How to review contract: Things to consider while reviewing a contract
Effective contract management is vital to the success of any business. One crucial aspect of contract management is the contract review process. Understanding how to review contracts thoroughly can save your business from potential pitfalls and legal complications. This comprehensive guide aims to equip you with all the necessary knowledge and tools to master contract review.
Contracts form the backbone of any business transaction. They provide a formal and legally binding agreement that outlines the obligations, rights, and responsibilities of each party involved. But before you sign on the dotted line, it's crucial to conduct a thorough contract review. This process goes beyond just reading the terms and conditions. It involves a deep understanding of the clauses, provisions, and implications that could affect your business in the long run.
In this guide, we will walk you through the essential steps of contract review, highlighting key areas to focus on and common mistakes to avoid.
What is a Contract Review
Contract review is the methodical examination of a legal document before its acceptance. It involves scrutinizing the contract in detail to ensure that all stipulations are precise, accurate, and favorable to your business. The contract review process is your final chance to detect any inconsistencies, potential conflicts, or unfavorable terms before committing to the agreement.
Why is Contract Review Necessary
The importance of contract review cannot be overstated. It’s the safeguard that protects your business from unnecessary risks and potential legal disputes. It enables you to:
Identify ambiguous or outdated provisions: Contract review helps pinpoint unclear or obsolete terms that could lead to disputes or misinterpretations later on.
Prevent misunderstandings: By thoroughly reviewing a contract, you can ensure that all parties have a clear and mutual understanding of their roles, responsibilities, and expectations.
Highlight areas for improvement: A contract review can reveal areas that need refining or optimization to better align with your business objectives.
Expose potential risks: The review process can uncover hidden pitfalls or clauses that could adversely affect your business.
Who Should Review Contracts
While it's common for legal counsel to conduct contract reviews, particularly for high-value agreements, non-lawyers can also participate in this process. Depending on your business's structure and the nature of the contract, various stakeholders might be involved in the review process. These could include sales representatives, contract managers, and even the business owners themselves.
Steps to Effective Contract Review
Now that we understand what contract review is and why it's crucial, let's delve into the step-by-step process of conducting a thorough contract review.
Examine Key Clauses and Terms
Every contract is composed of several clauses or terms, some of which carry more weight than others. Pay special attention to clauses related to confidentiality, indemnification, termination, and dispute resolution. These sections are pivotal and warrant a detailed analysis to ensure that your interests are adequately protected.
Assess Termination and Renewal Terms
One of the most critical aspects of any contract is understanding how and when it can be terminated or renewed. Be wary of contracts that lock you in for an extended period without providing a clear exit strategy. Make sure to take note of any opt-out windows or auto-renewal clauses, and set reminders for these important dates.
Ensure Clarity of Language
An effective contract is one that is clear and devoid of ambiguity. Avoid jargon and legalese, opting instead for direct and simple language. Any terms or clauses that could be open to interpretation should be clarified or revised to prevent potential conflicts in the future.
Fill in the Blanks
If you're using a contract template, ensure that all blank spaces are filled in or removed before the contract is finalized. Leaving blank spaces can lead to ambiguity or misinterpretation, potentially leading to costly legal disputes.
Review Default Terms
Default clauses outline the consequences should one party fail to fulfill their contractual obligations. Ensure you understand the implications of not meeting your obligations, as well as the available options if the other party defaults.
Note Important Dates and Deadlines
Contractual obligations often come with specific deadlines. Ensure that these dates align with any previous verbal agreements, and start tracking any responsibilities your business is expected to fulfill.
Allocate Risk Fairly
Ensure that the risk associated with the contract is equitably distributed between all parties. If a contract imposes excessive risk on one party, it may need to be renegotiated or amended to create a more balanced agreement.
Check for Reference Documents
If a contract refers to other documents or exhibits, ensure that these are included and scrutinized as part of the contract review process. These additional documents can contain critical information that forms part of the contractual agreement.
Verify the Governing Law
Ensure that the contract stipulates the governing law and jurisdiction that will apply in the event of disputes. This is especially important for contracts involving parties from different jurisdictions.
Common Mistakes to Avoid in Contract Review
While conducting a contract review, it's crucial to avoid these common mistakes:
Rushing through the review process without paying attention to details
Overlooking blank spaces in contract templates
Signing a contract without thoroughly reviewing it
Assuming that a contract is non-negotiable
Misinterpreting "standard language" as unimportant
Signing an agreement that is ambiguous or unclear
Neglecting to review contracts on a regular basis
Use Enty to Avoid Mistakes
In the digital age, technology can significantly simplify contract workflow for your company. First, Enty offers a tool that allows you to create contracts by simply answering questions and doesn’t require the involvement of legal professionals.
Professional lawyers created and reviewed the templates used to generate contracts to make the process simple. After creating a contract, both you and your counterparty can e-sign the document directly on the platform, while the counterparty won’t need to register on Enty.
Together with that, we’ve launched the AI Contract Review. Even the current version significantly simplifies your contract routine. All you have to do is upload a document on Enty and get a full review done in a matter of 3 to 4 minutes.
As a result, you’ll get a contract summary in human language. This summary includes a general opinion on the quality of the contract and a score from 1 to 10. The main goal of the summary is to provide you with insights on the contract's quality right away.
In other sections, the tool will highlight all contract details in one place. Yeah, we know how hard it is to get this information by yourself. Another section provides insight on what you should pay attention to in relation to this contract.
Last but not least, our tool provides you with a list of improvements you should consider implementing in the contract.
That’s it! Handle the majority of contract-related issues without having to pay lawyers. Create contracts from scratch and review the contracts sent to you on Enty. All on a single platform. No legal skills required; we've got you covered!
