Contract review is an essential operation of most corporate legal departments. GCs and their legal teams often serve as critical intermediaries between the stakeholders of their company’s business units and the parties on the other end of the deal. You need a refined process for your contract review that contemplates the nature of the agreement, inter-department mechanics, and the company’s broader business strategy. With our step-by-step guide, get a simple roadmap for developing your department’s contract review for greater success during closing and for effective loss prevention.
- The purpose of contract review is to protect the company against unnecessary risk and align the contract with the company’s overall business strategy.
- Preparation is the key to contract review, which requires coordination of stakeholders, pressing timelines, and other logistics needed to execute the deal.
- Rely on your CMS, form library, clause bank, and closing checklist to identify problematic language and begin proposing revisions or negotiation strategies.
The Goals and Objectives of Contract Review
Most contract review processes have two general goals. The first is to identify and protect the organization and its stakeholders against the individual risks a contract presents. The second is to evaluate and raise awareness of the contract does or doesn’t align with the company’s business strategy. GCs and in-house attorneys can achieve these goals through attention to the following objectives during contract review:
- Checking for conflicts with other third-party agreements and internal corporate governance.
- Verifying or, at least, considering compliance with applicable laws and regulatory measures.
- Mapping exit strategies and processes for departing from the contract should the need arise.
- Performing legal due diligence on the acquired assets, assignments, rights, obligations, or other liabilities.
6 Steps for Effective Contract Review
Every corporate legal department will have its own preferences for contract review based on the nature of the stakeholders involved the types of contracts under review. That said, the below steps should transcend those distinctions and apply to varying degrees of agreement.
1. Assemble the Deal Team for the Contract
The deal team comprises the people responsible for reviewing and approving the contract from conception to closing. Usually, the deal team will include members of the legal team (e.g., attorneys, paralegals, contract managers, etc.) along with representative stakeholders of the involved business units. Depending on the circumstances, your deal team could also include external members like outside counsel or your ALSP. Have a method in place for communicating on the contract review, including naming conventions, inclusion on emails or messaging, and other logistics.
2. Consider Contract Deadlines and Other Timelines
When your legal department first receives requests for assistance on contract review, it’s essential to map out essential timelines, deadlines, and other sensitivities that could affect the transaction. For example, the stakeholders may wish to complete the deal before an upcoming reporting period, such as for taxes or an annual shareholder meeting. Additionally, elements within the contract may require coordination with other organizations (e.g., a government agency) that will require attention to processing timelines.
3. Identify Any Non-Conforming or Problematic Terms
Reviewing an opposing party’s contract draft can be a burdensome task as you lack familiarity with the agreement’s structure and choice of language. When you receive the initial draft of the contract, the next step is to perform a primary review. The purpose here is to identify terms that are either problematic or do not conform with language in the company’s approved bank of forms and clauses.
Having a contract management system that utilizes smart review features from AI and other LLMs could expedite this process. This gives you more time for the next step—strategizing over redlines and negotiations—and provides another layer of review on top of your actual reading of the contract. Cross-reference the agreement with the available playbook and consider creating one for the type of contract at issue if your department doesn’t have one.
4. Establish the Priorities for the Agreement and Negotiation Strategy
Your initial review of the agreement will undoubtedly reveal many issues and legal risks that you must explain to the corporate stakeholders on the deal team. The simple reality is you won’t be able to address all the contract’s imperfections because of time limitations, business dynamics, and available leverage.
Rather, you must be able to establish priorities and determine which revisions are necessary as opposed to preferable or stylistic. This is where your experience as a strategic business partner becomes invaluable for knowing how the language of the agreement applies to the real-world execution and enforcement of the transaction.
5. Gather Ancillary Documents and Information for Closing
In the background of the contract review process, you may need to coordinate gathering other important legal documents and information critical to closing the deal. This could include verifying certain facts to support contemplated representations and warranties or inputting items as an exhibit or on a schedule. You need the relevant documentation as early as possible in the contract review process to create time for making redlines to the body of the agreement. Without this data, it’s impossible to know whether existing contract language is problematic.
6. Have a Closing Checklist
A final step for securing a smooth contract review process is to have a closing checklist for the type of agreement at issue. The checklist serves as a vital knowledge management tool to avoid starting your contract review process from scratch and to keep from overlooking key elements of the agreement. The checklist should include the ancillary documents needed, signatory authority, necessary filings, deadlines, and other key dates.
Learn How Exigent Can Improve Your Contract Review Process
Exigent is an ALSP that prioritizes using data and technology to improve the workflows of corporate legal departments worldwide. Paired with our team’s diverse experiences and skills, we help legal departments find, develop, and employ the legal tech solutions that will empower key legal operations, like contract review processes.