Why is it Important to Review Contracts and Who Should Do it?
Let's first answer some of the important questions like why you should review contracts before signing? Who should review them? What to look for in contracts, and tips for successful contract review?
Contracts are vital to every business. Contracts govern everything that enables an organization to function properly, from money flow to sales, procurement, and employment.
A well-written contract marks the start of a fruitful partnership. In contrast, a poorly written contract can get you into serious legal trouble. Poor contracts risk committing to obligations you can't fulfill, damaging your company's reputation, and wasting valuable time and financial resources resolving disputes that can be avoided with proper contract review.
What is Contract Review?
Contract review is the thorough examination and understanding of a legal agreement before signing. It can be conducted either manually or with a contract review platform.
During the contract review, it is crucial to ensure that the contract is clear and accurate, free of potential conflicts, and includes every contract element.
Why is it Important to Review Contracts?
Contract review ensures that your contract rightfully reflects your intent and expectations. It is critical to every contracting process, whether complex or straightforward.
A contract review helps reduce risks, increases benefits, and provides all the parties involved a chance to understand what they agree to before signing the contract.
Since laws and contract regulations constantly evolve, it sometimes causes what was once a standard contract to become ineffective. Hence, regular contract reviews are essential to uncover uncertainties or outdated provisions and identify possible improvement areas.
Even though contract reviews require time and resources, it is still much less expensive than defending a contract dispute. By taking care of contracts, you take care of your business and protect it from legal risks. (Learn more about different types of contractual risks and how to mitigate them here)
Who Should Review Contracts?
The contract review process involves multiple people. The process might start with a sales representative, who initiates the draft, decides the fundamental values, and then passes it on to the other reviewers, reviewing the entire contract carefully before forwarding it to the legal team.
An in-house legal counsel or law firm then reviews the agreement to ensure it is legally binding, includes all the clauses, and is clear and accurate. The contract is then forwarded to the counterparty or the stakeholders for review.
The counterparty reviews the proposed agreement to ensure that the legal and commercial terms are agreeable and work for them.
The process of contract review may differ according to each reviewer. The stakeholders review the contracts and either accept, reject, or suggest some changes. The drafting party will again review the changes and the suggestions. Hence, the contract goes through a lot of back and forth until the final approval is obtained and the contract is signed. (Learn how you can fast-track contract reviews with InkPaper here).
What to Look for During the Contract Review?
Contract review checklists ensure every element of the contract is reviewed carefully. When conducting a contract review, it is helpful to follow a plan. A contract review checklist makes it easy to highlight problem areas, eliminate mistakes, and minimize risks.
Here are a few things you must look for during the contract review process:
1. Analyze Key Clauses and Terms
Every line in the contract is important and needs to be thoroughly reviewed. But some clauses and terms are more significant and must not be neglected. The key clauses may vary for different companies, but some crucial provisions are common to most businesses, such as:
a. Confidentiality: Protects sensitive business information from being made available to the general public or competitors.
b. Indemnity: Sets out to protect one party from liability or loss arising from the transaction.
c. Termination: Authorizes parties to terminate an agreement without breaching the contract under early termination and mutual termination.
d. Dispute Resolution: Determines how you want to deal with the resolution of disputes.
While reviewing key clauses and terms, you must ensure you have mitigated as much risk as possible.
2. Check Termination and Renewal Terms
Before signing the contract, you need to comprehend the contract's termination fully and renewal terms to avoid getting locked into an agreement longer than you intended. Factors like automatic renewal language and opt-out windows are checked. Hence, you know when and how you can cancel the contract and what are the consequences of not notifying the counterparty by a given date. It also ensures you keep track of the deadlines and start planning ahead of time for new contracts.
3. Aim for Clear Language
When reviewing contracts, look for unclear language that might lead to misinterpretation. If the counterparty oppositely interprets the unclear terms, it may lead to potential conflicts. It is best to keep the language clear and ensure that all the terms are laid out correctly.
4. Look for Blank Spaces
Using contract templates is a great way to save time while drafting the contracts but requires careful attention while reviewing. Pay close attention to either filling out the blank spaces or removing them if not needed. Contracts with blank spaces can result in severe legal consequences.
5. Audit Default Terms
Typically, both parties entering into a contract has good intentions, but there is always a possibility that one side won't deliver according to the terms of the agreement. Which then leads to a breach of contract. One may need to audit default clauses, so you understand the possible consequences of not fulfilling your obligations. It also helps you learn the options available to you if you are the non-breaching party.
6. Note Important Dates & Deadlines
Verify that all dates and deliverables align with all the verbal agreements. Also, start tracking everything your organization is accountable for executing when the contract goes into effect.
7. Allocate Risks Carefully
Review all the risks that have been accounted for fully and determine how risks are allocated between each party. If a contract assesses too much risk for one party, it probably needs negotiations to reach a balance where risk is distributed fairly to all parties.
8. Comprehend Remedies Provisions
You should always be prepared for the worst-case scenario. It is essential to be aware of the options available to you in the event of unfulfilled promises. Parties must familiarise themselves with limiting their liability or pass it to a different party. Also, it is essential to know what course of action needs to be taken in the event of a default.
9. Confirm Signature Lines
Parties should confirm that signature lines are referred to the correct individuals authorized to sign the contract on behalf of the business. Otherwise, the contract may not be enforceable.
10.Review the reference documents
When another document is attached to the contract, give those documents as much attention as the initial contract. There can still be critical information in these reference documents, which may cause risks if left unaddressed.
Tips for Successful Contract Review
Now that you understand why you should review contracts, who should review them, and what to check while reviewing them, here are some tips for doing it efficiently:
Ensure sufficient time is allotted for contract review. Carefully reading and analyzing every line in a contract takes considerable time, especially for lengthy and complex contracts. Overlooking minor mistakes like misplaced commas can land you in a legal dispute.
2. It is best practice to have multiple people review a contract. Ensure someone other than the person who drafted the contract also reviews it. A person reading the contract for the first time is more likely to catch an error or a typo faster. It will increase your chances of executing a contract successfully.
3. Review contract for new drafts and existing agreements. Reviewing contracts at the time of renewals help fix previously overlooked mistakes and change language according to the updated industry regulations and guidelines. Hence it is best advisable to review contracts regularly.
4. Conducting a thorough line-by-line manual review of contracts is an outdated process. It takes weeks to execute the contract after the constant back and forth of negotiations. It becomes convenient with contract workflow management platforms to review lengthy contracts quickly within hours. Adopting a contract review platform like InkPaper offers the ability to select templates, draft, redline, collaborate, negotiate, track, sign, and store contracts all in one place.
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