Performing a thorough contract examination is an essential aspect of the contractual procedure, providing a chance to gain a complete comprehension of the terms you and your company are consenting to prior to finalizing the agreement. Conducting a contract review is beneficial as it aids in minimizing organizational risks and enhances the likelihood of achieving mutually beneficial outcomes for all involved parties. Failing to conduct a comprehensive contract review poses the danger of committing to obligations that cannot be fulfilled, potentially harming your company's reputation and brand, while also squandering valuable time and financial resources in resolving preventable disputes.
This article explores various vital factors to contemplate when performing a contract examination.
What is a contract review?
A contract review entails conducting a comprehensive evaluation of a legal contract prior to its execution, with the purpose of verifying the clarity and accuracy of its contents and ensuring your company's comfort with the specified terms. Even after the initial signing of the agreement, contract reviews remain crucial during significant contracting milestones, such as renegotiations or opt-out periods. It is typically the final chance to identify necessary modifications and request them before being bound by the terms of the agreement.
What to look for in a contract review?
To ensure a thorough contract review, it is beneficial to begin with a well-defined strategy that encompasses a careful analysis of the critical aspects within the contract. In the event that any inaccuracies, inconsistencies, or uncertainties are uncovered during the review process, it is imperative not to proceed with the contract until all concerns have been adequately addressed and resolved to your complete satisfaction. The following are essential elements to focus on when conducting a contract review.
Salient terms
Every line in a contract is important and needs to be reviewed closely, but some clauses and terms are clearly more significant than others. Since every company and industry is different, the most important contract terms are likely to vary as well, but there are a few to pay close attention to across the board. Terms like confidentiality, indemnification, termination, and dispute resolution are all important sections in a contract and are worth spending extra time reviewing to fully ensure the language is acceptable.
Termination and Renewal terms
Before finalizing any legally binding contract, it is crucial to ensure a thorough understanding of the termination and renewal terms to avoid being bound to an agreement for a longer duration than initially anticipated. It is advisable to examine provisions such as automatic renewal language and opt-out windows, which clarify the process and timeframe for canceling the agreement and outline the consequences of failing to notify the other party by a specific date.
Additionally, this is an opportune moment to proactively plan for the future, preventing any surprises when critical dates and deadlines approach. By setting calendar reminders, both you and your team can stay informed and avoid missing opportunities to renegotiate or terminate the agreement within the specified parameters.
Clear, unambiguous language
While reviewing a contract, it is essential to carefully analyze the wording of each sentence and identify any language that may be open to interpretation. Even if both parties currently interpret unclear terms in the same manner, it is advisable to modify the language to be more precise and unambiguous whenever possible.
This precautionary measure helps prevent potential conflicts that may arise once the contract is signed and in effect. In cases of significant conflicts, a third-party may need to intervene and determine the appropriate course of action based on their interpretation of the contract. Hence, it is crucial to ensure that all terms are explicitly stated to minimize any potential misunderstandings or disputes.
No unnecessary empty spaces
Utilizing contract templates can be a time-saving approach when creating contracts, but it necessitates specific attention during the contract review stage. Any empty fields or spaces within the template should be completed or eliminated before the final contract is signed. Neglecting to fill in these blank spaces in your agreement, depending on the situation, can result in expensive repercussions for your business. Therefore, it is crucial to ensure that all necessary information is properly inserted to avoid potential negative outcomes.
Key dates and deadlines
Apart from verifying the consistency of dates and deliverables with any prior verbal agreements, the contract review phase is an ideal moment to begin monitoring the tasks and responsibilities assigned to your team or organization. By planning ahead and staying proactive, you can minimize the risk of breaching the contract, which could have severe repercussions for your organization. Taking proactive measures and closely tracking your obligations will help ensure compliance and mitigate potential negative consequences associated with a breach of contract.
Other useful tips:
Allow enough time for a thorough review
Examining and carefully assessing each sentence in a contract can indeed be a time-consuming process, particularly for lengthy and intricate agreements. However, it is a crucial step in safeguarding your business against unwarranted risks. It is essential to allocate ample time to thoroughly review significant or high-risk contracts before signing them. Even a minor punctuation error or an ambiguous statement can result in costly and preventable errors. Therefore, taking the necessary time and attention to meticulously scrutinize contracts is vital for ensuring the protection and well-being of your business.
Have multiple people review
It is advisable to assign the contract review task to someone other than the individual who initially drafted the document. A fresh set of eyes from someone reading the contract for the first time is more likely to spot errors or typos that may have been overlooked by the drafter, who has been immersed in the content for an extended period. Involving a second member of your legal team or engaging a contract review lawyer to assess crucial agreements significantly enhances the likelihood of executing a contract that achieves its intended purpose. This additional review provides an extra layer of assurance and helps minimize the possibility of errors or misunderstandings in the final contract.
Review contracts on regular basis
Contract reviews should be conducted not only for new contracts but also for existing agreements. Whenever you are preparing for a contract renewal, it presents an opportunity to enhance the contract based on the lessons learned since its last signing. It allows you to rectify any overlooked issues, incorporate changes in language to align with updated industry regulations or guidelines, or make adjustments to reflect evolving circumstances. The fact that an agreement has been previously signed and accepted should not hinder regular reviews to identify chances for optimizing or refining the terms or even considering termination under specific circumstances. It is essential to recognize that contract reviews should be an ongoing process aimed at continuously improving and adapting agreements to better suit the needs and objectives of all parties involved.
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