An Introduction to Contract Analysis
Contract analysis is a critical function for any legal or business team managing a company’s agreements. But, until the advent of contract analysis solutions, deriving true value and insight from a contract was a long and arduous process. Contract analysis allows legal teams to extract key information from agreements, enabling them to make data-driven decisions, mitigate risk, ensure compliance, and ultimately derive greater value from agreements.
When we speak about contract analysis, we mean the process of studying and analyzing the terms of a contract to identify and extract valuable data. This process also includes associating categories and appropriate metadata to each clause to help improve the insight a legal team can learn from their contracts, as contracts rarely stand alone. Instead, they are typically related to other contracts governing things like supply relationships, insurance, purchase orders, licenses, and more, so contextualizing each clause within the appropriate lens is an important part of this process.
Contract analysis is a very important task for any legal team that manages a high volume of contracts. For example, imagine a company in the process of being acquired – due diligence is one of the most important parts of the acquisition process . In order to ensure a successful acquisition, the acquiring company needs full visibility into the contracts being acquired. If the acquiring company has analyzed these contracts, then it will have a complete understanding of its current position and be able to make data-driven decisions as it relates to future strategy. On the other hand, if the acquiring company does not perform adequate due diligence, it could set itself up for costly surprises down the road.
In a recent LexisNexis survey, 87% of in-house counsel stated they need to be more efficient and accurate with contract review and 82% of them agreed that a contract discovery and analysis tool would help them do so. Executing a thorough contract analysis is much more than a set-it-and-forget-it activity – it’s a dynamic, ongoing task that informs many other processes. By performing contract analysis, legal teams can track changes, monitor compliance and anticipate future problems. Contract intelligence, drawn from a detailed analysis of contracts across the organization, enables the legal team to better manage risk and allows business teams to make better, data-driven decisions. It’s a vital step in strategic planning for any organization.
The Major Aspects of a Contract Analysis Template
When developing a contract analysis template, it is critical to identify the key components that should be included to facilitate easy review and extraction of information in the future. Comprehensive provisions should be inserted under each category so that all areas of the contract are effectively captured. Some categories that should be addressed in the contract analysis include:
Parties: A thorough list of the parties’ names, addresses, phone numbers, emails and, if applicable, birthdates and Citizenship or residence information. Additional categories could be added to further categorize the parties (for example, are the parties individuals or companies; if companies, what type of company are they (i.e. corp, LLC, partnership); do they have any owners in common, is there anyone on the other side that should not be dealing with you directly, etc.)
Background History: A space to list relevant history prior to the execution of this Agreement that parties might want to review.
Definitions: A space to easily review the definitions referenced in the Agreement.
Term/Period: A space to easily review the dates for the term, as well as renewal dates, etc.
Obligations: This would include a third-party contract analysis of obligations of the parties as well as obligations that are captured in the third-party contract. Additional categories could be added based on the specific wordings of the obligations.
Limitations: This could include a review of liability, consequential damages, indemnity provisions or any other category that is a key limitation.
Remedies: This could include escrows, liquidated damages, et seq.
Exercising your rights: If rights on either side must be exercised, time frames by which such exercise must occur should be noted.
Proprietary Information: A summary of any proprietary information.
Miscellaneous: Contractual provisions that do not fit into any other section on this contract analysis template.
How to Personalize a Contract Analysis Template
A cookie-cutter approach to contract analysis is not effective. To analyze a contract, you must understand the nuances of the particular contract and its governing law. Mastering the basic elements of a contract analysis template is important, and equally important is the ability to customize your contract analysis template for a specific industry or type of contract.
Although certain contracts have provisions that are common across all contracts regardless of the industry, there are specific details and/or practices that are unique to certain industries. For example, the types of indemnities that are typically included in a software license agreement may be very different from those in an employment contract. As another example, your template for a manufacturing agreement may contain obligations that are only relevant to manufacturing contracts. For instance, a manufacturing contract may require a manufacturing party to submit weekly or bi-weekly quality reports to the other party.
There may also be provisions that are unique to certain types of contracts. For example, if you’re reviewing a contract that is under the uniform commercial code (UCC), then your contract analysis template should also include specific sections relevant to the UCC. A UCC contract analysis template can include sections that address warranties of merchantability and fitness for a particular purpose, remedies and risk of loss.
Depending on your industry, there may also be specific ways to handle legal exceptions on a clauses that may require customization of your contract analysis template. For example, if you primarily draft and negotiate executive compensation plans, your contract analysis template may include a provision that addresses the legal requirements of such agreements under section 409A of the internal revenue code, or your template may include how to conduct compliance reviews under those requirements.
There may also be specific ways to handle legal exceptions on particular clauses that your client can comply with. For example, if you draft and negotiate security services contracts, then you may frequently review contracts that have indemnity provisions that your client cannot agree to because of legal or business reasons. In these circumstances, the clause in your template might state that the client agrees to indemnify only if the services meet industry standards (or the reasonable standard of care), rather than agreeing to indemnify "regardless of fault" or "regardless of whether due to negligence".
As another example, if your company frequently drafts and negotiates confidentiality agreements, then you can provide guidance on how to customize the confidentiality provisions for your clients. A good contract analysis template will include reminders on important factors such as the duration of the confidentiality obligation, the carve outs from the obligations, who is owed the obligation, who can disclose the information and how.
The Advantages of Utilizing a Contract Analysis Template
Contract analysis templates are powerful tools for any legal team tasked with reviewing and drafting complex agreements, particularly when they contain multiple provisions that need to be monitored over time. The positive attributes of using contract analysis templates are such that once you become accustomed to using them on a regular basis, you’ll wonder how you ever did your job effectively before they existed. The following is a look at five of the many benefits of using such templates:
Speed and Efficiency
For legal professionals with heavy case loads, being able to conduct efficient contract reviews is of the utmost importance. The quicker important agreement provisions are located and monitored properly, the quicker the legal team can respond to clients and offer solid advice and counsel. Without contract analysis templates, legal professionals would have to sift through each agreement provision individually, drastically increasing the amount of time it takes to locate the right information.
Improved Accuracy and Consistency
When using contract analysis templates, the legal review process is both accurate and consistent. When you take advantage of digital document review tools, you can cross-reference data and easily designate important provisions so they’re all in one place. This leads to more accurate information being reported to regulatory authorities, clients and partners, and even internal departments. The result is greater accuracy in contract review, and improved communication between all parties.
Better Tracking Capabilities
A major challenge with most contract analysis tools is their inability to properly monitor provisions over time. This is where mastering the art of contract analysis templates is useful. By setting up a tracking system with the right templates, you will enjoy many of the same benefits as you would when using the best contract review software with AI capabilities. Not only does this help facilitate compliance with laws and regulations, it also helps ensure contract changes are captured and logged for future reference.
Insights into Your Contracts
Many contract analysis templates give legal professionals important insights into their contracts. For one, you will be better able to manage your contract portfolio and review complex arrangements in great detail. This is important when multiple parties are involved in negotiations that impact your business. Furthermore, you’ll be able to track provisions that have expired, have gone missing or have changed mid-stream, allowing you to better manage your contracts over time.
Increased Productivity
Last but not least, proper use of contract analysis templates leads to increased productivity for legal professionals. When everyone has access to important provisions in no time at all, more work gets done, and client needs are met more quickly. Plus, you and your legal team will be able to set aside more time for finding creative solutions to complex contract issues. In doing this, you’ll be able to offer clients the robust legal advice and guidance they’re looking for, further solidifying your standing as a trusted advisor.
The Most Common Mistakes of Contract Analysis
Even the best template is only as good as the lawyer using it. There are several common mistakes made in contract analysis that lead to a failure to identify key provisions. Consequently, it is important to identify the most common pitfalls.
First, the most obvious mistake is not using an analysis template at all. One of the most important purposes of a template is to force a lawyer to think of every issue or risk associated with a contract. If one does not use a template, they may be tempted to blow off a review as "learning the contract," or "knowing this language is poison," or "it’s just an affiliate." Once again, there is no such thing as "just an affiliate." The economic consequences can still be as large as if they were a separate entity.
Second, a lawyer is only as good as their template. You get what you pay for, so be sure to pick your template carefully, and then modify it for your specific practice. While we have provided an excellent starting point with our detailed Contract Template Solution, it also makes sense to customize one of your own for your particular situation. For example, one may want a more basic template with different, but important categories of information. For others, the template we’ve provided may be the right choice. However, many practitioners create their own templates and checklists without understanding the breadth and depth of issues that exist in contracts. Even our Contract Template Solution is not the "perfect template" that fits every type of contracting party.
Third, make sure to attach the agreement being analyzed. Too many lawyers do not attach the agreement to the analysis. If you use our Contract Template Solution, this is already done for you, but it is never a bad idea to attach the actual agreement to the analysis. This is especially true for an employee . We all remember major club signing events filled with mocking cheers because the quarterback of the beloved home team was too dumb to figure out how to sign or fill in a form. Those moments can be embarrassing. There is a reason to attach the form itself, even if it is electronic; asking an employee to fill out the contract is discipline and punishment. It is easier not to attach the agreement and make fun of the President who couldn’t figure out how to fill in a form. A labor lawyer friend said she probably has 10 cases waiting to be filed if she had all the clever lawyers who promised to send over a tortious contract when they could figure out how to sign it or attach it without working on it. Don’t let this happen to you; stick to simply asking the employee to look over the analysis. The analysis should be a contract to sign, not a messy attempt to sign the contract in two minutes while still behind the podium.
Fourth, watch for "non-obvious" provisions. Non-obvious provisions can be the biggest pitfall in a contract. A great example would be material adverse change ("MAC") post-closing termination rights. A MAC is an often highly negotiated provision, but one that far too many lawyers do not know to look for. Be ready to highlight them and draw attention to them, however much they are buried deep in attachments, as "non-obvious" provisions. Tell the person that hired you, if they don’t have a MAC provision they will not be able to terminate. You are likely to be ignored because you are just not that important, but be a damn broken record; you will be proven right in the end.
Finally, make sure to avoid issues related to whether the contract is binding.
Analysis is an interesting process. It’s often something that we are not prepared for, we are not comfortable with, and we often shy away from it. But it should be routine and obvious. Creating clear expectations, knowing the process, and sticking to our templates resolves most of the issues before they come up.
Best Practices in Effective Contract Analysis
One of the most common problems that I see with contract analysis these days is a lack of rigor by the person(s) charged with performing the task. While there are certainly enough resources available these days to assist with contract analysis, even a legal professional without deep expertise in a particular subject matter can do a reasonable job of contract analysis in a small amount of time if they follow a few simple guidelines:
- First, make sure that you have a complete copy of the contract with all exhibits. Certainly everyone knows this, and naturally it sounds completely common sense, but that’s the point – simply make it a habit.
- Check to see if the contract refers to related agreements and whether those agreements are present. The drafters of your contract may have skipped providing this referenced agreement, and it may have an enormous impact on your analysis.
- If the agreement cites an applicable law that you’re unfamiliar with or lacks clarity, obtaining such an expert opinion may be invaluable. While the temptation is to plow forward without seeking that legal advice or expert opinion, recognize that when it comes to contract analysis, the impact of missing a detail such as this could be significant.
- Recognize that not every question posed by the relevant contract is a yes/no question, and therefore answer the question as completely as possible. For example, in the context of a distribution contract, if you are asked whether the contract is exclusive or not, a clear answer is "yes, exclusive", but a more proper answer might include how exclusivity is affected by the territory and practices in place.
- Recognize that not every analysis question can be answered with 100% certainty, and state in any report any specific areas of uncertainty or gaps that impact the analysis. Avoiding a question simply because it’s complicated causes confusion and even worse, creates risk of improper decision making.
The Best Software for Contract Analysis
Selecting a contract analysis program goes beyond picking the one with the most attractive user interface or the lowest price. In addition to looking for features that enhance the use of contract analysis templates, there are certain minimum standards that should be considered. Here are some of these criteria:
Features
A good program will include advanced artificial intelligence features that allow for the use of templates in preparation, analysis, and due diligence. It will allow for the use of metadata from all types of documents, not just those created from within the analyzing program. The software should facilitate the use of the templates with features such as customizable word lists, variable list generation, and combining of template language to create new templates. Once you know what you need from the contract analysis software, be sure that you ask the provider for particulars. Is it easy to import data from other programs? Will you be able to parse documents into smaller pieces to make them easier to work with? Can data be exported easily and quickly for use outside the program? These are just some of the features that could be beneficial in the decision about which contract analysis software to buy.
Integrations
Whether you are mainly analyzing contracts in the course of due diligence or contract management or something else, integration with tools that you already have in use will enhance your use of the contract analysis software. The integration can be with data extraction tools for data analytics, AI engines, contract management software, document management software, e-Billing and e-Billing management, or other tools. Or it could be with a code library to give you access to API and other program integrations. Consider your current workflows before selecting contract analysis software.
User-Friendliness
For contract analysis software to be useful, it must be user-friendly. If interacting with the program is cumbersome or requires too much experience or training, no matter how many bells and whistles it has, it will not be utilized. Conversely, it should not be so basic that you feel as though it will not be useful for complex situations. Have an employee in question test the software to determine whether it is indeed user-friendly. It is important, too, that the software and templates allow you to do the following: Some of the questions that a potential user should ask themselves during the selection and evaluation of contract analysis software include:
Customer Support
Problems will arise from time-to-time. There will be bugs to fix, documents that need to be processed in a timely manner, and questions that need to be addressed. For these reasons, it is important to have complete confidence that the customer support you get for the contract analysis software will be competent and reliable. Make sure that the provider offers assistance that is on-demand and involves several communication options like chat, email, and phone. Also consider whether the support help comes from tried-and-true customer service professionals who are intimately familiar with the software, or from people whose experience is largely technical. Both types of customer service people are important, but there are also times when a customer service representative will need to have experience and insight into how attorneys and other users think.
The Next Wave in Contract Analysis
The future of contract analysis is one of the most anticipated topics as professionals from all areas of organizations contemplate how this will affect the use of templates. Will we soon have robots that can do more contract analysis with less effort? Will that replace the need for templates? Some dream of full robotic automation, while others predict that certain tasks may be handed over to "intelligent" software, leaving others for humans to complete. Although still up in the air, experts are generally optimistic. Others are looking at the potential and scope of other technological developments, primarily those identified with artificial intelligence (AI) in its various forms. For example, ongoing successes in debugging software have been hailed as a boon . Minds among the AI community are even more excited about what is emerging in machine learning – AI that learns and adapts to the information it processes. The implications here are fascinating for legal templates, including potentially greater abilities to distill the essence of the portfolio. The key to the successful use of templates in the future will be keeping up with these and other technological advances. We started with primarily text-based templates and are now increasingly offering templates that incorporate visual representations such as UML for process flows or ERM data models. Templates are growing and will continue to evolve into new spaces that automate processes to manage risk in contracts.