A contract review is a process used to identify and analyze the key provisions of a contract. The purpose is to minimize legal and financial risk.
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What is meant by “contract review”?
Contract review is an integral part of contract management and very important for risk mitigation. Throughout the contract lifecycle, large amounts of resources are invested in creating high value-added contracts. Contract reviews play a critical role in ensuring the quality of these assets.
Contract review involves analyzing the terms of a contractual agreement to ensure that the terms are in order and do not pose potential risks. The process requires a eye for detail. During contract review, the auditor typically examines the contents of the contract document word for word. If the document contains unclear provisions that disadvantage the signatory, the other party is asked to make changes or a new contract negotiation occurs.
Purpose of a contract review
The purpose of a contract review is to ensure that the legal agreements and the terms and conditions contained therein are sound and that legal and financial risk is reduced as much as possible to protect the company’s interests. Contract review is an important part of any contracting process because it typically reduces overall risk, increases the chances that all parties to the contract will benefit, and allows both sides to be fully aware (before signing a contract) of what they are agreeing to.
A comprehensive contract review can:
- Uncover unclear or outdated provisions
- Prevent misunderstandings
- Identify areas for improvement; and
- Uncover hazards that could lead to an unfavorable shift of risk between the parties.
Who performs the contract review?
Contract review often requires professional skills and experience. Large and mid-sized companies typically hire junior lawyers or paralegals to thoroughly analyze their contracts and understand the terms and potential risks. However, smaller companies may have internal business managers or executives perform this task.
Checklist for the contract review
Lawyers typically follow a contract review checklist to facilitate this task. The following are the 15 key points they look for in contract documents.
General Here it is checked if signature blocks are defined and also all references to attachments and schedules are included.
Ambiguity If a word or phrase in a document has multiple meanings, it is best to replace them with clear, simpler ones.
Grammar This includes typos, punctuation, incomplete sentences, and language structure violations.
Calculations Are the calculations or formulas in the document correct?
Blank spaces A blank space in the contract document is a loophole, as someone could go back and fill in incongruent clauses.
Deadlines If an asset or service expires on a certain date, it should be stated in the contract.
Parties involved The individuals or entities entering into the contract should be clearly defined with their full names.
Termination Can either party terminate the agreement early? If so, the document should also specify the terms of termination. Then the procedure and rights of the parties after early termination.
Renewal In what manner are renewals permitted? Automatically or manually? How long should each renewal last?
Compensation Is there an indemnity that can arise from negligence? If so, under what conditions is the indemnity valid? Will the indemnity be based on reciprocity?
Settlement of disputes How will both parties resolve disagreements that may arise during the course of the agreement?
terms of payment Does the agreement contain performance obligations for both parties? Are the terms and conditions of payment included?
Collection costs Who bears the legal costs and fees for collection?
Applicable law What law governs the terms and conditions? In which courts will the disputes be litigated?
Risk management How will both parties bear the associated risk? What conditions determine who bears the risks?
Contract review is the thorough reading and understanding of a contract. Contract review can be performed either manually or using contract review software.
Contract review involves reviewing the document to confirm that it contains all the elements of a contract, that everything is clear and accurate, without errors or inconsistencies, free of potential conflicts and, importantly, worded with acceptable terms to avoid the parties committing to an unsatisfactory agreement.
Although contract review may require some time and resources, it is usually far less costly than the risks associated with a bad contract.
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