can your business do to make life easier?
Third party paper can be a real pain for legal and business teams, as it’s always more challenging to agree a contract that isn’t on your own terms. Third party contracts are often full of alien language, unfavourable terms and take a long time to review. But what if we told you that third party contracts didn’t need to be a bottleneck for your legal team?
In this deep dive, we explain what third party contracts are and explore how to prevent them from being a problem area for your business. Keep reading or use the navigation tool below to find out more.
What is a third party contract?
Also known as a third party paper, a third party contract is a legal agreement that originates with the counterparty, and so follows their templates, structure and provisions instead of your own. This is the biggest difference between third party contracts and first party contracts, which are initiated by your legal team instead.
Some lawyers liken a third party contract to playing a sport away at the other team’s ground. In many ways, they’re right. When you initiate a contract yourself, you’re much more familiar with the provisions and arguments used. Meanwhile, third party contracts take away this familiarity and advantage, leaving you playing on foreign turf.
When is a third party contract used?
Now you know what a third party paper is, but when will you need to use one? More often than not, the party that makes an offer to provide their goods or services will be the party that initiates the contract, and the counterparty will review and eventually accept these terms. This means that if you are the ‘other party’ and are receiving access to a product or service, you’ll be on the other end of a third party contract, instead of initiating it yourself.
What are the disadvantages of third party contracts?
For those not familiar with the legal industry, the idea of the other party drafting up the contract can seem great because you won’t have to spend time writing a contract. However, this couldn’t be further from the truth, and most legal teams would much prefer to own the contract themselves. There are various reasons for this:
1. Potential financial losses
One of the biggest concerns when managing a third party contract is that your business might gain less value from a transaction than they would have if the contract was initiated by yourselves instead. In fact, PWC claims that poor management of third party contracts can result in financial losses alongside reputational damage and unexpected liability.
The reasons behind this risk are obvious, as the counterparty will have proposed their own terms within the contract, and these will almost always favour the third party’s interests over yours. Unfortunately, departing from these terms within negotiations can be a real challenge, particularly if the original terms are particularly harsh.
2. Business teams can't self-serve as easily
Even without an advanced contract management system in place, using contracts that include your own terms and use your own templates can empower business teams to self-serve on contracts to some extent. This is because, unlike with third party paper, sales and commercial teams can often be trained to process a contract manually, or are experienced in doing so.
However, with a third party contract, the terms and contract structure will probably be completely new to your business teams, meaning that they will naturally be less confident to self-serve on otherwise standard contracts. As a result, the responsibilities revert to the legal teams who continue to find themselves buried in low-value work.
3. Time-consuming to review
Third party paper also takes a lot longer to review than contracts you create yourself, as your legal team will need to go through the agreement with a fine-toothed comb to find any unfavourable terms, craftily worded clauses and gaps in the provisions.
More often than not, you’ll find numerous terms that need to be negotiated in a third party contract, and this can be a real pain point for legal teams that have a manual contract workflow and need to go back and forth over email to reach an agreement. This time spent negotiating contracts can often lead to a long delay in getting contracts over the line, and it can consume large amounts of legal’s time that could be better spent on high-value work.
4. Difficult to extract data from contracts
There’s an increasing desire to digitize and extract data from contracts in scaling businesses, and this wealth of data is used to more effectively negotiate contracts, project revenue and speed up the contracting process. When you initiate the contract yourself through a contract management software, for example, this data collection is often seamless.
However, third party contracts make this increasingly difficult to do, since they are often delivered in a completely different format to the contracts you’d usually query and audit, and they can be difficult to put through a rigid contract tool. This makes the process of tracking and analyzing important contract metrics near impossible.
How to manage contracts on third party paper
While there are numerous risks associated with a third party contract, there are also plenty of ways that you can manage third party contracts to gain as much value from them as possible.
1. Leverage your contract software
Third party contracts are notoriously difficult to review and negotiate, but this can be made significantly easier if you can use the right contract software platform. Why? Well, there are a few reasons.
For a start, working within contract software that you’re familiar with will help legal and business teams within your business review and negotiate contracts more confidently - even despite them being on third party paper.
With Juro, users can import Word documents or PDFs and work on the third party contract in-browser, benefitting from a purpose built contract editor, smartfields, version timelines and advanced commenting features.
2. Set up internal processes
One of the most important steps to take when reviewing any third party contract is to prepare an internal process beforehand, and ensure that it’s fit for purpose.
Depending on the type of business contract involved and how valuable it is, this internal process may vary. However, all internal processes should outline who will be responsible for negotiating the contract, how it will be reviewed, and who will approve it. This system will ensure that the contract review process is far more efficient and structured.
Fortunately, you can establish a strong internal process using contract management tools that allows users to set up approval workflows and tag users at each stage, instead of emailing back and forth to delegate the duties.
3. Establish expectations beforehand
Regardless of who is creating them, contracts function as a critical tool for building new relationships and expanding on existing ones, so it’s important to nurture these relationships - even in the negotiation process.
Luckily, there are few things that in-house legal teams can do to make the contract process more amicable and reduce friction. For example, you can:
Set clear expectations. Before you receive the first draft of a contract, you should make your expectations clear to the counterparty. Usually, this will mean highlighting any non-negotiables and red flags before the contract has been drafted.
Agree which technology will be used. It’s often useful to leverage your own technology where the counterparty hasn’t got any in place, and this will enable you to work on the contract in a platform you’re more familiar with.
Maintain version control at all times. Losing control of which version of a contract is most up to date can be a nightmare when trying to negotiate a contract, particularly if you are unable to see the changes you’ve requested or lose sight of your progress. It’s important to keep on top of the different versions being sent. Read about how to conquer version control in Word.
Keep a record of any substantive points. If you have discussed or agreed a substantive issue via phone or email, it is important that you keep a record of this. Not only will it help encourage the counterparty to keep to their promises, but it will also act as a reminder to both parties about what was agreed. In a contract automation tool like Juro, you have a detailed audit trail for this.
4. Ask the questions that matter
In a third party contract, there will almost always be some points you will feel compelled to concede on, but aren’t completely happy about. In these situations, it is always worth asking questions about these points before committing to them, as this can demonstrate your careful eye and ensure that your voice is heard - even on the other party’s paper.
For example, you may want to ask why certain clauses have been inserted, and how relevant they are likely to be in your relationship with the counterparty. Alternatively, if the language used is vague or potentially misleading, you should ask questions to clarify what it means and when it applies. This means that even though the terms have been drafted by the other party, you have full understanding of what they mean and whether they should be used.
5. Create a playbook
Playbooks have become a buzzword in business, but they are critical to ensuring that procedures are followed properly when reviewing and agreeing a third party contract, and that any risks have been minimized.
Whilst lots of businesses feel that they don’t have time to set up a playbook, the time that legal and business teams will waste without one is often far greater since playbooks are an effective way to enable commercial teams to self-serve with minimal input from legal.
6. Capture, transfer and analyze data
Extracting and analyzing contract data is also useful when managing third party paper, as it will allow you to retrieve important information like what the contract value is, how long the contract has been in progress for and when the auto-renewal date is.
This can be difficult to search and query manually in a third party contract, but with the help of a contract tool that captures relevant contract data, it can be seamless and require no effort at all. This is because a contract automation tool, for example, will automate the process and transform unstructured data into valuable insights.
How to find a contract tool that manages third party contracts
One of the most effective ways to get the most from a third party contract with minimal stress is to manage a third party contract using contract management software.
However, not all contract tools are created equal, so it’s important to ensure that the solution you choose can support Microsoft Word and PDF, but also that the tool turns a contract into structured data and offers the various features you need to edit, negotiate, approve and sign a third party contract without leaving the browser.
For example, here’s how Juro can help legal and business teams keep on top of third party contracts to achieve the best results for your business:
Approval workflows. Users can set up approval workflows to ensure that legal gets the final say on third party contracts that have been negotiated by commercial teams. That way, commercial teams can self-serve on third party contracts and legal teams that understand the associated risks can approve the agreement.
Structured data. Juro contracts are structured data, unlike contracts built in Word or shared in PDF. This means that users can pull important contract data from a third party contract, such as renewal dates, deviations and obligations.
Real-time dashboard and dynamic repository. Even if a contract belongs to the counterparty, you still want to have it in a centralized location where the appropriate teams can access it, along with all of the necessary updates about the contract’s progress. Juro’s real-time dashboard and dynamic repository makes this possible.
Version control. With third party contracts in Juro, users can scroll back through previous versions and see the edits that have been made in a single click. This means that your legal team can review the changes suggested and made by the counterparty - even on their own contracts.
Useful integrations. Juro integrates with leading platforms such as Salesforce, Greenhouse and Workday among others to connect data from third party contracts to the platforms that matter most to your teams.
eSignature. Users can use electronic signatures to sign documents from anywhere in the world, without needing to be in the room with the counterparty.
Use Juro for third party contracts
Want to gain control over third party contracts? Juro is an all-in-one contract automation platform that helps visionary legal counsel and the teams they enable to agree and manage contracts in one unified workspace. Keen to find out more? Hit the green button below.