Beyond simply drafting the agreement and sending it for signature, managers need to focus on a crucial step for the legal security of any business: legal contract analysis and legal document proofreading.
As the name suggests, legal document proofreading involves reviewing the information in that document. But not only that!
A thorough legal analysis of contracts verifies whether the company’s current and future interests are addressed in the document. It also checks whether the contract, as currently drafted, has the potential to cause problems for the parties involved.
In this article, you will understand once and for all what contract analysis and legal proofreading are and how to do them. You will see examples of contracts that require special attention, and finally, you will learn about tools that can help companies that need to analyse dozens of contracts every month. Let’s go?
What is legal contract analysis?
Legal contract analysis comprises a set of processes for reviewing and verifying legal document drafts, the purpose of which is to ascertain the instrument’s legal adequacy and to ensure that the parties’ interests are protected. Thus, legal contract analysis includes checking:
- based on the data contained in the contract; of the contractual clauses ;
- Regarding the legal compliance of the clauses with current legislation, in order to avoid the instrument having its validity challenged;
- the suitability of the clauses in relation to the internal policies and interests of either party.
Some contract analyses may go beyond strictly legal criteria. This is the case, for example, when analysing contracts that focus on verifying the supplier’s or service provider’s ability to fulfill contractual obligations in the quantity and quality stipulated.
In any case, the term “contract analysis” is most often used to refer to the process of legal and juridical analysis.
Thus, although different professionals may be mobilized for this task, the Contract Analyst is usually the professional hired for this role. This is a person with a background in Law, or related fields.
Advantages of legal contract analysis
Contracts are fundamental instruments in the daily lives of individuals and companies. In the formalisation of any legal transaction – whatever it may be – contract analysis fulfills several essential functions.
So, if you’re wondering why invest time in a thorough analysis of contracts, some advantages that can be gained are:
- Greater legal security for your business;
- Reducing the risk of losses resulting from signing contracts with errors or inadequacies;
- Reducing the rate of future litigation;
- Increased efficiency and operational excellence of the enterprise;
The items above are just examples of some of the most common benefits derived from the recurring application of legal contract analysis techniques. Next, we’ll look at some specific types of analysis that often cause confusion among managers. Let’s go?
Examples of legal contract analysis: sensitive points
Each type of contract may require different analysis criteria. The minimum requirements and sensitive points vary from document to document. In this scenario, some types of contracts have the potential to generate a large number of questions. This is the case with real estate contracts, construction contracts, and employment contracts.
We will discuss the necessary precautions when analyzing each of these three types of contracts below. Shall we begin?
Analysis of real estate contracts
Real estate contracts encompass a range of transactions involving real estate. Some examples include:
- real estate purchase and sale agreement;
- lease agreement;
- incorporation contract;
- barter agreement;
- Lease agreement (rural property);
- between others.
However, regardless of the type of contract, when it comes time to analyze real estate contracts, some points need to be considered. These are:
- Check the details of the parties involved;
- Verify that the property registration and area data are correct;
- Check if the draft specifies the intended use of the property (especially in the case of rental);
- To determine if there are provisions regarding liability for any outstanding charges and fees related to the property;
- Verify the accuracy of deadlines and dates (delivery date of the property or keys, for example);
- Check if there are clauses for contract termination and, if so, for withdrawal from the transaction (especially in the case of a purchase and sale);
The list above contains some sensitive points that need to be double-checked in real estate contracts. Remember, however, that the specifics of each transaction may require an even longer list of items to analyse.
Analysis of contracts for the execution of works
Construction contracts generally require close attention from all parties involved. When in the form of a fixed-price contract, they are a type of service agreement, but with the ultimate goal of promoting the construction of a building.
Therefore, before entering into this type of contract, the parties – especially the contracting party – should:
- Ensure that the scope of the work, its minimum technical characteristics, and construction requirements are well described, so that the object of the contract is clear.
- Verify the adequacy of the project cost spreadsheet (if applicable), its validity, and the expected date for updates;
- Verify that the negotiated deadlines are included in the project schedule attached to the contract.
- Check for the existence of minimum quality clauses for the delivery of goods and contract termination.
- Check if the contract includes provisions for potential delays in the execution of the work.
- Investigate the liability clauses regarding any accidents that may occur during the execution of the work.
- To ascertain whether there are clauses providing for payment securities and guarantees, and whether they are adequate in relation to what was negotiated between the parties.
Clearly, the specificities of the object and conditions of each construction contract may require further consideration during the analysis.
Analysis of employment contracts
Employment contracts, when governed by the Consolidation of Labor Laws (CLT), must follow a series of rules, the main purpose of which is to ensure the rights and duties of both the employer and the employee.
Despite this, with updated legislation and the adoption of new work arrangements – such as teleworking, for example – these types of contracts are becoming increasingly complex.
Thus, issues and clauses that were previously absent from employment contracts have now become relatively common. With this in mind, we have compiled some aspects that should be considered when analyzing employment contracts, as follows:
- Check that the work schedule, work regime, and location are specified in the contract;
- Check that all labour obligations and payments, in addition to the salary itself, are itemized in the document.
- Assess the need for a confidentiality clause.
- Check for the presence of a data processing clause (in accordance with the LGPD);
- Check if there is a non-compete clause (when necessary);
It is worth noting that other work arrangements – such as outsourcing, for example – require an even wider range of factors to be analysed. Always consider the specific circumstances of each case.
How to analyse legal contracts? Step by step.
Obviously, each business may adopt a distinct standard analysis process. However, some actions are essential and common to all types of analysis. An essential step-by-step process, therefore, includes the following stages:
- To do a general reading of the contract.
- Verify identification data
- Verify the key clauses in determining the object of the contract.
- Check the clauses related to the grounds for termination.
- Check the contract’s validity period and renewal clauses.
- Identify any potentially abusive or missing clauses.
- Forward for correction and approval by the parties.
So, let’s see what you absolutely cannot leave out in each of these analysis steps.
To do a general reading of the contract.
The first step in any contract analysis is reading the document itself. Obviously, some contracts can be dozens of pages long, which will make a detailed reading a rather time-consuming task.
Even so, it is important to do at least an initial, quick reading. Through this, it will be possible to identify how the contract is organised, what sections exist in the document, and it will also allow the analyst to identify points of attention, such as gaps, typos, among others.
Verify identification data, dates and values
After the initial reading, it’s time to examine some specific details of the contract. This includes, for example, the identification information of the parties . Make sure the information provided is correct, and check if the identified parties have the legal authority to enter into the contract.
Also check all the numbers in the contract, whether they are instalment or consideration amounts, interest, penalties, or others.
And last but not least, pay attention to each and every date. From effective dates and delivery schedules to other time markers. An error in this type of information can lead to the partial or total cancellation of the contract. Furthermore, it can give rise to potential litigation. So, be careful!
Verify the key clauses in determining the object of the contract.
Every contract has some essential clauses, usually at the beginning of the document, whose purpose is to define the object of the contract. In practice, these clauses are the core of the contract: they define exactly what the object of that legal transaction is. They also define the main obligations of each of the parties, and the essential conditions for fulfilment.
Because these are key clauses, they cannot contain errors or inaccuracies. Therefore, double-check the details and wording of these clauses if necessary.
Check the clauses related to the grounds for termination.
Most managers are focused on speeding up the hiring process. Therefore, termination options are often less discussed; in other words, they receive less attention. But this type of behaviour is a mistake. A good contract should contain clear and feasible termination clauses, covering the most common causes of breach.
Therefore, include in your contract review procedure the standard practice of verifying the existence of clauses containing the grounds and conditions for termination.
Check the contract’s validity period and renewal clauses.
We’ve already discussed the importance of checking dates when reviewing contracts. This obviously includes the contract’s term of validity. But, more than just verifying whether the date stipulated in the draft is consistent with the company’s practices and the interests expressed during negotiations, it is necessary to pay special attention to the renewal clauses.
Contracts can be for a fixed or indefinite term. In the latter case, it is common to establish automatic contract renewal.
In any case, the contract may contain pre-established special conditions that will determine whether or not it is renewed. Therefore, it is essential that the Contract Analyst review these clauses and verify their suitability in relation to the company’s interests.
Identify any potentially abusive or missing clauses.
In addition to all the checks already mentioned in the previous steps, it is also essential to verify that no clauses essential to the company’s legal security – or to its compliance – are missing from the contract. If the organisation works with specific clauses regarding data protection, environmental responsibility, or others, it is essential that, during the contract review, the presence or absence of these clauses is noted.
Furthermore, during the contract review process – the first step – it is crucial to pay attention to unusual clauses, or those not discussed during negotiations. These clauses may contain abusive conditions for one of the parties, which is why they should be identified, highlighted, and corrected.
Forward for correction and approval by the parties.
After following all the steps above, you will likely have found some items that need adjustment. Mark them clearly in case they need to be forwarded to another person or department for correction.
And after completing the suggested corrections, remember to forward the reviewed and revised draft for approval and signature. This step may seem obvious, but it is relatively common for incorrect or outdated draft versions to be mistakenly forwarded.
So, always make sure you are sending the draft that has been reviewed. As we will see below, there are some tools that can help reduce this type of risk.
Tip: Use a system that automates contract analysis.
At Virtual Assistant for Lawyers, use the contract risk analysis functionality powered by specialised artificial intelligence. This applies to both internal and third-party contracts. The analysis includes:
- Contradictory clauses: highlight any section of the contract where there are clauses that contradict or overlap each other, helping to avoid ambiguous interpretations.
- Typos: minor errors that could compromise the clarity or formality of the document are identified and highlighted.
- Limitation of liability: checks if there are clauses that define responsibilities and presents this information in the report to facilitate understanding of each party’s obligations.
- Contractual forum : the forum clause, which determines the legal jurisdiction, is identified so that the lawyer can verify its compatibility with the client’s interests.
- Access to sensitive data : when the contract provides for access to sensitive data, this information is marked to ensure that compliance requirements with data protection legislation are met.
- Possibility of audits : if the contract allows audits by one of the parties, the AI will record this clause, indicating the level of transparency required between the parties.
- Barriers to contract termination: analyzes the existence of clauses that establish obstacles to terminating the contract at any time, facilitating the identification of restrictions and penalties associated with early termination.
- Penalties described: all financial penalties stipulated in the contract are highlighted to assist in analyzing the consequences of non-compliance or default.
- Powers to speak for the other party : identifies clauses that delegate to one party the power to represent or act on behalf of the other, paying special attention to points that may generate additional liabilities.
Based on this information, the lawyer can analyse the recommendations and alerts generated by the AI, and decide on the necessary revisions to improve the accuracy and security of the contract before proceeding with the signing.
4 strategies to facilitate the legal contract analysis
If your company needs to approve a large number of contracts every month, it will be necessary to add a layer of method and systematic approach to practically apply contract analysis. The good news is that this type of procedure no longer needs to be entirely manual. Technological solutions already exist that can assist contract managers and analysts in validating and approving contracts.
Next, you’ll learn four simple strategies that can help you accomplish this task. Let’s get to them?
Adoption of standard models for each type of contract
In medium and large companies, which sign dozens of contracts with suppliers, partners, and service providers every month, adopting standard contract templates can reduce the risk of errors. In addition, it makes contract analysis easier.
But how do you operationalize the use of standard templates? First, identify which types of contracts are most common in the company.
Next, analyze the templates typically used for this type of contract, and create an editable document containing all the essential clauses.
Thirdly, make this template available in a location accessible to the entire team. And, of course, educate your team on how to use these templates – and on the importance of doing so.
Ideally, you should share your contract templates on a platform accessible to everyone, such as the legal or contract software used by your organization. Some teams choose to store these templates in cloud storage solutions. Remember, however, to ensure version control of the drafts.
And lastly, but no less importantly, create mechanisms to prioritize the use of your standard templates. One such strategy could be to reduce the SLA (service level agreement) of the legal team for releasing contracts that use the standard template – and not third-party templates.
Creation of a proprietary clause bank
Often, a simple difference in the wording of a clause can result in a considerably different interpretation, bringing legal uncertainty to the business. Therefore, while adopting standard templates already represents a major step, creating a clause database can result in even greater accuracy and security.
In practice, the clause bank consists of the centralization of dozens of clause templates, which can be easily accessed and included in contracts. Therefore, when you receive a contract draft from a third party, and that draft does not include, for example, a data protection clause, you can simply access your clause database to find a template.
This makes it easier to correct any inconsistencies identified in the contract analysis.
Use of a review and approval checklist
As you’ve seen, contract analysis is a broad and complex task. To ensure the draft is completely adequate, a dozen points need to be checked. And ensuring that none of these points are overlooked is the biggest challenge here.
Fortunately, using a contract review checklist can greatly speed up this process. A checklist is simply a list of mandatory items that must be reviewed and checked off for the draft to be considered approved.
There are already dozens of solutions on the market that can help your business create, manage, and control the application of these checklists.
Using software for contracts
The best way to organize all contract management processes – including contract analysis – is by using a tool that centralizes these tasks. The most advanced option currently available is contract management software.
By definition , contract management software – also known as CLM – needs to be able to facilitate the management of all stages of the contract lifecycle . This includes everything from receiving a request to drafting, reviewing, signing, storing, and renewing the contract.
Unification is also one of the main characteristics of this document. In daily practice, it’s common to find organizations that still use a series of disconnected tools , such as:
- e-mail;
- cloud storage;
- electronic signature solution;
- Spreadsheet for deadline management;
- Spreadsheet for analysis checklist;
With contract management software, all activities are kept in one place . This gives you a historical overview and allows you to generate a range of reports on your contract management, based on the data stored in the software.
Conclusion
Now it’s time to put the contract analysis process into practice. If you have a specific analysis request, follow the steps we’ve outlined in this article.
On the other hand, if you need to analyze a large number of contracts every month, consider using some of the strategies we’ve presented here. Remember that technology can be your ally in this task.