How to review a contract: key considerations for an effective process
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 review a contract.
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 review. This contract review 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 reviewing a contract, highlighting key areas to focus on and common mistakes to avoid.
What is a Contract Review
Reviewing contracts refers to 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 goes beyond just identifying errors; it’s about evaluating whether the contract reviewed aligns with your business goals and protects your interests. This step ensures you fully understand each party's rights, responsibilities, and obligations within the contracting process.
A critical part of reviewing contracts is analyzing the document's enforceability under applicable laws. This means checking whether the terms are not only fair but also legally binding in the jurisdiction specified in the contract. For example, when clauses related to confidentiality, intellectual property, or dispute resolution are being reviewed - they must comply with relevant laws to avoid potential enforcement issues.
The review processes also often include checking references to external documents or exhibits to ensure these align with the contract’s provisions. Missing or vague references can lead to disputes later, so reviews of all linked documents are present and correctly incorporated is vital. Additionally, having the document reviewed by multiple stakeholders, such as legal advisors, department heads, or even financial teams, provides a comprehensive assessment and reduces the risk of oversight.
Modern businesses leverage technology in the contracting process to enhance their reviews efforts. Automated tools and AI-powered platforms can assist by identifying risky clauses or inconsistencies, providing a quicker and more accurate way to conduct reviews while maintaining high standards of diligence.
Why is Contract Review Necessary
The importance of the contract review process cannot be overstated. It acts as a safeguard to protect your business from unnecessary risks and potential legal disputes while also serving as an opportunity to optimize agreements for long-term success.
Beyond identifying ambiguous or outdated provisions, reviewing a contract ensures that every clause reflects the current needs and strategic goals of your business. Contracts drafted in haste or without due diligence can often include terms that no longer serve your interests or impose unnecessary obligations. Thorough reviews can eliminate such redundancies, saving you from future complications.
Moreover, the contracting process is not just about mitigating risks—it’s also about seizing opportunities. For instance, reviewing contracts can highlight clauses that offer room for renegotiation, such as payment terms or exclusivity agreements, to secure better deals or competitive advantages. By proactively engaging in the agreement reviews, businesses can identify gaps where additional protective measures, such as warranties or liability caps, may be introduced.
Another crucial aspect of reviewed documents is compliance. Every contracting process with thorough reviews should evaluate whether the agreement aligns with regulatory requirements specific to your industry or jurisdiction. Non-compliance during reviews could lead to penalties or nullify the agreement entirely. Making sure that all terms comply with legal standards during reviews is an essential part of reviewing contracts and mitigating regulatory risks.
Finally, contracts often include deadlines, milestones, or deliverables that need careful attention. A poorly managed contracting process might overlook these critical elements, resulting in missed obligations or strained relationships. Reviews of such time-bound commitments ensures accountability and smooth processes throughout the agreement's lifecycle.
In summary, contract review process is not merely a precaution—it is a strategic tool for managing risks, enhancing clarity, and identifying avenues for growth within every contractual relationship.
Who Should Review Contracts
While it's common for legal counsel to review a contract, 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 reviewing a contract 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 review a specific contract.
Examine Key Clauses and Terms
Every contract review process starts here. A document is composed of several clauses or terms, some of which carry more weight than others. When these terms are thoroughly reviewed, they can reveal risks or hidden costs. Pay special attention to clauses related to:
Confidentiality: Ensures sensitive information is protected during reviews.
Indemnification: Defines which party will bear financial responsibility for losses or damages.
Termination and Dispute Resolution: Provides clarity on how the contract can be ended and how disagreements will be resolved.
By ensuring these key sections are reviewed and fully understood, you safeguard your business from unexpected liabilities.
Assess Termination and Renewal Terms
One of the most critical aspects of any contract process 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.
Contracts that lack transparent renewal terms can trap you in unfavorable agreements. Having these sections reviewed early can prevent long-term issues.
Ensure Clarity of Language
An effective contract is one that is clear and devoid of ambiguity. Throughout the contract review process, 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. Contracts that aren’t reviewed for clarity often result in misinterpretation, which can lead to disputes.
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 and reviewed. These blanks may include:
Payment terms.
Delivery timelines.
Signatory details.
Each section should be thoroughly reviewed to ensure it aligns with verbal agreements and leaves no room for assumptions.
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 per contract process, as well as the available options if the other party defaults. Default terms that aren’t reviewed could result in unexpected financial or legal repercussions.
Note Important Dates and Deadlines
Every contract has obligations tied to specific deadlines. As part of the contract review process, ensure that:
Milestones align with your operational capacities.
Deadlines for deliverables and payments are realistic.
You maintain a system to track these dates effectively.
Thoroughly reviewed dates prevent missed deadlines and associated penalties.
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. Risk allocation clauses that aren’t reviewed could leave your business vulnerable to significant liabilities.
Check for Reference Documents
If a contract refers to other documents or exhibits, ensure that these are included and scrutinized as part of the process of reviewing a contract. 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 trying to review a contract, it's crucial to avoid these common mistakes:
Rushing through the contract review process without paying attention to details
Overlooking blank spaces in contract templates
Signing a document without thoroughly reviewing contracts
Assuming that a contract is non-negotiable when reviewing contracts
Misinterpreting "standard language" as unimportant
Signing an agreement that is ambiguous or unclear
Collaborating in the Contract Review Process
The reviewed process is rarely a solo endeavor. Collaboration among stakeholders ensures a more comprehensive assessment. When conducting reviews, include:
Legal Advisors: For evaluating compliance and enforceability.
Finance Teams: To verify payment terms and financial obligations.
Operational Managers: To ensure deliverables and timelines align with business capabilities.
Collaborative reviews not only identify potential issues but also ensure the contract serves all aspects of your organization effectively.
Use Enty to Avoid Mistakes
In the digital age, technology can significantly simplify contract workflow and contract review process 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 review process. 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, as well as help in the contract review process.
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 a contract sent to you on Enty. All on a single platform. No legal skills required; we've got you covered!
